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How does Proof of Stake work in cryptocurrencies?

 


The Proof of Stake consensus mechanism is the most popular consensus mechanism in modern cryptocurrencies. It has many advantages over the classic Proof of Work consensus mechanism that the Bitcoin blockchain uses. Furthermore , Proof of Stake offers an opportunity for investors to earn money through staking.


We present the special features of the Proof of Stake consensus mechanism and tell you the advantages over the Proof of Work of the Bitcoin blockchain. You will also learn how to earn money through staking.


Blockchain

What is a consensus mechanism in cryptocurrencies? 

A consensus mechanism generally describes an algorithm that reaches agreement on a status between 2 participants. It ensures the correct processing of a transaction on the blockchain. A consensus mechanism has the following 3 tasks:


It ensures that the next block in the blockchain is the correct and only version .

It keeps attackers away from the blockchain and prevents the chain from being forked.

The reliability of the blockchain is ensured by the consensus mechanism preventing users from double spending the same coin .

Proof of Work

What are the consensus mechanisms?

Different blockchain networks use different consensus mechanisms to secure their blockchain. The following are the most important:


Proof of Work: The Proof of Work consensus mechanism is the consensus mechanism that the Bitcoin blockchain uses. The transactions are validated by the Bitcoin miners, who do most of the work. You can find out more here .

Proof of Stake: This consensus mechanism is used by most new blockchains. Decisive factors here are the number of coins held and the time held by the validators. In the following paragraph we explain PoS in more detail. 

Delegated Proof of Stake: With Delegated Proof of Stake, the work of the stake holder is outsourced to third parties. He creates a voting system that depends on the reputation of the appointed delegates. If a delegate behaves negatively, he will be avoided and replaced.


Proof of Stake (PoS) is an alternative consensus mechanism on the blockchain. In contrast to Proof of Work, it is not the hash rate of a validator that is decisive for PoS, but the so-called "stake". The larger this "stake", the higher the probability that the user will be chosen to validate the transaction. The "stake" is made up of the total number of tokens held and the time they are held.


Users can assign their tokens that they want to validate to a node. The larger the share of the total supply that is attributed to the node, the higher the probability for the user to be selected as a validator.


Proof of Stake


What are the benefits of Proof of Stake?

The Proof of Stake has a few advantages over the older Proof of Work consensus mechanism:


The Proof of Stake consensus mechanism is much more energy efficient than the Proof of Work. This also makes PoS more environmentally friendly.

Participation in PoS is much easier. While only a few extremely potent crypto miners can participate in Proof of Work, many more users can participate and compete in PoS. This also stabilizes the decentralization of the network. 

With PoS, there is a much lower chance that the blockchain can be tampered with by a smaller group.

However, this also results in a few disadvantages :


Large stake holders such as founders or early investors theoretically have an enormous amount of influence.

Unlike PoW, PoS does not have high hardware requirements. As a result, the barrier for potential manipulators is theoretically lower.

A more detailed look at how PoW vs PoS compares can be found here .


How does staking work?

Blockchain networks that use the Proof of Stake consensus mechanism offer staking. It represents a way to earn rewards by holding cryptocurrencies. This creates an incentive for users to participate in the blockchain validation process. 


Staking

The staking takes place via a so-called “staking pool”. This is similar in principle to an interest-bearing savings account. When users put their cryptocurrencies into staking pools, after some time they receive rewards in the form of tokens. Certain blockchains offer different returns. 

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