Crypto-Lingo: Proof-of-Stake – A consensus mechanism that validates transactions.
What it is
Money would be worthless without procedures to tell the difference between real and counterfeit units.
Traditional money relies on banks and governments to work on our behalf. They set the standards that determine what it means for a unit of currency to be real or fake. They also manage how money is distributed throughout the economy.
Cryptocurrencies need a fool-proof way to authenticate transactions that doesn’t rely on governments or banks. This is difficult because cryptocurrency is digital. How can someone be stopped from “copying and pasting” money into their account or even using the same unit of currency multiple times?
Proof-of-Stake (PoS) is one of the solutions.
Proof-of-Stake is a process that authenticates transactions by having people approve incoming transactions.
How it Works
Proof-of-Stake has two main components:
Staking is when a cryptocurrency owner loans some of their currency to the network, and a person who does this can become a validator. A validator is someone who is chosen to authenticate a group of transactions on the network.
For every group of stakers, a small set of validators are chosen by a semi-random computerized process. The process is not fully random because those who stake the most cryptocurrency have a higher chance of becoming validators.
There are many validators that cooperate to ensure that each group of transactions is fully legitimate. Failure to do so results in the validators losing a large portion of their staked funds. This gives them a strong incentive to do a good job. Ethereum requires stakers to put down over $100,000 if they want to become a validator. So validators are very motivated to perform good work.
In addition, a group of transactions will be confirmed and sent through the network only if more than 50% of the validators approve it. The combination of consensus and economic incentive ensures that valid transactions are accepted and invalid transactions are rejected.
How You Can Benefit
Becoming a validator takes a lot of technical expertise. However, anyone who uses a cryptocurrency that is powered by Proof-of-Stake benefits from the process.
Proof-of-Stake ensures that money is sent around honestly. When you send or receive cryptocurrency that uses this process, you can be confident that your money will get to the right place. Others are risking their money to make sure it does. The penalty for validating the wrong transaction is much harsher than the penalty a banker would receive for mismanaging your funds.
In addition to security, Proof-of-Stake is extremely fast at managing transactions in comparison to other processes like Proof-of-Work. This allows you to send and receive money quickly. It also requires less computer power which greatly reduces fees. All in all, Proof-of-Stake works for your convenience.
Proof-of-Stake is a consensus mechanism that selects validators to verify authentic transactions on the network.
Validators are held accountable by staking a significant amount of money as collateral. By verifying authentic transactions, validators receive a significant interest reward for their efforts. However, if a validator approves an inauthentic transaction, the validator loses a significant portion of their staked funds.
Ultimately, Proof-of-Stake works to benefit everyone and make cryptocurrency fast, accessible, and equitable.