Proof of Stake

In this article you will find out what proof of stake is, how can you make profits from it, what cryptocurrencies use this type of consensus mechanism and many others.

Before we start, you need to know that most public blockchain networks today use processes referred to as Proof of Work or Proof of Stake to provide consensus, while private and Distributed Ledger Technologies (DLTs) can be structured in various ways to prioritise speed, security, and scalability.

Proof-of-stake is a cryptocurrency consensus mechanism for processing transactions and creating new blocks in a blockchain. A consensus mechanism is a method for validating entries into a distributed database and keeping the database secure. In the case of cryptocurrency, the database is called a blockchain so the consensus mechanism secures the blockchain.

Proof of Stake blockchains keep the network secure and validators honest by requiring validators to stake their tokens. If validators act maliciously or incompetently, they lose their stake and access to the network through a process called “slashing.” This incentive structure ensures that validators have more to gain through lawful operation than by breaking the rules.

Can you make money with proof of stake?

The short answer is yes. Proof of Stake concept states that users can mine or validate block transactions depending on how many coins the user has in a personal account. The more coins the miner owns, the more mining power the user has.

Holders of Proof of Stake tokens can earn a "crypto dividend" on their holdings by staking their crypto and becoming network validators. Because this sometimes requires a substantial investment, exchanges have taken it upon themselves to make the process simpler and more affordable for the average user.

But even if that sounds like too much responsibility, you can still participate in staking by joining a staking pool run by someone else — and earn rewards for crypto that would otherwise be sitting around.

Staking is, at heart, the purest form of holding. By holding on to your coins for the chance to earn more, and simultaneously strengthening the network, you’re demonstrating your belief in the underlying technology of the coin itself. As we briefly touched on earlier, there’s no real point in staking a coin that you don’t want to accrue more of. By staking, you’re essentially signalling your belief in the viability of the project, its team, and its end-use.

Choosing the right coin to stake, then, is both a numbers game and a gut feeling. If you choose to begin staking, definitely begin with research on minimum amounts, staking rewards, particular staking protocols, and the like. But also remember to pick a project that resonates with you and one that you expect will be around far into the future. After all, by staking, you’re helping to make that a reality.

Features of proof of stake

• Low Entry

Another distinguishing feature of Proof of Stake systems is that they’ve low entry requirements. We’ve already shown that, unlike in the Proof of Work systems, here, you wouldn’t need to invest in mining equipment to verify transactions. Instead, your stake is your ticket to participating in the validation process.

• Passive Income

One advantage that Proof of Stake systems have over others is that they allow you to earn passive income. Just like mining rewards your effort with a certain amount of cryptos, so does staking. Staking shows your confidence in the project. Also, the fact that you’re not trading reduces its circulating volume, which in turn raises the token’s value. So, the project will pay you for holding it and you earn income without breaking a sweat.

• Validators take the Transaction Fees

In contrast to Proof of Work systems, where miners get rewards in mined coins, Proof of Stake validators earn rewards from transaction fees. The significance is that the verification doesn’t create new coins, which helps control a given coin/token’s supply.

Can Bitcoin Be Converted to Proof-of-Stake?

No, Bitcoin will not be proof of stake in the future. Proof of work is fundamental to Bitcoin’s basic use case of being a store of value that can be securely and trustless transferred without censor. A more detailed video about Proof of Work will be posted on our channel next week. A growing number of the most popular cryptocurrencies use some variation of the Proof-of-Stake protocol. Here's a partial list:

• Elrond or EGLD

Elrond blockchain is designed to provide decentralisation, security, and scalability for distributed apps and enterprises alike. Elrond Network calls itself an internet-scale blockchain, meaning it is designed to handle transactional throughput on par with major internet platforms, as opposed to the relatively low throughput associated with other blockchain networks. To put Elrond’s throughput in perspective: the Bitcoin network can confirm an average of 7 transactions per second (TPS); the Elrond crypto team claims its network can handle 15,000 TPS, and at a cost of only one cent per transaction. Elrond Network calls itself an internet-scale blockchain, meaning it is designed to handle transactional throughput on par with major internet platforms, as opposed to the relatively low throughput associated with other blockchain networks.

• Cardano or ADA

Cardano is built on the ground-breaking Proof-of-Stake consensus protocol Ouroboros, and the first blockchain consensus protocol to be developed through peer-reviewed research. At the heart of the protocol are stake pools, reliable server nodes run by a stake pool operator to which ADA holders can delegate their stake. Stake pools are used to ensure that everyone can participate in the protocol, regardless of technical experience or availability to keep a node running. These stake pools focus on maintenance and hold the combined stake of various stakeholders in a single entity.

• Solana or SOL

On the Solana network, many different people and entities run a program on specialised computers known as a validator. Validators play a key role in maintaining and securing the Solana blockchain. Validators are responsible for processing new incoming transactions on the network, as well as for voting on and appending new blocks to the blockchain.

• Polkadot or DOT

Polkadot uses the Nominated Proof of Stake as an algorithm to select a set of validators who are elected in each era. There will always be a limited number of these validators (for performance reasons), there are now around 200 and the target number is 1000. In Polkadot, two roles are defined - a nominator and a validator. Validators are responsible for running the consensus algorithm and creating blocks, while nominators support validators with their DOT tokens. Any validator can become a candidate and thus participate in the election to the active set of validators in a given era - there are no requirements for the validator.

Understanding how Proof of Stake is key to understanding cryptocurrency and how it works. In general, it's always better to know what you're investing in before getting involved.


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