What is Proof of stake (PoS)

In a distributed ledger, a consensus mechanism is needed to make sure the network approves the validity of the transactions recorded.

There are several types of consensus mechanisms adopted by different blockchains. Among the most popular mechanisms are Proof-of-Work and Proof-of-Stake.

Bitcoin is one of the blockchain networks that utilizes proof-of-work. Today, to generate new blocks on the Bitcoin blockchain, proof-of-work demands substantial amounts of energy to solve the complex mathematical equations and validate transactions. As bitcoin gains popularity, the impact of mining activities, which consume massive amounts of electricity, can be detrimental to the environment.

In response to the criticism Bitcoin received over its environmental footprint, other consensus mechanisms emerged and were adopted by other blockchain networks that consume less resources. Proof-of-stake is a good example of a consensus mechanism that is more energy-efficient compared to proof-of-work.

Instead of mining, proof-of-stake involves staking. Staking reserves the right to validate transactions to users who lock up their coins. The choice of who gets to validate transactions is made arbitrarily by the protocol. However, usually, the probability of a user getting chosen by the protocol increases as the number of locked tokens and the duration of holding them is higher. In exchange for validating blocks, the validators are rewarded. Proof-of-stake does not require sizable investments in infrastructure such as ASIC hardware that is used for mining because it does not involve complex computations. Instead, staking involves the need to invest in the tokens themselves, which then serve as collateral. Bad actors would be punished for harmful activity by losing their collateralized tokens.