The Proof of Stake Consensus Algorithm

The Proof of Stake governing consensus has become quite popular of late as many of the new generation crypto projects are now adopting the PoS (proof-of-stake) consensus algorithm over the PoW (proof-of-work) consensus algorithm.

Before we go into what the PoS algorithm is all about, it is important that we define what staking in cryptocurrency means.

What is Staking?

Staking is a phenomenon common with cryptos that utilizes the PoS (proof-of-stake) consensus algorithm. The process entails the locking of some quantity of tokens in a wallet connected to the blockchain. These tokens are then used to validate transactions, secure the network, and finally produce new blocks.

With the price of crypto falling significantly from their all-time high since 2018, the PoW (proof-of-work) algorithm which is the most popular and earliest form of governing consensus has become less profitable, making it harder for miners to keep the network secure. The increase in the cost of electricity and mining hardware made the process of mining financially unsustainable and many miners have shut down their operation. As a result, the network becomes less secure and prone to 51 percent attacks. The side effect of the PoW method is what ushered in the PoS algorithm era.

How the Proof of Stake Consensus work

The major difference between a Proof of Work system and a Proof of Stake system is that the former requires the user to confirm transactions and creates new blocks by carrying out a specific amount of computational work, the latter only need for the user to show ownership of a certain number of virtual currency units and gets rewarded accordingly.

Taking into consideration each network participant’s “wealth” which is also referred to as ‘stake’, the creator of a new block is chosen in a pseudo-random way. Blocks in the Proof of Stake system are either ‘forged’ or ‘minted’ and not mined, therefore, users who verify transactions and develop new blocks using this system are known as forgers and most of the time, cryptocurrency units are created at the launch of the currency and the number becomes fixed. Instead of using digital currency units as rewards like it is in a PoW system, the foragers get rewarded in transactions charges.

However, sometimes, units for a new currency can be developed by inducing inflation in the supply of coin, therefore, rewarding forgers with new currency units which were created as rewards compared to transaction fees.

A forger who wants to validate transactions and create blocks is required to put their own coins at ‘stake’, this is similar to holdings money in an escrow account. As such, If the transaction which the forger validate is a fake one, they lose their holdings alongside their right to perform the role of a forger in the future.

Upon investing their own funds, a forger is allowed to take part in the forging process, and since their own money is involved, they are motivated to incentivized the accurate transaction.

When it comes to the initial distribution of coins in a Proof of Stake system an ICO is usually required. Another method employed is the sale of pre-mined coins. Some project also launches with the Proof of Work algorithm only to later switch to Proof of Stake system.

List of some of a coins using the Proof of Stake Consensus Algorithm:

  • NEO
  • Lisk (LSK)
  • ARK
  • PENG Coin
  • Decred (DCR)
  • Stratis (STRAT)
  • Cardano (ADA)
  • Dash (DASH)