What is proof of stake?
Proof-of-stake is a cryptocurrency consensus mechanism that is used to process transactions and add new blocks to a blockchain. A consensus mechanism is used to validate and secure entries in a distributed database. The database in the case of cryptocurrency is called a blockchain, so the consensus mechanism ensures the blockchain.
Uses of proof of stake
The proof-of-stake model allows cryptocurrency owners to stake coins and set up their own validator nodes. Staking is the act of pledging your coins to be used for transaction verification. While you stake your coins, they are locked up. Note that you can ‘unstake’ them if you want to trade them. When a block of transactions is ready for processing, the crypto currency’s proof-of-stake protocol selects a validator node to review it. The validator ensures that the block's transactions are correct. If this is the case, they add the block to the blockchain and receive cryptocurrency rewards for their efforts. However, if a validator proposes adding a block with incorrect information, they will be penalized by losing some of their staked holdings.
Salient features of proof of stake
- Proof-of-stake reduces the computational work required to validate blocks and transactions. Proof-of-work ensured the security of the blockchain. Proof-of-stake alters the way blocks are verified by using the machines of coin owners, requiring less computational work. Owners stake their coins for the chance to validate blocks and become validators.
- Validators are chosen at random to confirm transactions and validate block data. Rather than using a competitive rewards-based mechanism like proof-of-work, this system randomizes who gets to collect fees.
- A coin owner must "stake" a certain amount of coins to become a validator. For example, before a user can become a validator, he or she must stake 32 ETH.
- Blocks are validated by multiple validators, and when a certain number of validators confirm that the block is correct, it is finalized and closed.
- Different proof-of-stake mechanisms may use different methods to reach an agreement. When Ethereum implements sharding, for example, a validator will verify the transactions and add them to a shard block, which requires at least 128 validators on a committee.
- After shards have been validated and a block has been created, two-thirds of the validators must agree that the transaction is valid before the block can be closed.
