The POS coin concept is a form of cryptocurrency, where something known as “Proof of Stake” is used to validate transactions. This means that instead of needing expensive and environmentally damaging hardware to mine coins, as is the case with most other cryptocurrencies, the process of rewarding the owners of coins as a reward for simply holding them can be done by simply keeping the tokens in a wallet.
The coins they own do not go to the miner, but to the owner of the wallet they’re in, who can then choose to sell the coins to someone else.
What Are PoS Coins?
In a PoS system, the creator of a new block is selected from a pool of nodes called “validators” or “witnesses.” These validators are rewarded with newly created coins for each block they make. The miner who completes a given block receives some form of reward, which includes freshly minted coins and transaction fees from all the transactions included in the block they mined.
The reward incentivizes miners to continue validating transactions so that they can receive compensation. The Proof of Stake algorithm was first introduced by the cryptocurrency Peercoin in 2012. It is an alternative to the Proof of Work algorithm, which requires much computing power but not much responsibility. The main differences between the two include:
- Proof-of-Stake: These cryptocurrencies are mined by holders who leave their wallets open or “stake” their coins. The more stake you have, the more often you will mine new blocks and receive rewards.
- A Proof-of-Work: These coins are mined by people solving complex math problems that become more difficult as time goes on. It is a computationally heavy process and consumes a lot of energy.
Essentially, it is a consensus algorithm invented to solve some of the issues faced by proof-of-work mining. Proof-of-stake mining is much more secure than proof-of-work mining because it does not require intensive computer calculations.
Additionally, some stake PoS coins such as Cardano, use an innovative layered design that defines every aspect of the system to ensure that it may solve different problems individually or collectively. Cardano is still in its early stages but has already started developing partnerships with industry leaders like IOHK and Google’s YouTube, among others, and more PoS coins are coming online as more investors begin to see the benefits.
How Does It Work?
Proof of Stake is a term used to describe the algorithm that distributes consensus in a blockchain network. PoS maintains the integrity of the blockchain by incentivizing users to reach an agreement on which block should be added next. In PoS, a miner is awarded a block for validating transactions and creating new blocks. There are three ways in which a miner can validate the transactions:
- By being designated as a proposer.
- By being selected randomly from all proposers.
- By being chosen from all miners.
In the first two cases, the miner doesn’t need to have any stake to be eligible for rewards. Miners with stakes are rewarded with more significant benefits from blocks because they have higher stakes in securing and building the blockchain’s network.
In What Way Does It Address Mining Power?
In proof of stake, miners don’t have to use as much computational power as proof of work. In a PoS stake system, the more coins a miner holds, the larger their share in mining power will be. This system would make it difficult for miners to obtain coins and then mine them for more tokens. Proof of stake mining requires users to “stake” their funds as a bet on their chosen virtual currency.
That means that miners are no longer rewarded for using more computational power. By using stakes to mine the currency they are willing to bet, mining becomes more decentralized. This means that the more miners bet on a particular currency, the fewer decisions they have to make about which one to mine.
Can You Pool PoS Coins?
Yes, you can pool them just like PoW coins. With proof-of-stake pools, there is a greater chance of being picked to verify another block as with proof-of-work pools. However, in proof of stake, the number of staked coins increases the opportunities rather than computing power.
Interesting PoS Tokens Available Today
There is a range of exciting PoS options available on the market today, each with strengths and weaknesses.
- NEO: NEO uses a unique consensus mechanism called Delegated Byzantine Fault Tolerance (dBFT) which ensures high transaction throughput and eliminates the need for forks and downtime.
- Cardano: Cardano is a project that provides a development platform for decentralized applications. The platform seeks to meet the needs of developers and users by delivering light security, scalable computation, and easy interoperability.
- DASH: DASH is a cryptocurrency launched in January of 2014. It has been one of the top 20 largest cryptocurrencies by market cap since its release.
What Investors Need To Consider Before Betting Big On PoS Coins
The economic rules of different tokens vary systematically, resulting in an array of token economies. If you are interested in these stake coins, you should be aware of the following points.
Rate Of Inflation
Some PoS networks with totally pre-mined tokens reduce the inflation risk; however, some others do not. Nonetheless, many newer PoS projects intentionally incorporate inflation into their economic models to better portray real economies and reward stakeholders and validators. Therefore, you should research to see which model is suitable for your portfolio.
Token stakeholders can delegate their staked tokens to a node if they cannot run a PoS node themselves. A node splits the rewards for generating the blocks proportionally among its stakeholders, minus servers and labor costs.
Period Of Lock-up
People who stake tokens and want to sell them on the secondary market must wait until the lock-up period has expired before transferring their tokens.
There is a risk when you regard the lock-up period. The reason is to keep the chain safe, but the result is that during this time, you can’t sell your staked tokens to profit from a bull run or to avoid loss during a bear market.
If you’re looking for a truly decentralized, secure, and highly energy-efficient alternative to Proof of Work, Proof of Stake is worth exploring. Even if you don’t want to mine, you may want to start acquiring some Proof of Stake cryptocurrencies to diversify your crypto holdings.