What is Proof-of-Stake?

Proof-of-Stake is an alternative algorithm to the widely accepted Proof-of-Work system. Whereas, in proof-of-work system, the miners validate transactions and create new blocks by performing a certain amount of computational work, a proof-of-stake system requires miners to show ownership of a certain amount of coins/tokens.

The creator of new block is chosen in a randomised way depending on the user’s ‘stake’. In the proof of work system, blocks are said to be forged, not mined. Users who validate transactions and create new blocks in this system are referred to as forgers.

So far, so good, but how does it work?

In order to validate transactions and create blocks, a forger must first put their own coins at ‘stake’. Forgers put an amount of coins and stake as an insurance that they will validate legitimate transactions. If the transactions validated are fraudulent, then, the ‘stake’ is lost and the forger is banned from participating in ‘staking’ in the future.

How are blocks selected?

For a proof-of-stake method to work, there needs to be a way to select which user gets to forge the next valid block in the blockchain. Selecting the user based on the amount that they have ‘staked’ would simply make the rich richer. Thus, there are two popular ways to avoid this – randomised block selection and coin age based selection.

In the randomised block selection, a formula which looks for the user with the combination of the lowest has value and the size of their stake, is used to select the next forger.

In coin age based selection, the selection of the forger is based on how long the coins have been staked and how many are being staked. Coins must have been held for a minimum of 30 days before they can compete for a block. Thus, users who have staked the most coins and earliest as possible have better chances at validating a block.

Why switch from proof-of-work to proof-of-stake?

Proof-of-Stake systems are more environmentally friendly. It is estimated that Bitcoin and Ethereum use approximately $1 million worth of electricity on a daily basis. Moreover, expensive equipment and high electricity bills make it close to impossible for the average Joe to participate in the mining process. Thus, it is believed that proof-of-stake will enable greater number of people to run nodes and thus the systems will become even more decentralised.

Are proof-of-work and proof-of-stake the only options to verify the blockchain?

What you have read until now, is simply a general guide to the idea behind proof-of-stake. It is likely that most cryptocurrency issuers will customise their proof-of-stake and try to make it unique.

Moreover, there are a few other systems being used and developed. Block creation and transaction verification are an integral part of the security of blockchain technology. Only time will tell what other ways are possible for the securitisation of the system.