What is Proof of Stake?
The Proof of Stake (PoS) protocol holds that miners validate blocks of transactions based on how many coins he or she holds, that is, their stake. In Proof of Stake mining, proportionate ownership of a coin matters much more than computing power.
PoS mining was first implemented by the Peercoin blockchain in order to cut down on the high costs that come with Proof of Work mining. Under the PoS mining protocol, the blockchain tracks a set of “validators” who hold a stake of the blockchain’s coin.
Validators “stake” by locking their coins in their wallet and keeping it running. The algorithm is designed to randomly select a validator. The chosen validator is granted the rights to mine the block. The more coins one has, the more likely they are to be chosen by the algorithm.
The result of the PoS protocol is that a miner’s ability is contingent upon his stake. 5% ownership of the cryptocurrency means that only 5% of the coin’s supply can be mined. Thus miners are rewarded for their stake, or ownership, rather than their work, or processing power.
Because PoS mining requires much less raw computing energy than Proof of Work mining, the potential miner base is expanded greatly. Miners don’t have to run expensive mining setups or work in large mining pools; they can simply mine from their standard computers.
Additionally, Proof of Stake was conceived as a way to prevent a 51% attack that could befall Proof of Work blockchains if enough mining power was acquired.
With the PoS protocol, it is actually disadvantageous for a miner to hold a 51% stake in the coin. This is because it wouldn’t make sense to attack a blockchain for which he holds a majority of the coins. Additionally, the coin’s price would fall, negatively impacting his 51% stake.
In addition to Peercoin, the Novacoin and Nxt blockchains use the Proof of Stake protocol.