One additional benefit of proof of stake blockchains offers potential for the future: they may be more scalable than their proof of work counterparts. Depending on the blockchain, crypto owners can earn yields of 5% to even 14% on their holdings by staking. There are even dedicated staking platforms, like Everstake. All you need are coins.Ĭrypto exchanges like Coinbase, Binance and Kraken offer staking as a feature on their platforms. There’s no need to buy expensive computing systems and consume massive amounts of electricity to stake crypto. Proof of stake opens the door to more people participating in blockchain systems as validators. According to Smith, proof of stake’s modest energy consumption solves this problem and widely distributes infrastructure, potentially making a blockchain system more robust. This concentrates crypto mining in a few regions where electricity costs are lowest. “On a global scale, proof of work is most profitable where energy can be had for the lowest cost,” says Smith. Given heightened concern about the environmental impacts of blockchains that use proof of work, like Bitcoin, proof of stake offers potentially better outcomes for the environment. Proof of work has earned a bad reputation for the massive amounts of computational power-and electricity-it consumes. If a validator submits bad data or fraudulent transactions, they could be punished by “slashing.” Their stake is “burned,” meaning it is sent to an unusable wallet address where nobody has access, rendering them useless forever.Īccording to Smith, proof of stake works because validators are saying “Hey, I have so much faith in the legitimacy of this transaction that I’m willing to back it up with my own money.” And verified transactions earn a cryptocurrency reward in proportion to the size of the stake. If I include bad transactions, then I’ll be assessed penalties and lose some of my assets.” “If I validate only good transactions, I earn interest on my assets. “The simple way to look at staking is like interest income that requires you to complete a task to earn the interest-checking blockchain transactions,” says Doug Schwenk, chief executive officer of Digital Asset Research. When the data that’s been cleared by the validator is added to the blockchain, they get newly minted crypto as a reward. The more you stake, the better your chance of being chosen to do the work. The blockchain algorithm selects validators to check each new block of data based on how much crypto they’ve staked. These validators, or “stakers,” put their crypto into a smart contract that’s held on the blockchain. Staking is when people agree to lock up an amount of cryptocurrency in exchange for the chance to validate new blocks of data to be added to a blockchain. Ethereum, the second-largest crypto by market capitalization after Bitcoin, is in the midst of a transition from proof of work to proof of stake. Solana, Terra and Cardano are among the biggest cryptocurrencies that use proof of stake. But if they improperly validate bad or fraudulent data, they may lose some or all of their stake as a penalty. In exchange, they get a chance to validate new transactions and earn a reward. With proof of stake, participants referred to as “validators” lock up set amounts of cryptocurrency or crypto tokens-their stake, as it were-in a smart contract on the blockchain. “When blockchain participants verify that a transaction is legitimate and add it to the blockchain, we say that participants have achieved consensus,” says Marius Smith, head of business development at digital asset custodian Finoa. Proof of stake is the consensus mechanism that helps choose which participants get to handle this lucrative task-lucrative because the chosen ones are rewarded with new crypto if they accurately validate the new data and don’t cheat the system. Instead, the network relies on an army of participants to validate incoming transactions and add them as new blocks on the chain. There’s no central gatekeeper to manage a blockchain’s record of transactions and data. What Is Proof of Stake?ĭecentralization is at the heart of blockchain technology and cryptocurrency. Since blockchains lack any centralized governing authorities, proof of stake is a method to guarantee that data saved on the network is valid. Proof of stake is a consensus mechanism used to verify new cryptocurrency transactions.
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