Proof-of-Stake
A consensus algorithm that dictates the rules by which transactions are validated on the blockchain and how it’s governed. Participants can lock-up tokens (stakes) and the protocol will randomly assign one of them the right to validate the next block in order to claim transaction fees. In general, the probability of being chosen is proportional to the amount of tokens you have staked: the more you have, the higher the probability of validating the next block. There are other mechanics typical of a PoS system and different variations of this system. The PoS system is preferable to the Proof-of-Work system because of its low energy consumption.
The consensus algorithm is the core of every blockchain because it establishes the way in which network participants (so-called nodes) agree on the validity of the data entered in the blocks. The Proof-of-Stake algorithm selects validators through those who have the blockchain’s native tokens in staking. Whoever wants to become a validator node therefore has to deposit native blockchain tokens in a wallet suitable for staking and have a constant internet connection. Validators can be chosen based on several criteria, the most common being the amount of tokens being staked, or how long the tokens have been staked, or a random function. Some blockchains set a minimum number of cryptocurrencies that must be staked, others do not. The difference in these criteria results in variations of PoS such as Delegated Proof-of-Stake or Pure Proof-of-Stake.
The stake, the amount of cryptocurrencies being staked, functions as a guarantee placed by the node for the proper performance of its work as a validator. If a node were to make a mistake or engage in fraudulent activity, it would lose all of its staked tokens (slashing).
Proof-of-Stake is considered to be the most decentralised consensus mechanism, since it requires fewer technical barriers to participate in the network, nodes are more distributed, and security is consequently higher. One criticism of PoS is that it benefits large holders who, by having more cryptocurrencies staked, are selected more often to validate blocks and earn incentives. However, the size of the stake is an incentive to do the validation work correctly and frequently. The higher the stakes, the higher the risk of losing them when validation mistakes are made.
