• Thu. Sep 22nd, 2022

Your Ultimate Guide To Proof-of-Stake Coins

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You might have heard of some anti-cryptocurrency arguments about how crypto is bad for the environment and about how much energy it consumes. Though there is some grain of truth to that claim, it is actually inaccurate, especially with the rising popularity of Proof-of-Stake (PoS) coins.

In fact, in the near future, Ethereum, the second largest cryptocurrency will be transitioning to a Proof-of-Stake (PoS) consensus mechanism and will be called Eth 2.0.

So, with the crypto market showing some signs of recovery, you might be wondering what PoS is all about and how it will compare to the more traditional Proof-of-Work (PoW) consensus mechanism.

What is Consensus Mechanism?

Since there is a large risk of malicious blockchain manipulation, cryptocurrencies employ strategies to minimize and fight this risk. These employed strategies are called consensus mechanisms.

Consensus mechanism in simpler terms is the way how the computers in the network validate a transaction and thus secure the blockchain.

Currently, the two most common consensus mechanisms are Proof-of-work and Proof-of-stake. However, there are also other lesser-known mechanisms like Proof-of-Staked Authority (PoSA) used by the BNB Smart Chain.

What is Proof-of-Stake (PoS)?

To secure the blockchain, different entities need to reach a consensus that each transaction that happens is correct and legitimate.

In a proof-of-work (PoW) system like Bitcoin, the entities that secure its blockchain are called miners. The miners compete with each other to solve complex mathematical equations for a chance to update the blockchain.

The PoW consensus mechanism is robust and highly secure but there is a big drawback. It is so power intensive.

In fact, its power-intensive nature has been one of the biggest criticisms used against crypto.

So, to eliminate this drawback, a new consensus mechanism was proposed and that is the Proof-of-Stake (PoS). In this mechanism, instead of miners competing against each other, there are validators who stake coins within the system to secure the blockchain.

The more coins a validator stakes, the higher the chance they have of updating the blockchain and thus earning rewards. In a way, PoS systems function like shares for a company.

How Does Proof-of-Stake Work?

In a PoS system, instead of miners competing against each other, computers in a PoS system stake coins to secure the blockchain. The more coins a validator stakes, the more likely they are to validate a transaction and thus earn monetary incentives.

However, as you may have noticed, this system favors the validators who own the most coins. It’s a system where the rich gets richer.

To address this problem, PoS systems employ some degree of randomness and diminishing returns in choosing which validator updates the blockchain. This is akin to holding a raffle with staked coins being the raffle tickets.

To avoid entities from amassing staked coins, different systems employ different strategies. Some have an upper limit to how much coins a validator can stake. Some use algorithms to automatically adjust the validator’s probability of being chosen based on the amount of coins staked.

What are the Pros of Proof-of-Stake?

One major criticism against cryptocurrencies is that they consume too much power. This lead some to believe that crypto as a whole contributes to the degradation of the environment. So, to address these concerns, the proof-of-stake consensus mechanism was developed.

Compared to their PoW counterpart, PoS coins have a significantly lower power consumption. According to the estimates of the Ethereum Foundation, PoW mining consumes an average of 5.13 gigawatts of power while a PoS system consumes an average of 0.00262 gigawatts or 2.62 megawatts of power. To put this into perspective, the power consumption of a PoS system is 99.95% lower than that of a PoW system.

Because of the lower power consumption, the cost of running a validator is lower and thus the cost of doing a transaction using a PoS system is also lower. The lower fees could then attract more users into the system and consequently raise the value of its native token.

Another advantage of a PoS system over a PoW system is its transaction speed. Because adding blocks to the blockchain doesn’t require miners to solve mathematical equations, PoS systems tend to inherently process transactions faster than PoW systems.

In summary, PoS coins have lower power consumption, cheaper fees, and faster transactions than PoW coins. Which could be better for the environment, attract more users, and improve user experience.

What are the Cons of Proof-of-Stake?

Though PoS coins look good on paper, a lot of their aspects are experimental since they are relatively new. An aspect that some remains skeptical about is the security of PoS systems.

Some are worried that performing a 51% attack on a PoS coin would be relatively easier than on a PoW coin. Since the barrier of entry for an attacker would also be lower compared to a PoW coin where the attacker needs to purchase tons of mining equipment and consume large amounts of electricity to stage a 51% attack.

To combat this vulnerability, some PoS systems use slashing penalties for validators who break system rules. For example, if a validator tries to maliciously approve an invalid transaction, its staked coins would then be slashed and burned. This system would dramatically increase the cost of staging an attack against the blockchain and make it more secure.

However, some investors tend to shy away from systems with slashing penalties. This is because of the risk of having their coins slashed when a validator they staked with goes rogue, an event that investors have no control of.

Most Popular Proof-of-Stake Cryptocurrencies (2022)

If you’d like to expand your crypto portfolio and start investing in PoS cryptocurrencies here are the top PoS cryptocurrencies based on their market capitalization:

Ethereum 2.0

The Ethereum 2.0 or Eth 2.0 is an upcoming update to the Ethereum blockchain and is meant to transition it from being a PoW coin to a PoS coin.

BNB (BNB)

BNB is the native token of Binance, the biggest crypto exchange. It operates with a unique variation of the PoS mechanism called Proof-of-Staked Authority (PoSA).

Cardano (ADA)

Cardano is a PoS coin that is famous for not having a whitepaper and takes a scientific peer-reviewed approach to its development.

Solana (SOL)

Solana is a PoS coin that also employs a unique Proof-of-History consensus mechanism along with its Proof-of-stake mechanism. It claims to be the fastest blockchain and the fastest growing ecosystem in the industry.

Polkadot (DOT)

Polkadot is a PoS coin that aims to achieve interconnectivity and interoperability of different blockchains.

Polygon (MATIC)

Polygon is a PoS layer-2 blockchain that aims to help Ethereum scale and optimize its transactions.

Avalanche (AVAX)

Avalanche is an open-source PoS cryptocurrency that also offers the use of smart contracts.

TRON (TRON)

Tron is also an open-source PoS cryptocurrency that also offers the use of smart contracts.

Near Protocol (NEAR)

NEAR Protocol is a PoS cryptocurrency that uses its sharding technology called “Nightshade” to scale its transactions.

Cosmos (ATOM)

Cosmos is a PoS blockchain that aims to make an “internet of blockchains” that would allow blockchains to interoperate and connect with each other.

Algorand (ALGO)

Algorand is a PoS cryptocurrency that aims to solve the “blockchain trilemma,” a problem that claims that only two of three desirable blockchain properties (decentralization, scalability, and security) are possible to achieve.

Vechain (VET)

Vechain is a PoS blockchain that focuses on crypto enterprise adaptation. It has BaaS, PaaS, and SaaS offerings.

Tezos (XTZ)

Tezos is a cryptocurrency that uses Liquid Proof-of-Stake (LPoS) consensus mechanism. The platform can perform peer-to-peer transactions as well as host smart contracts.

Theta Token (THETA)

Theta Token is a PoS blockchain that claims to be the only end-to-end decentralized infrastructure for video streaming and delivery.

Elrond eGold (EGLD)

Elrond eGold is a PoS blockchain that supports smart contracts and distributed applications.

EOS (EOS)

EOS is an open-source cryptocurrency that uses a Delegated Proof-of-Stake consensus mechanism.

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Your Ultimate Guide To Proof-of-Stake Coins was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.