Proof-of-stake is a term that crops up a lot in crypto. While it’s a complex topic, it’s definitely a subject to understand in-depth before diving into the world of blockchain.
What Is Proof-of-Stake?
Proof-of-stake is the mechanism used by some of the world’s most popular cryptocurrencies to secure their networks. Not only is it more energy-efficient, but it gives average token holders the opportunity to earn more from their crypto assets.
Proof-of-stake is used to secure blockchain networks through a consensus mechanism. The role of consensus mechanisms is to verify transactions to ensure the security of the blockchain is intact. In contrast to proof-of-work mechanisms that use computational power to secure the blockchain, proof-of-stake uses validators.
A validator’s role is to ensure transactions made on the blockchain are legitimate. This is done by locking up, or staking, crypto. If the transactions are approved by the validator, a new block is added to the blockchain.
Proof-of-stake blockchains allow crypto holders to participate in securing the network and earn rewards from doing so. This is unique to its system. Only cryptos using the proof-of-stake mechanism can be staked to earn a yield. It’s also one of its biggest advantages, as staking crypto can be a method of earning passive income from crypto assets for a network’s participants.
Proof-of-Stake vs. Proof-of-Work
Proof-of-stake and proof-of-work are both consensus mechanisms.
Proof-of-work blockchains rely on securing the network using large swaths of computational power to solve complex mathematical equations. This is a process known as mining. Due to the extreme difficulty of these mathematical problems, the use of graphic processing units — commonly known as GPUs — is required.
While this has proven to be the best way to secure blockchain networks, it has also been criticized for having negative environmental consequences. Ultimately, this is the downside to proof-of-work — the vast amount of energy input required to secure the network.
So, along comes proof-of-stake. Proof-of-stake mechanisms simply require crypto staking and a validator. For most cryptos, staking is readily accessible, and willing token holders can jump in to play a part in securing the network.
Proof-of-stake has a number of advantages. These include:
- Energy efficiency
- Lower barriers to entry.
Proof-of-stake is regarded as more environmentally friendly than proof-of-work. This is because proof-of-stake lacks the need for complex infrastructure requirements to secure the blockchain. Lower energy demand means improved scalability.
In return for staking crypto to secure the network, validators receive rewards. This return on crypto assets staked works similarly to a dividend payout from stocks. For those who have a significant portion of their wealth in crypto, this can be an extremely profitable form of passive income.
Lower Barriers to Entry
Depending on the crypto being staked, the token requirements can be relatively low for crypto staking. This means more people can participate in securing the network and benefit from its prosperity.
One of the main arguments made against proof-of-stake is reduced security. Compared to a proof-of-work crypto such as Bitcoin, proof-of-stake tokens can be more vulnerable to attacks. This isn’t to say that proof-of-stake has weak security, but proof-of-work has shown to be extremely resistant to hackers. Proof-of-work ensures that certain resources are necessary to interact with the blockchain, which makes it an expensive and time-consuming target for bad hackers.
Proof-of-stake is an evolutionary byproduct of crypto and blockchain technologies. There are arguments for the superiority of both of the core consensus mechanisms — proof-of-stake and proof-of-work. But, all in all, both protocols come with unique benefits, each of which is useful in its own right.
FAQHere are some questions people ask when considering staking crypto.
- Is Bitcoin proof-of-stake?
- Bitcoin is not proof-of-stake. Bitcoin uses a proof-of-work protocol.
- Is ETH proof-of-stake?
- Originally, Ethereum (ETH) used a proof-of-work consensus. However, Ethereum 2.0 is moving over to proof-of-stake. In comparison to other cryptos, a large quantity of ETH is required to become a validator for crypto staking -- approximately 32 tokens.
- Is proof-of-stake better?
- Proof-of-stake is more energy-efficient than proof-of-work. However, some issues have been raised concerning reduced security and disparity of network control.
- Which cryptocurrency has proof-of-stake?
Information is accurate as of June 13, 2022.
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- SoFi. 2021. "What Is Proof of Stake?"