Proof of Stake (PoS)
Since cryptocurrencies are decentralized and not under the control of financial institutions, they need a way to verify transactions. One method many cryptos use is proof of stake (PoS).
Proof of stake is a type of consensus mechanism used to validate cryptocurrency transactions.
With this system, owners of the cryptocurrency can stake their coins, which gives them the right to check new blocks of transactions and add them to the blockchain.
This method is an alternative to proof of work, the first consensus mechanism developed for cryptocurrencies. Since proof of stake is much more energy-efficient, it has gotten more popular as attention has turned to how crypto mining affects the planet.
Understanding proof of stake is important for those investing in cryptocurrency. Here's a guide to how it works, its pros and cons, and examples of cryptocurrencies that use it.
How does proof of stake work?
The proof-of-stake model allows owners of a cryptocurrency to stake coins and create their own validator nodes. Staking is when you pledge your coins to be used for verifying transactions. Your coins are locked up while you stake them, but you can unstake them if you want to trade them.
When a block of transactions is ready to be processed, the cryptocurrency's proof-of-stake protocol will choose a validator node to review the block. The validator checks if the transactions in the block are accurate.
If so, they add the block to the blockchain and receive crypto rewards for their contribution. However, if a validator proposes adding a block with inaccurate information, they lose some of their staked holdings as a penalty.
As an example, let's look at how this works with Cardano (CRYPTO:ADA), a major cryptocurrency that uses proof of stake.
Anyone who owns Cardano can stake it and set up their own validator node. When Cardano needs to verify blocks of transactions, its Ouroboros protocol selects a validator. The validator checks the block, adds it, and receives more Cardano for their trouble.
