Even though cryptocurrency operates in a completely decentralized system, a verification method for transactions and security is still required. Proof of stake is one such verification technique. Proof of stake is a critical component of blockchain technology and its operations; it ensures that every piece of data kept within the network is genuine.
What Is Proof of Stake?
In the crypto world, proof of stake is a consensus method used by blockchains to achieve an equitably distributed consensus. Proof of stake is a method of validating cryptocurrency transactions.
It is accomplished by picking random validators based on their amount of cryptocurrency. The proof of stake approach avoids the computational costs associated with proof of work methods.
Proof of stake is a different way to reach a consensus, just like proof of work, which was the first method devised for cryptocurrencies; however, it is now a favored consensus mechanism over proof of work because it’s a more efficient means of saving energy.
Over the years proof of stake consensus mechanism has received more attention as discussions on the effect of crypto mining on the planet have received more popularity.
Whereas proof of stake uses staking, proof of work uses a system of miners solving complex math problems to select which network participant will validate transactions and expand the blockchain.
How Proof Of Stake Works
The proof of stake consensus mechanism allows holders of a specific amount of bitcoin to become validators and stake their coins in exchange for validator nodes. The name given to this practice is Staking.
Staking occurs when holders of a certain cryptocurrency lock up a certain amount of their cryptocurrency or tokens, referred to as their stake, within a smart contract on the blockchain in exchange for the possibility of validating new data blocks added to the blockchain and be rewarded. A validator can choose to remove their stake if they need their coins to trade.
When processing a block of transactions, the protocol for the aforementioned cryptocurrency proof of stake will select one validator node for block evaluation, after which the validator reviews the transactions and approves for the transactions to be added to the block only if the transactions are accurate.
The validators are then rewarded with dividends for their aid, but if a block of transactions validated by them is incorrect, the validators are penalized, which means a portion or all of their stake is lost. Cardano, Solana, Terra, and Ethereum 2.0 are examples of large cryptocurrencies that currently use proof of stake.
Proof of Stakes: Staking Leverage
The staking procedure can be leveraged using the proof of stakes method. However, this depends on the validator and the number of coins one is ready to stake. When transaction blocks require validation, validators with higher stakes are most likely to be picked.
Because one’s chances of being picked to be a validator only improve as the stacked amount of count increases, the likelihood of a validator with stakes of 0.001% of the entire amount stacked will also be around 0.001%, even with the process of selection being randomized.
Staking with an exchange is a good strategy to boost one’s chances. If one is seeking an easier way with less work, one should consider using an online exchange.
Using a regular exchange technique, such as the bitcoin ETF, allows retail investors and other investors who are hesitant to invest in cryptocurrency due to security concerns and high costs to participate in a similar investment.
As the price of bitcoin increased, these ETFs were designed to help regular retail investors who could no longer participate in bitcoin directly.
Stake Pool Method
Joining a staking pool is another excellent technique to boost a validator’s chances to leverage on mining.
A staking pool is created by one individual, with other participants permitted to join; their coins are combined, and the staking pool owner creates a validator node to increase their chances of being chosen for new blocks. The rewards are subsequently distributed among the staking pool participants.
Benefits of Proof of Stake
- It’s a more effective way to save energy.
- Proof of stakes is faster and more scalable than proof of work
- It doesn’t require any special equipment for participation
Downsides of Proof of Stake
- Excessive influence on the verification of transactions by validators with large holdings.
- Some cryptocurrencies, for proof of stake, need to be locked first for a period of time.
- Proof of stake is not as secure as proof of work.
Proof of stake is likely to acquire popularity over time. Some benefits include a faster transaction process, lower costs, and a more efficient method of preserving energy, making it more environmentally friendly. And all of this benefits cryptocurrencies and their many investors.
>> Learn More: What is a POS?