Every system must have an algorithm that is useful for data processing, calculation, and automatic reasoning with mathematical methods. This also applies to the blockchain system. In cryptocurrency, this algorithm is referred to as consensus which means an agreement. This consensus algorithm is what makes blockchain adoption services decentralized, meaning that they don’t need a third party in all transaction activities there. It is different from centralized services that involve third parties as transaction regulators. Currently, there are many types of consensus algorithms. The most popular, for example, is Proof of Stake (PoS), Proof of Work (PoW), and Delegated Proof of Stake (DPOS). In this article, we will explore one of the three consensuses, namely Proof of Stake. Listen carefully to the following discussion, yes!
What is Proof of Stake?
Proof of Stake (POS) is a consensus algorithm that was developed in 2011 and then introduced by anonymous developer Sunny King. Simply put, validators on this consensus stake their tokens to secure the blockchain network. In return, the selected validator will get a reward. This method is known as staking.
By carrying out a more efficient concept, this consensus is prepared to replace the Proof of Work (POW) consensus algorithm. Why was the POW algorithm replaced? Please note, that POW uses miners to validate each transaction. Then they are rewarded with crypto coins. But mining with consensus POW requires a lot of energy, causing waste. For example, in 2015, validating a single Bitcoin transaction required the equivalent of 1.57 U.S. households to power each day. Then a Proof of Stake is presented which is considered to be able to overcome this.
The POS algorithm implements a mechanism whereby the block is validated based on the stakeholder or the number of coins owned by the coin holder stakeholder. This means that the more coins a miner own and stakes, the more bargaining power they have and the more likely they are to be selected as validators.
Advantages of Proof of Stake
As stated earlier, Proof of Work consensus consumes a lot of power to mine and validate every transaction. This makes PoW less environmentally friendly. There are even some countries that prohibit the use of Bitcoin for transactions because it wastes electricity. The Bitcoin mining rig warehouse operates 24 hours so the mining process consumes a lot of energy. In contrast to Proof of Stake, which consumes much lower electrical energy, it is more environmentally friendly than the Proof of Work consensus.
Users can stake and get passive income from there. This is because the validation process on the blockchain with PoS consensus involves users in it. So that both parties benefit.
The transaction fees charged to users are cheaper. Proof of Work uses tools and electricity which makes the gas fee expensive.
Also read: Cryptocurrency tokens and coins, what’s the difference?
Examples of Coins Using Proof of Stake
Cardano uses a system called Ouroboros which is a modification of PoS. The system utilizes time divisions called epochs to separate the validator selection process. This division process is carried out by dividing into several slots, and each slot has a leader slot as a validator.
Fantom is a coin that utilizes a modified Proof of Stake to create a leaderless proof of stake called Lachesis. Lachesis can manage the transaction sequence structure for each validator thanks to the directed acyclic graph (DAG) technology it uses. That way, Lachesis allows every validator to validate transactions without having to wait for confirmation from other validators. This system makes Fantom only take 1–2 seconds in verifying and validating transactions.
Solana uses Proof of Stake and combines it with Solana’s proof of history algorithm which adds timestamps to all transaction validation processes. The combo of the two creates a blockchain that processes transactions quickly and the transaction fees are low. This makes Solana one of the fastest blockchains and can compete with Ethereum.
Terra adopts a proof of stake system to enable it to validate transactions easily and quickly. This is especially important for Terra which has a stablecoin ecosystem that requires fast crypto conversions without expensive fees. Terra also requires PoS capabilities that allow dozens of smart contracts to run concurrently.
Well, that’s an explanation of one of the blockchain consensus namely Proof of Stake.