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Proof-of-Stake (POS) can sound familiar to several individuals, but how many people can claim to understand it deeply. This content is made for the intensive exploration of the concept and explaining its functionality.
Proof-of-Stake
Proof of Stake is an agreement system for the verification of new distributed processes. Due to how blockchains are not controlled or managed by any financial institution, there should be a different systematic method to ensure good transaction verification. POS is introduced to serve this purpose, standing as an approach to efficiently validate every entry within the network. With this, the database’s optimal security can be guaranteed.
POS helps confirm the authenticity of the blocks with the assistance of the blockchain participants. These individuals participants, that are also referred to as coin owners, use their assets as collateral to prove the validity of the blocks. A validator is used when the coin owners possess staked coins.
So, what is staking? To stake means that participants choose to keep some crypto to verify fresh data blocks. Those with a promising likelihood of being chosen by the blockchain algorithm to evaluate fresh data blocks are participants with better records of staking. After validators are done with the validation process, the data are joined to the blockchain. Also, such validators get newly created crypto as a bonus.
Unlike POW, which employs a mechanism that centers on competition to mine, POS selects validators that will mine or verify the block randomly. When validators deliver authentic agreements, they will be rewarded accordingly; nonetheless, if dishonest transactions are delivered, their punishment could be burning some of the stake they possess, which is sending them as an inaccessible wallet address, thereby rendering the stake useless.
Why is the POS Designed
For a better understanding of POS, knowing its specific goals is essential. Basically, POS is developed to deal with the scalability and eco-sustainability issues associated with POW. It. has been shown earlier that POW is a mechanism that involves competition when it comes to confirming transactions. So, as a competition that involves a monetary value, participants strive to have an edge within the system.
Bitcoin is the prize offered to those that mine it after the validation of blocks and transactions. Nevertheless, the mining process price (operating expenses) is alarming. An example is when miners are expected to pay for rent and electricity using fiat currency. This indicates that power is being traded for a digital currency. The consequence of mining POW crypto using a very high amount of power is the effects on the market dynamics of profitability and pricing. Concerning the fact that POW mining utilizes great power, the environmental aspects should also be considered.
Therefore, the POS is created to proffer solutions using staking instead of computational power, which implies that the system chooses participants randomly based on their capacity to mine. With this, energy consumption is minimized because there’s no more reason for miners to utilize powerful hardware to achieve what they want.
Advantages and Challenges of POS
A significant percentage of electricity (computational energy) that POW consumes is one of its unfavorable characteristics. The POW poses more significant concerns due to the environmental influences the blockchains that use it have. Nonetheless, the POS ensures that the environment has better outcomes. Notwithstanding, POW will not be a wrong idea if power can be more cost-effective; In fact, it will be more profitable compared to POS.
But since the energy consumed by POW is a big challenge, POS provides an excellent solution by ensuring a reasonable energy use and distributing infrastructure wisely. With this, blockchain systems tend to enjoy more satisfactory advantages.
Moreover, POS makes more participants in blockchain networks validators. These individuals don’t require costly computing procedures and much power for crypto staking. What these validators require are coins.
You should also know that POS tends to be more scalable than POW. Theoretically, the blockchains of POS allow more concurrent transactions while ensuring that security and decentralization remain intact.
It’s great to know how beneficial POS can be. Nonetheless, it’s an agreement mechanism featuring some significant cons. One of these is the vetting strategy. It’s claimed that POW is more extensively vetted compared to POS.
Blockchains could sometimes be more susceptible to several attacks, such as low-cost bribe attacks, due to specific undertakings of POS when compared to POW. Try to understand that the general defense of the blockchain drops when it becomes prone to attacks.
Also, it’s likely that coin owners that have huge percentages of a blockchain’s token will have more influence on the POS network.
The migration system is the final cons here. Changing from POW to POS appears snarled and tricky. This could be a benefit because it’s a means to ensure that the integrity of the blockchain is protected.
It’s evident that POS has benefits and features some drawbacks. But it’s crucial to discuss its security system.
Is POS Safe
You should know that when people use POS, the threat to the digital currency is the 51% attack. The attack occurs when a digital currency of 51% is controlled by someone who utilizes the bulk to modify the blockchain. Generally, a group/ individuals in the POS are expected to possess the staked crypto of 51%.
Seen before anyone holding this 51%? Whoa! That is huge. Apart from being too expensive, the staked digital currency stands as collateral, giving the mining privilege. You should understand that miners are faced with the risk of forfeiting their staked currency if they try to revert a block via a 51% attack. With this, miners are encouraged to do the right thing for the interest of the network and the cryptocurrency.
Impressively, POS has a confidentiality policy of not promulgating most of its security features. It’s a great way to prevent any likelihood of circumventing the defense measure. But numerous systems of POS feature additional security spotlights that contribute to the inbuilt safety of the agreement mechanisms and blockchains.
For further clarity and an in-depth understanding of the POS, let’s look at how it’s different from POW.
How is POS Different from POW?
POW and POS are agreement mechanisms utilized in decentralized finance (DeFi) and crypto applications. The significant difference between them is that POS is created to utilize miners that are chosen erratically to validate transactions. In contrast, POW is a competition-based mechanism to verify transactions and put fresh blocks on the blockchain.
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| Proof Of Stake | Proof Of Work |
|---|---|
| In Proof-of-Stake mining, the reward between validators is distributed randomly | In PoW, miners compete against each other. The reward goes to the participant who is the first to find a new block. |
| Critical computing power is not required to verify transactions. | Critical computing power is needed to confirm transactions. |
| It’s recent and less adopted compared to its counterpart. | It has been around longer than POS |
| POS has a lower eco-effect– this qualifies every crypto under it for ESG portfolios | The large percentage of energy that it demands often makes crypto under it to be classified as unfit for ESG portfolios. |
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With the explicit details about the POS, let’s go through some digital currencies that use it.
Cryptos Using POS
Because of the advantages that POS has over POW, it’s becoming widely known in the cryptocurrency world as a significant agreement mechanism. If we have to count the existing cryptos that use POS, they should be up to eighty by now. Some prominent cryptos are Tron, Cosmos, Cardano, EOS, Algorand, and Tezos.
To satisfy your curiosity about how the POS system works, let’s delve into some explanations.
POS– How it Works
As explained, the POS, being an agreement mechanism, provides participants with the opportunity to stake their assets and form their special validator nodes. Specifically, when you pledge coins for the transaction verification process, it’s called staking. While staking the coin, you lock them up. However, you are free not to stake in case you need the coins for trading.
You should note that transaction blocks will be reviewed by a validator selected by the cryptocurrency’s POS protocol the moment it’s ready to be processed. The vital role of a validator is to review the accuracy of the transaction in the block. If the checking is authentic, the block will be made as a part of the blockchain; also, the validator will receive crypto as an incentive. Nonetheless, if the validator’s information is inaccurate, they will lose their stake.
POS remains the newest agreement mechanism for blockchain, and it holds several great possibilities in the crypto society. With its significant characteristics to require lower energy yet featuring an impressive height of allowance for participants to become validators, POS comes with numerous unique qualities, capable of qualifying it as the main focus to protect blockchain.
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