Each cryptocurrency works based on a series of protocols like PoW (Proof of Work) or PoS(Proof of Stake), with the former being the most popular one. Since PoS represents a relatively new concept in the market, we would like to talk about it and highlight some of the pros and cons it brings.
What is Proof of Stake (PoS)?
The Proof of Stake or PoS is a virtual consensus mechanism that sets the rules by which every new block on the blockchain gets to be created. The overall process remains the same as with the PoW, with only the method for reaching the end goal being entirely different. If we have miners who solve cryptographically hard puzzles with computational resources for PoW, in the case of PoS we’re dealing with validators.
These validators need to lock up some of their coins as a stake in the ecosystem and then they bet on the blocks that they believe will be added next to the blockchain. When the block is generated and added to the network, the validators received a block reward based on their stake.
Advantages and Disadvantages
Mining requires a great deal of computing power in order to run cryptographic calculations and that translates into high electricity consumption. Based on the 2015 estimation, one Bitcoin transaction required the amount of electricity to power up 1.57 American households per day, according to Investopedia. In the meantime, the network difficulty continued to increase and the block reward will drop in 2020, meaning there will be a need for more electricity to create a new BTC token.
In the case of PoS, that’s not the case, because there is no competition. The block creator is chosen by an algorithm according to the stake. If the PoW protocol rewards the first miner to solve the puzzle, there is no reward in Pos, because the block creator receives a transaction fee.
Moving forward to the disadvantages, in order to add a malicious block on a PoW protocol, one should have a computer more powerful than 51% of the network. Things change in the case of PoS, where a malicious block can only be added by someone who owns 51% of all the cryptocurrency on the network.
At the present time, cryptocurrencies like Tezos, Dash, and Neo are using the PoS protocol. Ethereum, the second-largest cryptocurrency will also transition from PoW, thanks to the Casper implementation which will take place in three phases. Will PoS become the new norm in the crypto sphere? Too early to say, but as the industry grows, the PoW’s limitations will need to be addressed.