PoS is a type of “consensus algorithm” which defines who (which node on the blockchain) gets to validate and add the next group of transactions to the blockchain.
PoS was proposed as an alternative to the Proof-of-Work consensus algorithm in 2011. The PoS alternative was created to try to improve on some of the drawbacks of the PoW consensus algorithm, such as excessive power consumption, and the susceptibility to 51% attacks. PoS uses far less power since it does not rely on large amounts of computational power to “win” the right to validate blocks.
Staking is a type of mining process but is more correctly called “forging”. PoS Blocks are Forged, not Mined.
Coin holders can “stake” their coins in the hopes of being chosen to validate the next block of transactions on the blockchain. To stake coins, you have to temporarily lock them up so they can’t be used for a period of time. On some blockchains, this period can be longer than a year.
The PoS consensus algorithm selects one of the computer nodes on the blockchain with staked coins to be the “validator” node for the next block of transactions. The selection process is often based not only on the amount of coins staked but also on how long (age) the coins have been staked, plus a randomization factor so that the biggest stakeholder doesn’t always win. This allows even very small stakeholders to occasionally win the selection process. The “age” of staked coins would typically be reset once the associated node was elected to validate a block so that that node would not necessarily be soon chosen again.
Different criteria can also be defined by the algorithm depending on exactly how the developers want validators to be chosen.
Stakers who are chosen as the next block validator can earn newly generated cryptocurrency (and network fees). These earnings are due to their work to validate the next block of transactions and add them to the blockchain. The amount of earnings are typically relative to the number of coins that are staked.
51% attacks on PoS networks are anticipated to be less likely (than PoW networks). This is because attacking a PoS network requires that the attackers would need to stake 51% or more of the total number of coins staked coins on the blockchain. But anyone who already owns 51% of the coins would probably have very little financial incentive for the attack since they would actually have the most to lose due to the value of their staked coins. Conversely, a 51% attack on a PoW network just requires lots of computer power from a determined attacker with no coins at all at risk.
PoS discourages staking nodes from creating fraudulent block since, if the block is later discovered, the staker will typically lose part (or all) of their stake, plus they will typically not be permitted to participate in future forging. These penalty rules may be different on each blockchain that uses a PoS. For this reason, stakers are usually not permitted to immediately withdraw their stake and rewards right after winning them – they must keep them staked, and at risk, for a period of time after adding their block.
Anyone who wants to stake their coins can do so in several ways:
- By setting up their own computer node on the blockchain.
- Paying a third party to set up a dedicated node for them.
- Joining a group staking pool with other currency holders.
- Storing their coins on an exchange and allowing the exchange to stake their coins.
Some of the typical requirements of staked coins can be:
- A minimum amount of coins.
- A minimum period of time to keep coins staked after winning the forging process
Note that each blockchain can have its own rules, but the above description is generally true for most PoS blockchains. Here are a few of the other blockchains that use PoS:
RELATED DICTIONARY TERMS
- Mining
- Consensus Algorithm
- PoW – Proof of Work
- DPoS
- PoWeight [link]
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