Proof of Stake (PoS), Its A Type of Mining That Is Sort of Like Getting A Chance to be Paid Interest on Coins Held (like a Mash-up of a Savings Account and the Lottery in Most Cases)
Proof of Stake (PoS) is an alternative to Proof of Work (PoW) where mining power is based on how many coins a person holds. Essentially, new coins are created as interest paid on existing coins.
FACT: There have been several proposals on how proof-of-stake can be implemented. One version that is currently working in practice is PPCoin (Peercoin) created by Sunny King. Meanwhile, as we’ll explain below, Ethereum plans to move to a PoS model.This video from PPCoin describes how Peercoin is different from other coins like bitcoin, one of the most important ways being that it uses proof-of-stake rather than proof-of-work.
PoS in More Detail
The above explains the basics of Proof of Stake (PoS), below we explain the specifics.
More specifically, PoS works like this: instead of mining power being based on how much [in simple terms] CPU/GPU you have (like it is with PoW), PoS mining power is based on how much coin you hold.
In order for your coins to count toward your mining power, you have to “lock them up.”
So it’s sort of like storing money in a savings account, bond, or CD. You commit coins to mining for a time, and you get a chance to get paid what can essentially be described as interest on your coins over time (PoS mining creates new coins that have a chance to be paid to those who have them set aside for mining; the more you hold, the greater the chance).
In other words, like with traditional PoW mining, but unlike with a savings account, with PoS you typically get a chance to get paid new coins rather than a guarantee (you aren’t guaranteed “interest”).
With many people doing PoS mining at once, it helps increase security, reduces the risk of centralization, and to increases energy efficiency compared to the rather energy inefficient PoW common to Bitcoin and many cryptos.
Ethereum, the top #2 coin by market cap, is notably moving from a pure PoW consensus model to a PoS-PoW hybrid consensus model. That makes this concept more important to understand than ever (although the model has already been adopted by a few coins).
Proof of Stake (PoS) is a category of consensus algorithms for public blockchains that depend on a validator’s economic stake in the network… Significant advantages of PoS include security, reduced risk of centralization, and energy efficiency.
To quote Ethereum’s GitHub with a few annotations, the benefits of Pos include:
- No need to consume large quantities of electricity, and thus there is not as much need to issue as many new coins in order to motivate participants to keep participating in the network. It may theoretically even be possible to have negative net issuance, where a portion of transaction fees is “burned” and so the supply goes down over time. This could potentially decrease the supply of coins, thus increasing the value of each coin.
- Reduces centralization risks. One of the biggest problems in crypto right now is centralization (of mining power, of capital on exchanges, etc). Protecting the many against the few is vital, only proper code can do that, because there is essentially no central authority in the very democratic world of crypto.
- Ability to use economic penalties to make various forms of 51% attacks vastly more expensive to carry out than proof of work – to paraphrase Vlad Zamfir, “it’s as though your ASIC farm burned down if you participated in a 51% attack”.
That is the gist.
Learning about the nuts and bolts from me seems silly when you can read about it on the official Ethereum Github. So click the link above, or if you are in video watching mode, watch the video below.Proof of Work vs Proof of Stake (Ethereum) – Explained for Beginners.
BOTTOMLINE: Proof of Stake is an alternative to Proof of Work cryptocurrency mining. It creates new coins like Proof of Work, but it avoids computational waste by requiring the prover to show ownership of coins.