What is Proof-of-Stake, and How Does it Work?
Proof-of-stake cryptocurrency has become essential in the DeFi space. Investors can now earn from their favorite coins, potentially never having to sell to make great ROI.
Compared to traditional finance, it might sound too good to be true. It might seem unsustainable, centralized, and inflationary. Yet, PoS coins tend to be the most performing projects so far.
How does that work?
What Is a Consensus Mechanism in Blockchain?
Cryptocurrencies use decentralized, distributed blockchains. Thousands of node devices keep copies of this financial database. As people make transactions, these devices create their own blockchains based on the original.
Some blocks might be common (AKA confirmations), others might be unique. Assuming they’re all valid, how do you know which chain to upload to the actual blockchain?
There are no “correct” answers in crypto, only consensus mechanisms. In Bitcoin, whatever validator verifies the transaction first will be the “right” block. In proof-of-stake, the validator with the most coins will have the highest chance of being chosen.
Every time you trade a PoS cryptocurrency, there’s a random algorithm running. Validators can influence their probability by putting more tokens at stake.
What Are the Different Kinds of Consensus Mechanisms?
Consensus mechanisms inspire by factors like processing power, token quantity, holding history length, memory capacity, and activity. There’s no universal agreement as to what criteria are best. The most popular ones are:
Alternative consensus algorithms include:
How Does Proof of Stake Work?
For users, staking might be as simple as a “Stake” button on a Defi platform. But how does it work behind the scenes? Suppose you send Ethereum using a PoS blockchain:
- The algorithm will randomly choose a validator. The more tokens staked, the better the chance.
- If the validator isn’t available, the process repeats. If it is, it verifies the block.
- Nodes add your transaction to their blockchain, increasing its “confirmations.”
- After enough confirmations, your transaction is complete.
Even though PoS has existed since 2012, it didn’t become mainstream until 2020. To understand what makes it so different, let’s compare it with the first-ever consensus model: Proof of Work.
Proof of Stake vs Proof of Work
Have you noticed? Very few proof-of-work tokens rank in the Top 20 of CoinMarketCap. These are mostly old coins launched before 2014.
Not only PoS is more popular, but some PoW coins like Ethereum have switched to this consensus method. Is it really that big of a difference? Let’s see:
Now, it’s not enough to only compare proof-of-stake vs proof-of-work. PoS has as many cons as pros, and every project manages them differently. It doesn’t mean that every PoS cryptocurrency will outperform Bitcoin.
Proof of Stake: Advantages and Disadvantages
It seems proof-of-stake has become the standard for modern blockchains. Most major coins use some variation of PoS. Polkadot, Tezos, Cardano, Tron, Cosmos, EOS, Avalanche.
That doesn’t mean it’s the perfect consensus mechanism. For non-PoS, it might seem like the only viable option. But its features don’t come without trade-offs.
The Proof of Stake advantages are:
The Proof of Stake disadvantages are:
Despite limitations, it seems proof-of-stake is the best solution so far. Not only it outperforms PoW but also encourages community building. Besides staking, users are more likely to contribute with their ideas to improve the blockchain.
PoW is about competition, PoS is about teamwork. The question is, what proof-of-stake blockchain is the best?
If you believe Pulsechain could be “the one,” stake PLS, PLSX, and LOAN tokens with our Liquid Loans validator.
FAQ
Here are more specific Q&As about proof-of-stake and consensus methods.
Is Bitcoin Proof of Stake or Proof of Work?
Not only is Bitcoin proof of work, but it’s the largest PoW blockchain today. Which also makes it the most expensive for crypto mining and network attacks. Bitcoin’s algorithm makes PoW more intensive as validators mine more blocks.
Bitcoin has over 15,000 nodes and consumes ~0.55% of the global electricity production . While Bitcoin could become proof-of-stake, it’s unlikely. Validators won’t give up their mining profits, which come from a handful of pools controlling most of the block rewards.
Is Ethereum Proof of Stake or Proof of Work?
The current ETH blockchain (Ethereum 2.0.) has been proof-of-stake since late 2020. The network has become more scalable, cheaper, and faster. So have all other apps backed by ERC-20 tokens, which now allow staking.
ETH supported both PoW and PoS until merging into a single PoS chain in 2021. Note that proof-of-work still exists on earlier Ethereum forks such as Ethereum Classic and Expanse.
Will Proof-of Stake on ETH2.0 Reduce Gas Fees?
Before 2.0., Ethereum gas fees were increasing, averaging $100 to $200 last year. So far, fees have been below $60 for at least six months (besides occasional spikes). So while ETH 2.0. has reduced fees, they’re nowhere near as competitive as <1$ on Binance, Solana, or Avalanche.
Is Pulsechain Proof of Stake or Proof of Work?
Pulsechain is the proof-of-stake Ethereum fork that will hopefully close the performance gap. Ethereum has more dApps than all other networks combined, and it’s because of this market size that many developers stay in it.
Now, Pulsechain allows them to copy all ERC-20 tokens to a faster and cheaper network. This benefits smaller traders, developers, and even Ethereum (because of load sharing). You can stake Pulse (PLSX) tokens today with the Liquid Loans validator.
Disclaimer: Please note that nothing on this website constitutes financial advice. Whilst every effort has been made to ensure that the information provided on this website is accurate, individuals must not rely on this information to make a financial or investment decision. Before making any decision, we strongly recommend you consult a qualified professional who should take into account your specific investment objectives, financial situation and individual needs.
Originally published at https://learn.liquidloans.io on September 6, 2022.
