3 Tips to Understanding the Proof of Stake

Proof-of-Stake

Harold Serra, Negosentro |  If you are into cryptocurrencies, then you have most likely heard about proof of stake or POS.  You may also have tried to understand what it is, but with little success due to the complex jargon used in crypto space. To help you out, here are 3 tips to understanding the proof-of-stake mining algorithm.

  1. Understand how transactions happen in blockchain

For you to understand proof of stake, you need to understand how blockchain works. Many people only know that blockchain is decentralized, but how exactly does this work? In blockchain technology, multiple transactions go through the system at the same time. These transactions form what is called a block. For these transactions to be added to the public ledger, they have to be validated. Now here is where proof-of-stake comes in. Unlike in proof-of-work where miners with complex computers validate these transactions, prove-of-work does this by simulating the transactions.  It then assigns the power to validate these transactions in a deterministic way, where the person who owns the highest number of coins stands the best chance of making money from solving the block.

  1. Understand the rationale behind POS

One of the reasons why people don’t understand prove-of-stake is because they don’t understand the underlying concept behind it. So what’s the rationale behind proof-of-stake? As we have discussed above, mining is all about adding transactions to the public ledger. However, proof-of-work mining, which is the mining algorithm used by bitcoin is energy intensive. It is so energy intensive that recent studies show that the power required to mine bitcoin, is enough to power a small country. On top of that, proof-of-work is highly centralized, because it is gives power to a few players, those who have the capacity to buy mining equipment. This is what necessitated the rise of proof-of-stake. Proof-of-stake doesn’t require any energy in validating a block. This makes it highly energy efficient, and in line with the current global goals of energy efficiency as a strategy for combating climate change. In addition, it eliminates the rise of monopolies that can take over a crypto. Remember the whole idea of cryptocurrencies is decentralization, and any system that gives rise to monopolies and cartels goes against this idea.  The deterministic and random nature of proof-of-stake makes it hard for such cartels to emerge, hence keeping crypto to its true ideals of decentralization.

  1. Understand how blockchain maintains security

One of the hallmarks of blockchain technology is security. However, as the crypto space matures, it is becoming clear that one player or a group of players can take over a crypto network if they have 51% of the mining power. Proof-of-stake eliminates this problem by making it so costly for any individual or a group of individuals to gain the 51% power. That’s because they would have to own 51% of the crypto market cap. In essence, even such a group were to gain such power, the potential payout from an attack on the network would not be worth the effort, and the resources involved.

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