Proof-of-Stake Algorithm Explained: Everything You Need to Know About It

Consensus mechanisms are the main elements of the blockchain technology and cryptocurrency, however, they might be difficult to understand. Experts claim that the most successful of them could become the revolutionary foundation on which the new era of Internet will run.

In this article, we will explain one of the most widely-used consensus models – proof-of-stake. But before we start, let’s find out some basic facts about these algorithms in general.

What is a consensus algorithm?

So, a consensus is a generally accepted decision made by a group of people. While an algorithm is a list of rules for completing a task in a particular number of steps. If we combine these two concepts, we will get a set of rules and steps for completing a generally accepted decision approved by a group of people.

Blockchain technology is based on the consensus algorithms, which act as decision making mechanisms. The consensus algorithm has a simple and clear logic: if A happens, then B happens, then C happens, and so on. For cryptocurrency, these algorithms regulate transactions and ensure that all members of the network agree that operations are valid and authentic.

Considering the fact that cryptocurrencies are associated with decentralization and exclude any regulation or authority, consensus algorithms are necessary to check and ensure that a group of random users will achieve agreement in the network.

These algorithms also serve to prevent digital money from double spending. This problem was a main obstacle in the first attempts at creating cryptocurrency. Double spending is similar to sending files via the Internet – you only send a copy and someone has the same file as you. Imagine if this was possible with currency.

Consensus algorithms decide whether a transaction is valid or not

Proof-of-Stake (PoS)

This is how PoS works

There are various algorithms used in the blockchain to ensure its proper functioning. The most widely-used are Proof-of-Work, Proof-of-Stake and Delegated Proof-of-Stake. Now we will stop on Proof-of-Stake and review it in detail.

Proof-of-Stake is more advanced and energy-efficient than Proof-of-Work. This algorithm is based on the randomization of tokens/coins staked by the network members. In simple words, PoS requires users to stake their currency in the wallet connected to the general network. The amount of existing coins increases user’s chances to solve a new block and get a reward. The more coins you stake, the higher is the possibility that you will verify a new block. Some types of PoS algorithm consider additional measures such as the amount of time your coins are staked in the wallet.

PoS simply gives precedence to those networks and users, who have long-term interest. For example, if you are a part of the network and you own a significant number of coins, you will contribute to the network’s success and growth. Personally, you have a financial interest for a network to grow. There are no chances that you may corrupt the network, because this would ruin your own value. This is the reason why your chances for getting a reward grow with the higher amount of currency you already have.

The only problem with PoS is that those who have less coins will still have less coins, while those who are already rich will get even richer. Thus, if you have a big thick wallet of coins, you will be rewarded with more coins and your savings will grow, this way your chances to get even more will also grow and so on. If your holdings are small, then your chances to get a reward are close to zero.

The final word

Decentralized and anonymous groups with no regulation need consensus algorithms for efficient and valid functioning. Since there are no third parties to check the system and its operations, such algorithms are absolutely necessary to make decisions within a network. They approve right transactions and prevent any unjust acts.

Proof-of-Stake validates the transactions, ensures network’s safety, and rewards users for existing volume of coins. This algorithm has pros and cons and still is far from perfect, however, it sustains the network and ensures that every step and operation is valid.

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