What is Proof-of-Stake?

By Kirsty Moreland

The concept of Proof-of-Stake (PoS)

Proof-of-stake (PoS) is a consensus algorithm for blockchain networks that is based on randomly selected validators, who “stake” the native network’s tokens by locking them into the blockchain, to produce and approve blocks. Validators are rewarded based on their total stake, incentivizing nodes to validate the network based on a return on investment (ROI).

PoS is largely viewed as the greener, and a more scalable version of Proof of work (PoW) consensus in Bitcoin, which requires significant energy expenditures.  

Validators

In Proof of Stake blockchains, validators are selected to produce the next block based on their stake. Although often designed with random functions to prevent a front-running consensus, a larger amount staked by a validator could give them a higher chance of producing the next block. Proposed blocks by validators are then propagated to the rest of the set, who verify and add the approved block to the blockchain. 

Benefits for the network

There are several intriguing components in the Proof of Stake design. Notably, since incentives are financially driven via rewards in the native token, PoS bypasses the computational lottery-like process of Proof of Work. This has several important consequences for performance and security. 

Concerning performance, PoS has a “fast-finality” consensus design and is more performant both in terms of on-chain transactions per second (TPS) and the actual settlement of network transfers. 

Regarding security, validators are incentivized to act honestly in producing blocks and approving transactions for two primary reasons. 

Firstly, validators likely control sizeable portions of the network token, which financially incentivizes them to secure the chain. Otherwise they’ll face a dilemma where security vulnerabilities negatively affect their token’s price. Secondly, the stakes that validators subject to the lock-in mechanism in order to produce blocks are under the threat of being “slashed” or removed from their control if they choose to act maliciously and produce false blocks.

Benefits for crypto owners

Crypto owners who are not interested in being a validator themselves can also be rewarded for participating in the network’s ecosystem.

Different ways to generate revenue by staking are available today. The rules depend on the blockchain you are using. Make sure to learn more about each protocol before participating.

• Reward for holding – Users can earn rewards by simply keeping their coins in their wallet for a given period of time. No specific action for staking those coins is necessary. The reward will depend on the number of coins kept in their wallet and (often) the amount of time they are kept. The action of claiming such rewards may be either automatically enforced by the protocol, or consequent to a user’s action.
  
• Reward for participating / delegating – Users delegate part of their stake to a validator who will be in charge of securing the network. The reward will come from the validator sharing part of its revenue with those delegating their stake to him.Those rewards can be either automatically enforced by the protocol, or depending on the good will of the validator.

The cons of PoS

Proof of Stake coins

Ethereum (ETH)

Ethereum’s ongoing overhaul sees it transitioning from Proof-of-Work to Proof-of-Stake consensus, bringing faster transaction speeds, better scalability and reduced energy consumption to the network.

As a result, you now have the option to stake your ETH tokens to support the running of its blockchain. If you’re looking to stake your ETH 2.0 you’ll have two options: become a validator, or join a staking pool.

As a validator, you run your full own node that functions to check the validity of each incoming block before is added to the blockchain. In exchange, you’ll receive a reward for every block you successfully propose. Which is straightforward enough – as long as you can stake the princely sum of 32 ETH 2.0 to get you started.

If that’s not an option, don’t worry – you can also join a staking pool, such as Lido. This means staking a smaller amount of ETH 2.0 to a larger equity pool (in exchange for a small fee), which then issues rewards proportionate to your original stake.

It’s important to note that however you decide to stake, you won’t be able to withdraw your coins until Phase 1.5, which is not expected for 1-2 years.

Tezos (WTZ)

This coin is widely known for having one of the biggest ICOs of all time, with nearly $232 million invested in XTZ tokens.

Tezos is a multi-purpose blockchain which uses a Proof-of-Stake protocol to secure its network. Token holders can delegate their accounts to other token holders called validators without transferring ownership of your assets. These validators will then be in charge of securing the network on their behalf. The user may then earn the rewards generated minus validator’s fees.

When delegating, your XTZ are completely liquid. You are free to move your tokens anytime as there are no freezing periods when delegating to a validator.Furthermore, there are no direct risks of delegating XTZ. Choosing carefully your validator is enough to easily ensure quality of service and rewards.

If you want to know more about staking Tezos directly with Ledger live click here.

Tron (TRX)

Here is another popular way to earn passive staking income.

Tron achieves a high rate of transactions per second (TPS) through a Delegated Proof of Stake mechanism. 

In the Tron network, there are 27 validators that create the blocks on its blockchain. These are called Super Representatives (SR). Everyone participating in the Tron network can use their TRX to vote on who should be a Super Representative. To become a Super Representative, you’d need to have the highest amount of votes.

Super Representatives who have created blocks can then choose to reward those who voted on them by giving them some Tron. And this is how you can earn more TRX!

If you want to know more about staking Tron directly with Ledger live click here.

Cosmos (ATOM)

This is one of the most popular staking coins. Cosmos is a rather unique blockchain, which is powered by its native cryptocurrency known as Atoms.

Cosmos coin sets itself as an all-in-one solution to solve scalability and interoperability issues that the blockchain industry has been trying to address using a hybrid Proof-of-Stake mechanism relying on validators. Validators are chosen by all Atom holders and are then rewarded for their work. As an Atoms holder, you can vote on who should be a validator by delegating your assets.

By delegating your Atoms to validators, you will be rewarded. But an important thing to know is that if you delegate your Atoms, they will then be locked and you could not use them for transactions. 

Once you start your delegation to a validator, you can claim your rewards at any time.

If you want to know more about staking Cosmos directly with Ledger live click here.

Algorand (ALGO)

Algorand aims to solve the three main challenges faced by blockchains today: security, scalability, and decentralization.

In Algorand’s consensus algorithm, called Pure Proof of Stake, the network ties its security to the honesty of the majority.

Many Proof-of-Stake coins force you to either become a validator for the network or to delegate your cryptocurrencies. This isn’t the case with Algorand. With ALGO, you just need to hold at the very least 1 ALGO on your address and you will automatically start accumulating rewards. No further actions are required!

If you want to know more about staking Algorand directly with Ledger live click here.

Polkadot (DOT)

Polkadot is a next-generation blockchain protocol designed to support multiple chains within a single network. It has implemented a new innovation to the Proof of stake (POS) consensus which is known as Nominated Proof of Stake (NPOS).

The multi-chain protocol is designed to return control to individuals, building on the revolutionary promise of existing blockchain technology and going beyond to offer several additional advantages.

For instance, it aims to overcome a problem in the current blockchain landscape whereby hundreds of blockchains exist in isolation with little ability to communicate. Polkadot is built on the premise that blockchains should be able to securely communicate with one another.

Polkadot is the latest entrant in the blockchain space, seeking to grow the ecosystem with additional solutions beyond networks like Ethereum and Cosmos. However, Polkadot is designed to coexist and interoperate with other blockchain networks rather than competing with them.

If you want to know more about staking Dot directly with Ledger live click here.

Here are some of the most famous stakeable coins, but what you need to know is that there are other coins that enable you to earn passive income. For example, we could mention here DASH, NEO or Cardano (ADA).

PoS, to become the new standard?

PoS consensus has risen in prevalence significantly over the last few years among public blockchains looking to improve Bitcoin’s underlying performance execution. Such blockchains can support more applications and transactions in a certain period, and innovative takes on PoS have emerged to meet specific network demands. 

Ethereum, the high-profile smart contracts platform, is currently in the process of transitioning from PoW consensus to PoS with the long-awaited Ethereum 2.0.

PoS also gives validators and network node operators a greater opportunity to participate in consensus compared to PoW chains like Bitcoin. The low barrier to entry, which requires holding a specific number of tokens, is appealing to users who do not wish to sink costs into expensive ASIC hardware for Bitcoin mining. 

Stake directly Through the Ledger Validator Node

Staking is one of the most rewarding options in the DeFi space – and did you know, you are now able to stake directly from your wallet, through Ledger’s own validator node? So you can enter the rewarding world of staking securely, via a platform you already know and trust. Find out how to access staking through Ledger validator node for yourself, right here.

Overall, PoS has been gaining significant momentum in the rapidly evolving cryptocurrency space. Its long-term sustainability among public blockchains is still yet to be proven, but it has widespread support among many industry experts, participants, and observers.

Knowledge is Power.

Keep learning! If you enjoy getting to grips with crypto and blockchain, check out our School of Block episode Cryptocurrency Explained