What is proof of stake?
While the Bitcoin blockchain acts as a virtual cheque book and ledger to process incoming and outgoing transactions, Proof-of-Stake is a type of consensus protocol that relies on a network of ‘validators’ with similar responsibilities to miners: ordering transactions and creating new blocks that have to be agreed upon by all parties before being added to the blockchain.
The key difference is the criteria through which a creator of a block is chosen, such as the amount of wealth e.g. ether a validator holds. Validators contribute or ‘stake’ their own cryptocurrency in exchange for the opportunity to validate a new transaction, update the blockchain, and earn a reward. As proof of stake networks are based on algorithms that choose which validators are selected based on, the larger the stake, the higher the chance they will be chosen.
The most well-known example of a platform using this protocol is Ethereum, whose developers believed that the proof of work protocol would soon face issues with scalability and hash rate due to the increasing difficulty of the mathematical problem miners had to solve.
Key differences to Proof of Work (PoW):
- The amount of energy needed to mine blocks is much lower
- New blocks can be created with less advanced technology
- A stronger case for decentralisation due to the larger number of independent nodes in the network