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What Is Proof of Stake and How It Helps You Earn APY

Proof of stake is a type of consensus mechanism or algorithm used to verify cryptocurrency transactions. This method is an alternative to proof of work, another consensus mechanism, and helps keep blockchains secure by allowing only genuine users to add new trades.

Proof of stake is a type of consensus mechanism or algorithm used to verify cryptocurrency transactions. This method is an alternative to proof of work, another consensus mechanism, and helps keep blockchains secure by allowing only genuine users to add new trades. 

You might have heard the term 'proof of stake' thrown around recently, especially in cryptocurrency and blockchain news. While the technical details of proof of stake (PoS) can get quite complicated, we'll try to keep it simple, explain what this concept is all about, and provide examples of cryptocurrencies that use it.

What is Proof of Stake?

Proof of stake (PoS) is an algorithm by which a cryptocurrency blockchain network aims to achieve distributed consensus. Distributed consensus is accurately updating the blockchain with new transactions and blocks. It ensures network integrity by confirming the validity of new blocks before they are added to the chain. This system prevents malicious users from tampering with the ledger (for example, by spending bitcoins they do not own). 

PoS was first implemented in 2012 by Peercoin, a cryptocurrency created to address some of the problems seen in Bitcoin and other proof-of-work cryptocurrencies. The PoW model had several drawbacks that led developers to consider other methods of reaching consensus on a blockchain network. 

What is Proof of Stake used for?

Since cryptocurrencies are decentralized and aren't regulated by financial institutions such as banks or governments, their transactions need to be verified. Cryptocurrencies use proof of stake as a method to validate these transactions.

With this system, cryptocurrency owners can stake their coins, allowing them to verify new blocks of transactions and add them to the blockchain. Since proof of stake is much more energy-efficient and, in some cases, more secure, it has gained popularity and become the better option for distributed consensus.

When the first consensus method (PoW) was introduced, it had drawbacks. As Bitcoin's value increased over time, miners with specialized hardware could generate more cryptocurrency relative to others by solving blocks more efficiently than their competitors. This led to mining power being concentrated into fewer and fewer hands, with extensive mining pools controlling increasingly large percentages of network hash power.

The PoS system introduced a more energy-efficient and secure way of achieving distributed consensus. In contrast, miners are selected based on how many coins they own, not how much computing power they can provide in a proof of stake mining. This means that in PoS-based cryptocurrencies, there is no block reward for miners; instead, miners take transaction fees from each block. Additionally, miners in the PoS system are more likely to win additional blocks if they have more money, i.e., PoS relies on proof of how much users have.

How it Works

Staking is the act of holding funds in a cryptocurrency wallet to support the operations of a blockchain network. 

When transactions are processed, the PoS protocol chooses a validator node to review the block. The validator then checks if the transactions in the block are accurate. They add the block to the blockchain and receive crypto rewards for their contribution. This is also known as an annual percentage yield or APY. You will probably see a lot of crypto exchanges that allow crypto staking mention the APY.

However, if a validator adds a block with inaccurate information, they lose some of their staked money.

As an example, we can understand better how this works by looking at Avalanche, a significant cryptocurrency that uses PoS. 

Anyone who owns Avalanche crypto can stake it and set up their validator node. When Avalanche needs to verify blocks of transactions, they choose a validator. The validator then checks the block and receives crypto for their efforts.

In Point of Stake, creators of the block are chosen randomly, and just like PoW, PoS is used to confirm transactions and produce new blocks on the chain.

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Proof of Stake vs. Proof of Work

When it comes to blockchain consensus protocols, proof of work and proof of stake are the two most popular ones. All cryptocurrencies employ either one or both methods to achieve distributed consensus.

In public base Proof of Work blockchains work requires miners to put in a significant amount of computing power to verify a transaction and add it to the blockchain. For their efforts, miners are rewarded with coins from the blockchain they help maintain.

In contrast, in PoS-based public blockchains, a set of validators take turns proposing and voting on the next block, and the weight of each validator's vote depends on the size of its deposit (i.e., stake). 

Disadvantages of Proof of Stake

The benefits of using proof of stake to power a cryptocurrency are well known. It is more energy-efficient than proof of work and results in more decentralized ownership of coins because miners don't need expensive hardware to participate. However, some disadvantages have discouraged some from adopting this approach. 

Centralization. PoS can lead to centralization, which means that the currency is controlled by a small group of nodes with the majority of coins. This creates potential security problems because if one of these nodes goes down or is compromised, it can cause severe issues with the whole network. For example, if one of these nodes is hacked, the hacker can gain control over all transactions on that node.

Nothing at Stake. The "nothing at stake" problem occurs when users have nothing to lose by voting for multiple chains at once. This leads to forking issues and can make implementing changes difficult. This means they can mine on multiple networks simultaneously with no additional cost (beyond the initial purchase of coins).

Which cryptos use Proof of Stake

The following are some of the most popular cryptocurrencies that use the proof of stake coins:

Nxt. Nxt is a decentralized crowdfunding platform that uses the NXT token and proof-of-stake to validate transactions. The Nxt blockchain was launched in 2013 and was one of the first to implement proof-of-stake.

ShadowCash. ShadowCash (SDC) is a cryptocurrency that aims to provide users with fungibility, private transactions, and decentralized governance. Users can earn staking rewards by simply holding their SDC in a wallet.

Peercoin. Peercoin, often referred to as PPCoin, is a peer-to-peer cryptocurrency utilizing both proof-of-stake and proof-of-work systems. Peercoin was inspired by Bitcoin, and it shares much of the source code and technical implementation of bitcoin. T

BlackCoin. BlackCoin (BLK) is an open-source digital currency based on proof-of-stake consensus. A user locks up their coins for a designated period and receives interest in return. BlackCoin was launched in 2014 and had been running on its own.

Many other cryptocurrencies use PoS as their main consensus algorithm, including Cosmos (ATOM), Cardano (ADA), Polkadot (DOT), Solana (SOL), VeChain (VET), and Tezos (XTZ).

Start investing in Cryptos Today

If you want to know more about the crypto world and are interested in investing in it, that's great. First of all, don't ignore the risk factors – and do your research. Cryptos can be pretty volatile, and there is more than enough evidence to suggest that it is still very much a wild west environment for investors. 

On the other hand, if you are ready to take some calculated risks, then, by all means, give it a try. You can start by checking out our crypto exchange comparison page to find the best exchange for you.

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FAQs

  • In proof of stake, validators are selected using an algorithm based on the amount of cryptocurrency they own — or "stake" — in that blockchain's network. The larger the stake someone has, the greater their chances of being selected to validate transactions on the network.

  • Proof of stake (PoS) is an algorithm by which a cryptocurrency blockchain network aims to achieve distributed consensus. Distributed consensus is accurately updating the blockchain with new transactions and blocks. It ensures network integrity by confirming the validity of new blocks before they are added to the chain.

  • Several cryptocurrencies use PoS as their main consensus algorithm, including Cosmos (ATOM), Cardano (ADA), Polkadot (DOT), Solana (SOL), VeChain (VET), and Tezos (XTZ).