Proof-of-Stake

Proof-of-stake is a different way to validate transactions. There are no enormously complex calculations to perform; one proves their coin-ownership in the currency. It is still an algorithm, and the goal is the same as that of proof-of-work; however, the process to reach the goal is quite different.

For example, with Ethereum, the concept is, if you own and can prove you own at least 1 percent of all the Ethereum coins, then you would be able to mine an average of about 1 percent of the transactions. Miners are basically forced to have a literal “stake” in the success of the coin. But, one of the more attractive aspects to many is that it opens mining back up to individuals at home, rather than just companies with huge mining rigs. Even if they only own a tiny piece of Ethereum (0.000000001%), it will enable them to potentially mine and receive a reward, especially if they are part of a mining pool (this will be covered in another module). The reward is just transaction fees, and no new coins are created.

For example, say you have five validators competing to mine a block: one has 40 percent, one has 30 percent, one has 20 percent, and one has 5 percent. Each validator has a chance to mine the block based on the level of stake they have. This also means less likelihood of a negative attack on the network or an attempt to fork it is much less, as there is a risk of devaluing or losing your increasingly valuable stake.

The idea of Proof-of-stake was initially suggested on the bitcointalk forum in 2011. The first digital currency to use proof-of-stake was Peercoin in 2012, closely followed by ShadowCash, Nxt, BlackCoin, NuShares/NuBits, Qora, and NavCoin.

Unlike the proof-of-Work, where the algorithm rewards miners to validate transactions and creating new blocks, with the proof of stake, the creator of a new block or “validator” is chosen in a deterministic way, depending on its wealth.