WHAT IS PROOF OF STAKE (POS) IN CRYPTO?

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Proof of stake is a consensus mechanism used lớn verify new cryptocurrency transactions. Since blockchains lack any centralized governing authorities, proof of stake is a method khổng lồ guarantee that data saved on the network is valid.

What Is Proof of Stake?

Decentralization is at the heart of blockchain technology and cryptocurrency. There’s no central gatekeeper to lớn manage a blockchain’s record of transactions and data. Instead, the network relies on an army of participants to validate incoming transactions and địa chỉ them as new blocks on the chain.

Proof of stake is the consensus mechanism that helps choose which participants get to handle this lucrative task—lucrative because the chosen ones are rewarded with new crypto if they accurately validate the new data and don’t cheat the system.

“When blockchain participants verify that a transaction is legitimate and add it lớn the blockchain, we say that participants have achieved consensus,” says Marius Smith, head of business development at digital asset custodian Finoa.

With proof of stake, participants referred to lớn as “validators” lock up mix amounts of cryptocurrency or crypto tokens—their stake, as it were—in a smart contract on the blockchain. In exchange, they get a chance khổng lồ validate new transactions and earn a reward. But if they improperly validate bad or fraudulent data, they may đại bại some or all of their stake as a penalty.

Solana, Terra & Cardano are among the biggest cryptocurrencies that use proof of stake. Ethereum, the second-largest crypto by market capitalization after Bitcoin, is in the midst of a transition from proof of work lớn proof of stake.


What Is Staking?

Staking is when people agree khổng lồ lock up an amount of cryptocurrency in exchange for the chance lớn validate new blocks of data to lớn be added khổng lồ a blockchain. These validators, or “stakers,” put their crypto into a smart contract that’s held on the blockchain.

The blockchain algorithm selects validators to kiểm tra each new block of data based on how much crypto they’ve staked. The more you stake, the better your chance of being chosen to vày the work. When the data that’s been cleared by the validator is added to the blockchain, they get newly minted crypto as a reward.

“The simple way lớn look at staking is like interest income that requires you lớn complete a task to earn the interest—checking blockchain transactions,” says Doug Schwenk, chief executive officer of Digital Asset Research. “If I validate only good transactions, I earn interest on my assets. If I include bad transactions, then I’ll be assessed penalties và lose some of my assets.”

If a validator submits bad data or fraudulent transactions, they could be punished by “slashing.” Their stake is “burned,” meaning it is sent khổng lồ an unusable wallet address where nobody has access, rendering them useless forever.

According khổng lồ Smith, proof of stake works because validators are saying “Hey, I have so much faith in the legitimacy of this transaction that I’m willing to back it up with my own money.” & verified transactions earn a cryptocurrency reward in proportion to the size of the stake.

Proof of Stake Benefits

Proof of work has earned a bad reputation for the massive amounts of computational power—and electricity—it consumes. Given heightened concern about the environmental impacts of blockchains that use proof of work, like Bitcoin, proof of stake offers potentially better outcomes for the environment.

“On a global scale, proof of work is most profitable where energy can be had for the lowest cost,” says Smith.

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This concentrates crypto mining in a few regions where electricity costs are lowest. According lớn Smith, proof of stake’s modest energy consumption solves this problem & widely distributes infrastructure, potentially making a blockchain system more robust.

Proof of stake opens the door to more people participating in blockchain systems as validators. There’s no need to buy expensive computing systems & consume massive amounts of electricity lớn stake crypto. All you need are coins.

Crypto exchanges lượt thích Coinbase, Binance và Kraken offer staking as a feature on their platforms. There are even dedicated staking platforms, lượt thích Everstake. Depending on the blockchain, crypto owners can earn yields of 5% khổng lồ even 14% on their holdings by staking.

One additional benefit of proof of stake blockchains offers potential for the future: they may be more scalable than their proof of work counterparts. Smith says that proof of stake blockchains can, in theory, support more simultaneous transactions without compromising security or decentralization.

“This is where a great giảm giá khuyến mãi of innovation is happening today, và indeed a challenge that blockchains will have to lớn overcome if they are ever to become widely used on a global scale,” he says.

Proof of Stake Drawbacks

According to lớn Amaury Sechet, founder of eCash, proof of stake isn’t without cons.

“Proof of stake is not as extensively vetted as proof of work, which has secured billion-dollar blockchains for over a decade now,” said Sechet.

Certain implementations of proof of stake could leave blockchains more vulnerable to lớn different kinds of attacks than proof of work, such as low-cost bribe attacks. Susceptibility to attacks decreases the overall security of the blockchain.

Validators who hold large amounts of a blockchain’s token or cryptocurrency may have an outsized amount of influence on a proof of stake system.

Migrating a cryptocurrency from proof of work to lớn proof of stake is a complicated & highly deliberate process. Any crypto that wants to lớn change consensus mechanisms will have khổng lồ go through an arduous planning process lớn ensure the blockchain’s integrity from start to lớn finish và beyond.

Proof of Stake Vs. Proof of Work

There are two consensus mechanisms that are generally used in cryptocurrency and defi applications: proof of stake and proof of work. Whereas the former employs staking, proof of work requires miners to lớn solve complicated math puzzles in order to lớn decide which network participants get to lớn validate transactions and expand the blockchain.

Proof of Stake

Requires validators to hold some of the blockchain’s token or cryptocurrency.Doesn’t require significant computing power nguồn for transaction validation.It’s a newer approach than proof of work, with less adoption as a consensus mechanism.

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Proof of Work

Proof of work has a longer proven history of use as a blockchain consensus mechanism.Miners don’t need lớn hold any of the blockchain’s assets, & only need computing power to validate a transaction.May use a very significant amount of electricity. Cryptos using proof of work are often excluded from ESG portfolios because of the energy demands.

Which Cryptocurrencies Use Proof of Stake?

Proof of stake is becoming more prevalent as a consensus mechanism in the cryptocurrency world. There are currently about 80 different cryptocurrencies that use PoS as the consensus mechanism. Some of the most popular coins using proof of stake include: