Cryptocurrencies require a method of transaction verification because they are decentralized and independent of financial institutions. Proof-of-Stake (PoS) is one method that many cryptos employ.
What is Proof-of-Stake?
Proof-of-Stake or PoS is a consensus mechanism for processing transactions and adding new blocks to a blockchain. A consensus mechanism is a technique used to secure a distributed database and validate entries into the database. The database is known as a blockchain in the context of cryptocurrencies. So, the blockchain is secured by the consensus mechanism.
Proof-of-Stake is an alternative to Proof-of-Work (PoW) which is the first consensus mechanism created for cryptocurrencies. PoS has gotten more popular since it is much more energy-efficient as attention has shifted to how the planet is affected by crypto mining.
How Is Proof-of-Stake Different from Proof-of-Work?
Both PoS and PoW are consensus mechanisms that help blockchains process transactions, validate information, and synchronize data. There are advantages and disadvantages to each approach, but they have all been successful at maintaining blockchains. However, both algorithms, take very different approaches.
Block creators are known as validators under PoS. A validator examines transactions, confirms activity, keeps records, and votes on outcomes. The creators are called miners under PoW. Miners solve difficult mathematical problems to validate transactions.
Investors only need to buy the sufficient limits of tokens or coins necessary to join a PoS blockchain as a validator to "buy into" the position of a block creator. For PoW, miners must invest in processing equipment and pay high energy costs to run the machines that are attempting to solve the computations.
PoW mining requires expensive energy and equipment, which restricts who can mine and increases the blockchain's security. However, because of their energy efficiency, PoS blockchains frequently permit greater scalability.
How Does Proof-of-Stake Work?
The Proof-of-Stake model enables cryptocurrency owners to stake their coins and establish their validator nodes. Staking is the act of pledging your coins to be used in transaction verification. Once you stake, your coins are locked up. However, you can un-stake your coins if you want to use them for trade.
The PoS protocol of the cryptocurrency will select a validator node to review the block when a block transaction is ready to be processed. The validator verifies the accuracy of the transactions in the block. If the information is accurate, they add the block to the blockchain and receive crypto rewards for their contribution. However, validator incurs a loss of staked holdings if they propose adding a block with inaccurate information.
As an example, let’s take a look at Cardano (ADA) a major cryptocurrency that uses PoS. Any Cardano owner can stake it and create their validator node. Cardano's Ouroboros protocol chooses a validator when blocks of transactions need to be verified. The validator verifies the block, adds it, and is compensated with more Cardano.
Some of the other most popular coins using Proof-of-Stake include:
· Tron (TRX)
· EOS (EOS)
· Cosmos (ATOM)
· Tezos (XTC)
Pros of Proof-of-Stake
· Does not require specialized equipment
· Provides inexpensive and fast transaction processing
· Energy efficient
Cons of Proof-of-Stake
· Keeping staked funds locked up for a set period is necessary for some Proof-of-Stake cryptocurrencies
· Transaction verification may be overly influenced by validators with substantial holdings
· In comparison to Proof-of-Work, its security is not proven
Proof-of-Stake is beneficial for users of cryptocurrencies as well as for investors because of how it works. The ability to process transactions quickly and cheaply is essential for scalability, and PoS-based cryptocurrencies excel in this area. Investors can stake their cryptocurrency to earn rewards, creating a passive income stream.
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