What is Proof-of-Stake

Proof of Stake (PoS) is a consensus mechanism used in blockchain networks to validate and confirm transactions.

Image by Adrien Olichon

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Proof of Stake is a blockchain consensus mechanism used in blockchain to validate and confirm transactions, as well as create new blocks in a blockchain.

Unlike the original Proof of Work mechanism, which is used in cryptocurrencies like bitcoin. Proof of Stake was developed in order to solve some of the issues associated with the Proof of Work consensus algorithms, such as the scalability issues caused by the Blockchain Trilemma, and the high energy usage caused by mining.

Proof of Stake uses validators to create new blocks and validate transactions. ‘Validators’ are also referred to as ‘stakers’. Validators are required to lock up cryptocurrency as collateral in the network. The process of locking up the cryptocurrency in the network is called ‘staking’, and the locked up cryptocurrency is called a ‘stake’. For example, in order to become a validator on the Ethereum 2.0 Proof of Stake network, a validator would need to deposit a minimum of 32 Eth.

The main elements of a Proof of Stake consensus algorithm are:

1. Validators: Anyone who would like to become a validator will need to first stake some cryptocurrency. This initial process of staking is sometimes referred to as a “staking deposit”. The locked up cryptocurrency ensures that validators have a vested interest in the proper functioning of the network.
2. Block Creation: Validating transactions and creating a new block is done by a randomly selected validator. The probability of being chosen to validate transactions and create a new block is generally proportional to the amount of cryptocurrency a validator has staked. Meaning that the higher the amount of cryptocurrency a validator has staked, the higher their chance of being chosen as the next validator of transactions and creator of the next block.
3. Block Validation: Once the new block has been created by the chosen validator. The other validators in the network check the accuracy of the transactions within the newly created block. If the transactions in the new block are correct and valid, and adhere to the rules set by the network, then the new block is added to the blockchain.
4. Rewards: Each validator is rewarded for taking part in securing the network. Validators receive transaction fees derived from the fees in the transactions within the the new block. Additionally, in some Proof of Stake consensus algorithms, for example the Ethereum 2.0 Proof of Stake network, validators receive an additional reward in the form of newly created cryptocurrency. Whereas, in some other Proof of Stake networks, the validators only receive the transaction fees as a reward for validating the network. The rewards of transaction fees, and newly minted cryptocurrency if included, are typically distributed in proportion to the amount of cryptocurrency the validator has staked.
5. Security: Proof of Stake networks rely on validators to act honestly because each validator has an economic incentive in the network. A validator who engages in malicious behavior, or attempts to validate fraudulent transactions, is in danger of loosing their staked cryptocurrency as a penalty for engaging in unwanted behavior. This economic security model is designed to discourage malicious actions.

Proof of Stake Advantages:

1. Energy Efficiency: Unlike Proof of Work consensus algorithms, the Proof of Stake consensus algorithms consume significantly less energy. This makes Proof of Stake consensus algorithms much more environmentally friendly.
2. Scalability: In contrast to Proof of Work consensus algorithms, Proof of Stake networks can often process transactions quicker and at lower costs. This makes it much easier to scale Proof of Stake networks, than Proof of Work networks.
3. Decentralization: Proof of Stake networks have the ability to promote decentralization because it allows for a wider range of participants to become validators, as it does not require expensive mining hardware.

While Proof of Stake offers several advantages, it also has its own set of disadvantages:

1. Nothing at Stake Problem: The “nothing at stake” problem happens when validators have no disincentive to validate multiple competing blocks during a fork in the blockchain. In a Proof of Work network, the miners must choose one chain to mine on, because they have invested a lot of computational resources in the form of hardware and electricity costs. In a Proof of Stake network, the validators can theoretically validate on all forks, which can complicate consensus and lead to chain instability.
2. Long-Term Centralization Risk: Over time, a Proof of Stake network can become more centralized. This can happen if a number of large validators, or as is much more common, validator pools, dominate the network. This centralization can reduce the network’s resilience and censorship resistance, which are key principles of blockchain technology.
3. Economic Security Uncertainty: Proof of Stake networks depend on the economic incentive to secure the network. If the value of the staked cryptocurrency drops significantly, validators may become less motivated to act honestly, potentially weakening the network’s security. The security of Proof of Stake systems depends heavily on the distribution of stakes and the effectiveness of the penalty mechanisms.

There are some well-known cryptocurrencies that use Proof of Stake or variations of it. Examples of these Proof of Stake networks are Ethereum 2.0, Cardano, Tezos and Pulsechain. Each of these networks have chosen their own specific Proof of Stake implementation, but the core principles of validators staking cryptocurrency and earning rewards remain consistent.

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About the Author

Kenneth Omoya is a visionary entrepreneur focusing on the intersection of startups and Web3 blockchain technology. He is the founder of a revolutionary Web3 blockchain company called Tripterium and is also a public speaker.

For more information, please visit:

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