What is proof of stake? | GOBankingFees

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Proof of stake is a term that comes up a lot in crypto. While it is a complex topic, it is definitely one to understand in depth before diving into the world of blockchain.

What is proof of stake?

Proof of stake is the mechanism used by some of the most popular cryptocurrencies in the world to protect their networks. Not only is it more energy efficient, but it gives average token holders the opportunity to earn more from their crypto assets.

Proof of stake is used to protect blockchain networks through a consensus mechanism. The role of consensus mechanisms is to verify transactions to ensure that the security of the blockchain is intact. Unlike proof-of-work mechanisms that use computational power to secure the blockchain, proof-of-stake uses validators.

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The role of a validator is to ensure that transactions made on the blockchain are legitimate. This is done by locking or staking crypto. If the validator approves the transactions, a new block is added to the blockchain.

Proof-of-stake blockchains allow cryptocurrency holders to participate in protecting the network and earn rewards for doing so. This is unique to your system. Only cryptocurrencies that use the proof-of-stake mechanism can be staked for a return. It is also one of its biggest advantages, as crypto staking can be a method of earning passive income from crypto assets for network participants.

Proof of Stake vs. Proof of Work

Both proof of stake and proof of work are consensus mechanisms.

Proof-of-work blockchains are based on securing the network by using huge swaths of computational power to solve complex mathematical equations. This is a process known as mining. Due to the extreme difficulty of these mathematical problems, the use of graphics processing units, commonly known as GPUs, is required.

While this has proven to be the best way to protect blockchain networks, it has also been criticized for having negative environmental consequences. Ultimately, this is the downside of proof of work: the large amount of power input required to protect the network.

Then comes proof of stake. Proof-of-stake mechanisms simply require cryptographic participation and a validator. For most cryptocurrencies, staking is easily accessible and willing token holders can participate to secure the network.

Advantages of proof of stake

Proof of stake has a number of advantages. These include:

  • Energy efficiency
  • rewards
  • Reduce barriers to entry.

Energy efficiency

Proof of stake is considered greener than proof of work. This is because proof of stake lacks the need for complex infrastructure requirements to secure the blockchain. Lower power demand means improved scalability.

rewards

In exchange for staking crypto to secure the network, validators receive rewards. This return on staked crypto assets works similarly to a dividend payment from stocks. For those who have a significant portion of their wealth in cryptocurrencies, this can be an extremely profitable form of passive income.

Lower barriers to entry

Depending on the crypto being staked, the token requirements can be relatively low for crypto stake. This means that more people can participate in protecting the network and benefit from its prosperity.

Proof of Stake Disadvantages

One of the main arguments against proof of stake is reduced security. Compared to a proof-of-work crypto like Bitcoin, proof-of-stake tokens can be more vulnerable to attack. This is not to say that proof of stake has weak security, but proof of work has proven to be extremely resistant to hackers. Proof-of-work ensures that certain resources are required to interact with the blockchain, making it a costly and time-consuming target for bad hackers.

final shot

Proof of stake is an evolutionary byproduct of crypto and blockchain technologies. There are arguments for the superiority of the two basic consensus mechanisms: proof-of-stake and proof-of-work. But overall, both protocols come with unique benefits, each of which is useful in its own right.

Frequently asked questions

Here are some questions people ask when considering gambling crypto.

  • Is Bitcoin Proof of Stake?
    • Bitcoin is not proof of stake. Bitcoin uses a proof-of-work protocol.
  • Is ETH proof of stake?
    • Originally, Ethereum (ETH) used a proof-of-work consensus. However, Ethereum 2.0 is moving towards proof of stake. Compared to other cryptocurrencies, a large amount of ETH is required to become a validator for cryptocurrency staking – approximately 32 tokens.
  • Is proof of stake better?
    • Proof of stake is more energy efficient than proof of work. However, some issues related to reduced security and disparity of network control have been raised.
  • Which cryptocurrency has proof of stake?
    • There are dozens of proof-of-stake cryptocurrencies. Some of the most popular include Cardano, Solana, and Tezos.

Information is accurate as of June 13, 2022.

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About the Author

David is a qualified financial adviser in the Republic of Ireland. He has a bachelor’s degree in business and entrepreneurship, as well as more than five years of investment experience.

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