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What is Proof of Stake (PoS)?

Updated on :  

08 min read.

Cryptos are decentralised so that no central financial institutions can control them. That is why they need a way of verifying transactions. Proof of stake (PoS) is one method that several cryptocurrencies use. 

It is an alternative to the first consensus mechanism developed for cryptos – Proof of Work (PoW). With the world’s attention turning to the way cryptocurrency mining affects the planet, PoS has grown to become more popular owing to its benefits.

Here’s a comprehensive guide on Proof of Stake. 

Proof of Stake (PoS): Definition

Proof of stake (PoS) is a kind of consensus mechanism used to validate cryptocurrency transactions. With this mechanism, cryptocurrency owners can stake coins which allows them to check new transaction blocks and add them to the blockchain.

This mechanism lowers the computational work necessary to verify transactions and blocks, which helps keep the blockchain and the crypto secure. PoS changes how block verification takes place using coin owners’ machines.

Working of Proof of Stake

The proof of stake model enables cryptocurrency owners to stake coins and develop their validator nodes. For those new to staking, it is when you pledge your coins to be used for verification of transactions. At the time of staking, your coins are locked up. But you are free to unstake them if you are willing to trade.

When a block of transactions is ready for processing, the crypto’s PoS protocol will opt for a validator node to review the block. The validator checks the accuracy of the transactions in the block. If the transactions are accurate, validators add the block to the blockchain. And for their contribution, they receive crypto rewards.

But, a validator will lose a portion of their staked holdings as a penalty if they propose the addition of a block with inaccurate information.

Difference between PoS and PoW

Proof of Stake (PoS)

Proof of Work (PoW)

Initial investment to purchase stake and build a reputation

Initial investment to purchase hardware

PoS systems are a lot more energy and cost efficient in comparison to Proof of Work systems but are less proven.

PoW systems are less costly and energy-efficient but more proven.

Standard server-grade unit is enough for efficiency.

There is a specialised equipment to optimise the system’s processing power.

An algorithm based on user stake selects the block creator, hence there exists no competition.

Miners compete to add each block to the chain. They use their computer process power to solve difficult puzzles.

Hackers must own 51% of all crypto on a network.

To add a malicious block, hackers should have 51% of computation power.

Instead of receiving a block reward, a validator collects a network fee as a reward.

The first miner who solves the cryptographic puzzle of every block receives a reward.

The probability of validating a new block is ascertained by how big of a stake an individual holds (how many coins they have in possession).

The probability of mining a block is ascertained by how much computational work a miner does.

Understanding the goals of PoS

PoS is engineered to lower the environmental sustainability and scalability concerns surrounding the PoW protocol. PoW is a competitive approach of transaction verification that encourages individuals naturally to look for methods to gain an advantage, particularly because there is an involvement of monetary value.

The amount of energy necessary to mine PoW crypto has a profound impact on the market dynamics of profitability and pricing. Also, there are environmental aspects to look into, as the energy used by PoW mining is equivalent to what a small country uses.

The proof of stake mechanism aims at solving these issues by substituting staking for computational power by which the network randomises the mining ability of an individual. This implies that there must be a drastic lowering of energy consumption as miners cannot depend on massive farms of single-purpose hardware to reap the benefits.

Pros of Proof of Stake

  • Offers inexpensive and fast processing of a transaction
  • Special equipment is not necessary to participate.
  • Energy-efficient

Cons of Proof of Stake

  • Validators with huge holdings can have a significant influence on the verification of transactions.
  • Some PoS cryptos need locking up staked coins for a minimum period of time. 
  • Not as proven when it comes to security like PoW

Cryptocurrencies using Proof of Stake

PoS is emerging as a more prevalent consensus mechanism in the crypto space. As per an article dated 8 April 2022, there are around 80 different cryptos which use Proof of Stake as a consensus mechanism. Some popular coins that use PoS are:

  • Cosmos (ATOM)
  • Cardano (ADA)
  • Tezos (XTC)
  • Tron (TRX)
  • EOS (EOS)

Final word

Admittedly, PoS is still emerging as a consensus mechanism for blockchain. But it does hold significant potential. With a greater level of accessibility and lesser energy demands for individuals to participate as validators, PoS comes with several attractive features which can bring it to the mainstream for blockchain security.