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Proof of Stake Meaning

Jan 2, 2024 | Updated Jan 2, 2024
Proof of stake is a consensus mechanism that selects validators based on the amount of cryptocurrency they stake to process transactions and produce new blocks.

What is Proof of Stake?

Proof of Stake (PoS) is a type of consensus mechanism through which blockchains achieve consensus. It uses a staking model to choose validators who verify transactions and create new blocks.

PoS is counterintuitive to the original proof of work (PoW) consensus algorithm used by blockchains such as Bitcoin. PoW involves miners who compete to solve a complex mathematics puzzle through a process called mining for the chance of validating the next block. Due to the computational power required to solve the mathematical problem, PoW is more energy-intensive. 

The PoS algorithm is designed as the energy-efficient alternative to PoW. Instead of requiring computing power to process transactions, PoS requires validators to commit a certain amount of cryptocurrency in the network. This immensely reduces the energy consumption required. 

How Does Proof of Stake Work?

In PoS blockchains, validators forge blocks rather than mine them. To participate in the validation process, nodes (a group of network participants) offer their cryptocurrencies as collateral through a process called staking

Staking discourages validators from acting dishonestly the same way the high computing power needed to solve mathematical puzzles does in PoW systems. The amount of cryptocurrency committed determines the probability of a node being selected to validate the next block. Thus, nodes with large stakes have higher chances of being chosen. As such, nodes often join staking pools to increase their chances of being picked.

The selection of validators on PoS networks is pseudo-random. The algorithm picks validators based on a randomization aspect, staking age/period, and economic stake. 

  • The randomization aspect considers nodes with both the highest stake in the network and the lowest hash value
  • Staking age or staked coin age refers to the period the coins have been staked. It is the product of the amount of coins staked and the number of days they’ve been locked.

The validator that forges the next block is eligible for a block reward, paid from the transaction fees in the form of the network’s native currency. The algorithm resets the staking age to zero once the validating node has forged a block to prevent the wealthiest stakers from dominating the validation process. This ensures that the node is ineligible to process another block for some time to give other nodes the opportunity. 

Some examples of PoS networks include Ethereum, Cardano, Tezos, and Polkadot.

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