What is Proof of Stake?

Proof of Stake (PoS) is a decentralised consensus algorithm used for validating blockchain transactions.

In a Proof of Stake consensus algorithm, the nodes (computers) arrive at a single source of truth by validating transactions. As blockchains are not under any central influence as such, consensus algorithms hold great importance.

Proof of Stake is a consensus algorithm where validators are randomly selected to forge new blocks on the blockchain network.

As the name suggests, validators have to stake a certain amount of crypto coins as collateral (stake) which in turn holds them accountable for any fraudulent validations. Proof of work incentivises miners by minting new crypto coins where proof of stake algorithms reward validators from the revenue generated by the transactions.

Proof of Stake does not mint new coins for rewarding validators, maintaining the stability of the digital asset and it’s more energy efficient as a result of selecting a particular node to validate transactions.

How does it work?

When a node is selected for forging a block, the validator checks the legitimacy of the transactions. Once verified, the node approves the block and adds it to the blockchain network. How a validator node is selected?

The Proof of Stake algorithm randomly selects a validator node based on factors like staking age, staking amount along with elements of randomisation. However, each blockchain platform that incorporates a Proof of Stake algorithm has its own rules and methodology.

In a Proof of Stake consensus, the size of your stake determines the chances of your selection as a validator node. This often leads to a debate about favouring a ‘wealthier’ node. To combat this issue, Proof of Stake prioritises two methods – a) Randomised Block Selection and b) Coin Age Selection.

In Randomised Block Selection, the validator having a combination of the lowest hash value and the highest stake amount is selected.  In essence this method uses a combination of different requirements to ensure maximum node participation. 

The Coin Age Selection method selects a node depending on how long their deposits have been staked. After a node successfully forges a block, its coinage automatically resets to 0. The node will have to wait for a certain period of time before it gets selected to become a validator node again.

wheel of fortune
proof of stake

Proof of stake economics

The validator who forges a new block is rewarded with the transaction fees that are associated with that block.

If you wish to stop being a validator, your stake along with the earned rewards are released after the verification of your added blocks.

Security

In Proof of Stake consensus, security deposits hold the validator accountable for any fraudulent validation. If you forge a block to fool the system, you will lose a part of your stake. Your right to participate as a validator will also be revoked.

Proof of Stake is also protected against 51% attacks, as it is economically infeasible to aggregate 51% of the stake as the price of the token will increase as you try to buy more in comparison to poof-of-work where you can mint more token/coin with more computational power.

This system of financial penalisation safeguards the blockchain network from both fraud and security issues.

The random selection process makes the Proof of Stake consensus more decentralised as it ensures maximum node participation.

cryptocurrency security

Summary

Proof of Stake is a consensus algorithm that randomly selects validator nodes to add new blocks on the blockchain network, while Proof of Stake economics ensure a fair incentive for validators.

The security deposit makes it economically impossible to fool the system and the random selection of nodes makes the entire validation process more transparent and facilitates maximum participation. As a result Proof of Stake has proven to be a major advancement from the Proof of Work consensus algorithm.