The blockchain-based platforms are all said to be open-source and accommodate everyone interested in the field. The Proof-of-Work (PoW) is considered to be the first consensus mechanism implemented in the blockchain platforms that does not involve any third-party. Although used by Bitcoin, Ethereum and many other cryptocurrencies, there are certain issues in this mechanism. The drawbacks include high computation requirements, energy costs as well as a threat of becoming centralized. To move forward, the Proof-of-Stake (PoS) protocol has been developed and is being implemented.
Breaking Down Proof-of-Stake
The Proof-of-Stake protocol was developed with the objective of addressing the issues of PoW. The Proof-of-Work protocol goes through the process of mining that includes executing different cryptographic calculations and unlocking challenges in order to confirm the legitimacy of a transaction. Also, the amount of electricity expensed in the process would be way too high that forced the miners to exchange the earned cryptocurrencies into fiat to pay off the electricity bills. This was detrimental to the cryptocurrency projects and also had a negative effect on the trading sector.
The Proof-of-Stake protocol solves this computational issue by ascribing mining power to a miner depending on the volume of coins held by them. This way energy is not wasted in the process of solving the puzzles while the PoS miner has to stay within the limit as per their ownership stake. Thus, if a miner owns 5% of a particular cryptocurrency, then they will be able to mine only 5% of the blocks.
PoS, An Improvement Over PoW
If the PoW system is continued to be implemented by the blockchain-based platforms, then the chances of the network being attacked increases significantly (over 50%). Moreover, the miners will hardly receive any reward from mining the blocks. The PoS protocol makes this process extremely difficult as it would be difficult for the threat to accumulate over 50% of the coins in circulation. Also, if a miner holds over 50% stake in the crypto coin they would not take the risk of attacking as they will suffer more.
The Proof-of-Stake protocol requires new consensus algorithms that involve node operators. The nodes need to have a significant amount of token to ensure the longevity and growth of the network. The process will not lead the nodes to convert crypto coin into fiat currency or switch to another crypto for short-term profits.
In the proof-of-stake protocol, the balance among the token holders, developers and validators is maintained by a constant “voting” system where the staking component is not the sole factor. The involved parties have to act in a process that will benefit the network holistically.
The PoS protocol also helps in making the way for networks which depend on more meta-level token economies to involve all the participants in the network to support the community’s activities. The users will no longer be on the side, simply speculating on an ICO or mining the coin just for profits. Their involvement will be more for the growth of the network rather than personal profits.