What is Proof of Stake?

In the crypto world, you’ll often come across two terms: Proof of Stake and Proof of Work. What’s the difference between the two, and when should PoW or PoS be used? Moreover, how much should you stake in PoS? We’ll answer all your dilemma, whether you’re a future miner or just trading crypto every now and then.

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Proof of Stake

Illustration: Milica Mijajlovic

What is Proof of Stake? 

The combination of crypto mining and Proof of Work were at first seen as well-thought and efficient. Over time, this process showed its shortcomings, such as low transaction speed, intensive energy consumption, and pricy hardware. This wasn’t a deal breaker, but people started wondering if there’s a possibility of a cheaper, faster and energy efficient alternative. And that’s how Proof of Stake was born. 

It works based on a consensus within the peer network and represents, put simply, a process of validating entries in the database, ensuring that the chain is accurate and secure. In exchange to be validators, users stake their coins. 

But there’s more to it.  

Deciding to turn to mining or validating comes with a lot of questions. If you dive into endless conversations online, you’ll often find contradictory information because, in the end, it comes down to individual preferences. In other words, there’s not an ultimate response to which is better – Proof of Work or Proof of Stake.  

But there are ways to figure out which one is a more convenient option for you. 

But first, let’s try to break down the mining/validating logic and explain why there’s a necessity for proving anything at all. 

Understanding Proof of Stake 

There’s a huge responsibility that comes with mining. It’s based on trust, honesty, accuracy, devotion and continuous work. Moreover, you need to understand how crypto and blockchain work on a deeper level, not just as a regular user. 

So, for crypto to stay decentralized, its every segment – such as verifying transactions and mining new blocks – needs to be distributed. Each member of the network can then contribute and do their part of the job, whereas optimized blockchain technology leaves no room for human mistake. 

Proof of Work is an older mechanism, created with an idea of a major network that ensures security and excludes hacking possibilities. That is, for a hacker to attack the network and take over, his hardware power needs to be stronger than 51% of all other users. That’s why more miners were encouraged to join and make the whole process fairer and safer. 

But in order to do that, miners needed to be reliable.  

Let’s see how to ensure that. 

How Does PoS Work? 

Since there is more than 1M miners up until now, it’s understandable that controlling such a network is challenging. Luckily, the blockchain itself provides ways of ensuring miners’ credibility. 

One of them is Proof of Work.  

As described extensively in a devoted article, Proof of Work relies on hardware investment and proving computing power. In other words, miners are solving cryptographic puzzles and adding new blocks to the chain. Moreover, they feel motivated to do honest and prompt work because they have invested in the equipment. 

On the other hand, Proof of Stake doesn’t require that sort of investment, meaning that there must be another way of proving their honest work. That’s ensured by locking a certain amount of the validator’s cryptocurrencies – or staking – so that he’s motivated to work responsibly in order to keep them. 

For comparison purposes, we can say there are more than 400,000 validators on the original Ethereum chain called the Beacon Chain

Additionally, there’s more than one validator working on the same block. Only after a specific number of validators approves it, the block can be considered added and closed. 

But that’s not the only difference between the PoW and PoS. 

How Is PoS Different from PoW?   

First, let’s see what the official definitions of these two terms look like: 

  • Proof of Work is a blockchain consensus mechanism for processing transactions and adding new blocks to the blockchain. 
  • Proof of Stake is a blockchain consensus mechanism for  
    processing transactions and creating new blocks in the blockchain. 

Pretty much the same, right?  

Now, we’ve already covered that PoW means using computer power to solve mathematic problems, whereas PoS is about staking your crypto. The reason why a similar logic lies between the two is because PoW actually came to light much earlier (in 1993), as a way of allowing users to check the integrity on a chosen server in real-time. 

In fact, it was initially designed to fight spam emails and was only later adapted into Reusable Proof of Work for Bitcoin purposes. To this day, it’s irreplaceable for this cryptocurrency, but others use it as well, such as Litecoin, Dogecoin, and Ethereum 1.0. 

On the other hand, PoS was introduced in 2012 by Sunny Kind and Scott Nadal as a way of validating transactions by staking or locking tokens. That’s why, validators would want to ensure proper functioning of the network and wouldn’t attack it because they would be attacking their funds as well. 

Proof of Stake Benefits 

If you’ve been around for a while, you know that there’s a huge discussion about environmental sustainability with mining. Apparently, mining consumes energy as much as countries like Denmark, Switzerland or Argentina. 

PoS

Source: FTSE Russell and Digital Asset Research

Even though Bitcoin is a digital currency, miners pay electricity bills and other operational costs with fiat. In other words, they’re using crypto in exchange for energy. 

That’s why, PoS was invented with reducing energy consumption in mind. There’s no need for using that much computing power, because validators are instead staking their crypto. As a result, experts believe that new crypto will solely rely on PoS but, at the same time, nobody expects Bitcoin to switch to PoS. It is possible, but it would take years and all of the network members to agree to this change, so it’s safe to say PoW will exist as long as there’s BTC. 

Another thing specific for PoS is the penalty mechanism aka slashing. So, in order to make sure validators are working according to agreements, developers have come up with penalties. Whenever one of them misses a transaction, double signs it or performs other malicious activity, their locked capital will be reduced or eliminated, depending on how serious the consequences are. 

Why is Yielding Considered a Hidden PoS Benefit? 

Now, we’ve saved the best for last.  

Have you heard of yielding? 

Proof of Stake has yet another way of solving scaling problems and reducing energy consumption. An additional, less known benefit is its ability for generating yields. 

Yields are in a digital asset markets the same as in traditional assets – how much income you generate on investment. However, there are some specifics in the crypto world. 

Digital assets yield can be earned from interest on capital, or from receiving rewards for participation in the protocol. Participating in and staking in a protocol generates yield that can be compared to a stock dividend, which is automatically reinvested into the underlying equity. 

These are the Top 8 digital assets by market cap with staking yield: 

Ethereum

Source: FTSE Russell and Digital Asset Research

When to Use PoW or PoS? 

To help you decide whether to use PoW or PoS, here’s a side-to-side comparison: 

Proof of Work Proof of Stake 
Block creators are called miners Block creators are called validators 
Used for Bitcoin, Dogecoin, Ethereum 1.0 Used for Ethereum 2.0, BNB, Cardano, Polkadot and other new cryptocurrencies 
Limited transaction speed Higher transaction speed 
Expensive energy costs Less energy consumption  
Investment in processing equipment Doesn’t require expensive hardware 
Works on solving mathematical problems Works on staking tokens 
Low transaction fees Validators are awarded with transaction fees 
Miners compete for a coin award System chooses validators randomly 
51% attack can happen in miner’s power is stronger than 51% of the network 51% attack can happen if the validator owns more than 51% of staked crypto 

A journalist by day and a podcaster by night. She's not writing to impress but to be understood.