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.

Correlated words

Metaverse

Digital platform in which users take part in shared experiences, immersed in an online virtual environment, sometimes based on blockchain

Delegated Proof-of-Stake

A variant of Proof-of-Stake in which the stake is transferred to delegates who act as validators. 

Pure Proof-of-Stake

It is a type of Proof-of-Stake in which validators are chosen randomly and anonymously thanks to the VRF function.

Liquid Proof-of-Stake

Proof-of-Stake variant in which tokens are not staked but liquid.

Stake

Total amount of cryptocurrency being staked

Staking Pool

The joint staking of several people's cryptocurrencies with the aim to increase the rewards

Cold Staking

Type of staking that requires the use of a cold wallet

Blockchain

A technology based on cryptography that enables decentralised and uncensored execution of any type of transaction.

Genesis Block

This is the first block of a blockchain, sometimes referred to as block 0.

Block Height

The number of blocks in a blockchain starting from the genesis block.

Network

The set of interconnected computers, called nodes, on which the blockchain of a given cryptocurrency is based.

Transactions per second (TPS)

Literally 'transactions per second', it is a measure of the speed of a blockchain.

Transaction

Exchange of value, property or data between two parties.

Shard

Fragments' of blockchain operating in parallel.

Proof-of-Work

A consensus mechanism based on computational power to contribute to the blockchain.

Node

Device connected to a blockchain and participating in its network.

Off-chain

Transaction that is not performed on the blockchain.

On-chain

Any process performed on the blockchain.

Mining Pool

A company that bases its business on mining, by collecting a large number of powerful mining devices.

Mining

The process of adding new blocks to the blockchain and creating new bitcoins by miners.

Consensus Mechanism

A decentralised way to validate transactions on blockchain.

Hash

A cryptographic function that serves to identify each block of the blockchain.

Governance

In the cryptocurrency sector, it indicates the way and rules by which projects and blockchains are governed.

Fee

Commission paid for the execution of transactions.

Double Spending

The possibility for an attacker to spend the same amount twice if the payment system does not have a mechanism to prevent this.

DoS

A Denial of Service is a computer attack that aims to make a network or service inaccessible.

DLT

Distributed Ledger Technologies are technologies based on an immutable ledger of transactions, the control of which is distributed.

Decentralised

It is said of a system governed by the consensus of its participants and without a central authority or hierarchy.

Cold Wallet

Wallets that are not connected to the internet.

Bridge

In blockchain technology, it is a connection that allows interaction between different blockchains.

Financial Bubble

Increase in the value of an asset, in an excessive way, given its intrinsic value.

Block Explorer

It allows you to consult any transaction made on a blockchain online

Block

The set of encrypted transactions that, connected to other blocks, makes up a blockchain.

ASIC

Devices dedicated to mining certain cryptocurrencies.

Interoperability

The ability to exchange data with other platforms, including those based on different types of blockchain, as well as with the off-chain world.

51% Attack

When a node or group of nodes attempts to take control of the blockchain.

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