Proof of Stake (PoS) is a mechanism for correctly connecting cryptocurrency transaction and transfer data to the blockchain.
It is not used in the cryptocurrency Bitcoin, but it is used in several other cryptocurrencies (altcoins).
The data of cryptocurrency transactions and transfers must be approved as correct and definitely connected to the blockchain. Since many cryptocurrencies do not have a central governing body, the approval role is assigned to someone among the general participants to approve.
Proof of Stake is a system where the more cryptocurrencies you own, the more likely you are to be assigned the approval role. Once the approval process is complete, the new cryptocurrency will be given to the participant who approved it as a reward.
However, Proof of Stake is a system where the more cryptocurrencies you own, the higher the probability of being assigned approval authority, making it easier for the rich to gain authority. Because this is unfair, there is a type of Proof of Stake that takes into account not only the amount of cryptocurrency held, but also the length of time it has been held.
Difference between Proof of Stake (PoS) and Proof of Work (PoW)
Proof of Work (PoW) is a consensus algorithm used in cryptocurrencies such as Bitcoin.
Proof of Work is a consensus algorithm used in cryptocurrencies such as Bitcoin, in which the miner who wins the calculation competition approves the data and receives the cryptocurrency as a reward.
In other words, the faster the machine, the more advantageous it is for this approval process (mining).
There are two problems with this proof of work.
- Mining consumes more electricity, putting a strain on the environment.
- Because dedicated mining machines are required, large organizations and companies monopolize the rewards. The result is that the miners are fixed and mining is centralized. If there are only miners with malicious intent, it may be possible to approve fraudulent data.
Pros and cons of Proof of Stake
Proof of Stake does not require power consumption or strong machine power to gain approval privileges.
However, since it is more advantageous to hold cryptocurrencies for a long period of time in Proof of Stake, few holders will be willing to sell them in a short period of time. This will reduce the liquidity of the cryptocurrency, as there will be people who want to buy it but few people who want to sell it.
In Proof of Stake (PoS), the ratio of holdings to the total volume of cryptocurrency already issued makes it easier to gain the right to work on approving transactions and generating new blocks.