Proof of Stake - what it is?

By
Tokeneo
-
3 min reading

Proof of Stake is the most popular cryptocurrencies mining  alternative for the expensive and energy-intensive consensus algorithm Proof of Work (PoW).

cryptocurrencies pow

The purpose of the consensus algorithm in a public blockchain network is to allow many different users to agree on the current state of blockchain even though they do not trust each other or any central authority. This is a difficult problem and was unresolved until the Bitcoin network was launched.

Proof of Stake (PoS)

Proof of Stake is the most popular alternative to the expensive and energy-intensive consensus algorithm Proof of Work (PoW).

Proof of Stake is a consensus algorithm that selects the owner of a new block based on the stake/assets they have.

Miners are rewarded with cryptourrencies based on their stake. The stake is used to calculate the amount of this currency that you can mine. The more coins you have, the more you gain by extracting them using this protocol.

In PoS coins are generated for just having them, so in order to start mining you need to have a given crypto on your wallet. The more you have, you have higher chance to mine new ones.

But in order to avoid the situation that someone has a monopoly on a given PoS cryptocurrency, there are different ways to prevent this, I'll describe two that I think are most popular:

Drawing

e.g. NXT and Blackcoin randomly draw hashes, and the number of hashes drawn depends on how many coins you have in your wallet.

Age" of coins

We also have a hash draw here but coins older than 30 days take part in the draw. When a coin mine a block, we count it back to 30 days.

The key advantages of Proof of Stake

Energy efficiency

PoS algorithms are energy-efficient - especially when compared to PoW. Cutting out the energy-intensive extraction process makes PoS a more ecological option and cheaper to maintain.

Safety

The attackers must place their assets (their stake) on the line in order to attempt an attack of 51%. This is a big deterrent. By comparison, attackers do not lose their equipment when trying to attack PoW systems.

Decentralisation

Large mining pool (groups of miners combining their resources) can control more than 51% of the network with PoW systems, leading to a very real threat to centralisation. This is due to an exponential increase in the reward for investment in PoW systems, as opposed to linear growth in PoS systems.

How to start mining with Proof of Stake?

The great advantage of this method of mining, is that there is no need to own/invest in expensive and energy consuming graphic cards or specialist ASICs. However, in return we have to buy a minimum amount of a given coin to start the so-called Staking (a common name for PoS digging).

Three best known methods of PoS mining are:

  • Renting a virtual VPS server
  • Mining in the cloud with other users
  • Own Server - "Excavator"

How much can you earn on PoW?

"How much will I earn on this?" is one of the most common questions we hear about crypto mining, and if that question is hard to answer when it comes to Proof of Work, then Proof of Stake is much easier.

Explaining it as simply as possible with PoS, we earn money like on a bank deposit. When we keep a given amount of coins on our wallet (which has to be run, preferably 24/7) in return we get a certain annual return, which is paid in tranches. A great advantage of this method is the constant access to our funds (24/7). So at any time we can take our funds from our wallet and exchange them for another crypto or cash them in traditional currencies.

Proof of Stake method is still very underestimated. I think that as time goes on it will be more and more noticed by small "miners" who can no longer compete with the big PoW mines on their own and by ordinary people looking for a way to multiply their capital.

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