Proof of Stake

Proof of stake is one of the two most popular models used to validate transactions on a blockchain. The other is the proof of work model.

In the proof of work model used by bitcoin, among others, the ability to process transactions and thus "mine" new coins or tokens is determined by the computing power provided. Entities which provide at least a minimum amount of computing power become nodes or "miners" which process transactions on the blockchain's network. Transactions are assigned to the computer which provides the most power.

In the proof of stake model, on the other hand, the ability to process transactions and thus earn "interest" or "mint" new coins is based on a deposit or "stake" held as collateral. Entities which stake a minimum number of coins or tokens earn the right to operate as nodes or "validators" and process transactions on the blockchain in question. The more coins an entity is willing to stake in a blocked wallet, the higher the chances of the system selecting them to process a transaction are.

For example, if two entities both act as nodes or "validators" on a proof of stake blockchain and entity A stakes 1000 coins but entity B only stakes 500 coins, entity A is more likely to be selected to process transactions and earn the rewards.

If a validator performs an action which harms the blockchain's integrity, the system deducts some or all of the staked coins or tokens as a penalty. This discourages entities from validating incorrect transactions (such as duplicate transfers) or performing other actions which could harm the network.

For example, if entity A were to approve a duplicate transaction to allow the same coins to be used for two payments, and this is discovered by other validators, entity A may lose the 1000 coins it has staked.

Peercoin was the first well-known cryptocurrency to make use of the proof of stake model. Cardano and Tezos are other examples of proof of stake blockchains.

A major advantage of proof of stake over the proof of work model is that entities do not have to compete to provide the greatest amount of computing power. For this reason, transactions on proof of stake blockchains consume far less energy than proof of work blockchains like bitcoin. However, there is far less historical data on the viability and risks of proof of stake models compared to proof of work models.

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Proof of importance explained
Buying and spending bitcoin in Switzerland
How to invest in bitcoin
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