Proof of Stake (PoS)

Since cryptocurrencies are not under a centralized authority to track transactions and balances, their underlying systems require a method for users to agree on who owns what.

Because any user can potentially attempt to modify the shared ledger of historical transactions, developers have devised methods to prevent fraud or mistakes from occurring. They accomplish this by aligning users' economic incentives around maintaining correct records. Using proof of stake is just one of the solutions.

Along with the PoS model, there are customized versions such as Leased Proof of Stake (LPoS) and Delegated Proof of Stake (DPoS) mechanisms. In addition, there are hybrid consensus systems such as Hybrid PoW/PoS, which incorporates features of both PoW and PoS models.

The Proof of Stake (PoS) system was created as an alternative to Proof of Work (PoW). Miners on PoW-based blockchains, such as Bitcoin, can only be rewarded if they find a valid solution to a cryptographic puzzle. This is what qualifies them to add the next block of transactions to the blockchain.

In contrast, blockchains that use the PoS concept reach consensus through a process that selects validators based on a number of criteria. The implementation of block selection varies, however it typically takes into account staking size and how long coins are being staked ("currency age"). In most situations, the block selection technique is a randomization mechanism, which means that validators take turns forging new blocks.

Block creators are referred to as validators in PoS. A validator verifies activities, checks transactions, votes on outcomes, and keeps records. Block creators are referred to as miners in PoW. Miners work to solve for the hash, a cryptographic number used to validate transactions. They are given a coin in exchange for solving the hash.

Security

The 51% attack, long promoted as a threat to cryptocurrency enthusiasts, is a problem when PoS is utilized, but it is unlikely to materialize. A 51% attack under PoW occurs when an entity controls more than 50% of the miners and utilizes that majority to modify the blockchain. A group or individual would need to own 51% of the staked coin in PoS.

Controlling 51% of the staked coin is prohibitively expensive. If a 51% attack occurred in Ethereum's PoS, the network's honest validators may opt to reject the altered blockchain and burn the offenders staked ETH. This encourages validators to act in good faith in order to benefit both the cryptocurrency and the network.

Most other PoS security features are not publicised, as doing so may provide an opportunity to circumvent security mechanisms. However, most PoS systems include additional security features that enhance the inherent security of blockchains and PoS algorithms.

Pros of Proof of Stake

Energy-efficient - Proof of work has a negative reputation due to the enormous quantities of computational power and electricity that it requires. Given the increased concern about the environmental impacts of blockchains that use proof of work, such as Bitcoin, proof of stake may provide better environmental outcomes. The low energy consumption of proof of stake eliminates this problem and broadly distributes infrastructure, thus making a blockchain system more stable.
Doesn't require special equipment to participate - Proof of stake allows more people to participate in blockchain systems as validators. To stake cryptocurrency, there is no need to purchase expensive processing devices or waste enormous quantities of electricity. You only need coins.
Provides fast and inexpensive transaction processing.
Staking - Investors can stake their cryptocurrency to earn rewards, generating passive income. And because proof of stake is ecologically benign, it is expected to become more popular as a consensus mechanism.

Cons of Proof of Stake

Outsized influence - Validators with significant holdings may exert excessive influence over transaction verification.
Security - Certain proof of stake implementations may make blockchains more vulnerable to certain types of attacks than proof of work, such as low-cost bribe attacks. The exposure to assaults reduces the overall security of the blockchain.

The Bottom Line

When considering whether to invest in a cryptocurrency, it is critical to compare proof of stake and proof of work. Even if you believe proof-of-stake cryptocurrencies are better, keep in mind that not all proof-of-stake blockchain systems are equally valuable.

As always, do your homework on the cryptocurrency project you want to support. Determine what it is trying to do and whether other solutions on the market are able to do it better.