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Proof of stake

Proof of stake (PoS) is a type of consensus mechanism or protocol that uses the amount of stake (or value) held in the system to determine consensus. In essence, a consensus protocol is what controls the laws and parameters governing the behavior of blockchains. Think of consensus as a ruleset that each network participant adheres to. As blockchains are not controlled by any single, central authority, a consensus protocol is used instead to allow distributed network participants to agree on the history of the network captured on the blockchain – to reach consensus on what has happened, and continue from a single source of truth.

Cardano is built on the ground-breaking PoS consensus protocol Ouroboros, and the first blockchain consensus protocol to be developed through peer-reviewed research. At the heart of the protocol are stake pools, reliable server nodes run by a stake pool operator to which ada holders can delegate their stake. Stake pools are used to ensure that everyone can participate in the protocol, regardless of technical experience or availability to keep a node running. These stake pools focus on maintenance and hold the combined stake of various stakeholders in a single entity.

How does proof of stake compare to proof of work protocols?

In contrast, proof of work (PoW) is a synchronous protocol that encourages miners to compete to be the first who can solve any problems within the block. A rewards system is used to incentivize this problem-solving. However, this approach comes at a cost, with increased electricity usage and longer time spans to solve problems within the chain. These factors can slow the network down significantly and means it is costly to maintain.

Features of proof of stake

One of the key features of PoS is that as a user's value increases, the opportunity to maintain the ledger also increases. This means a higher chance to produce new blocks that can be added to the blockchain and timestamped accordingly. The creator of a new block is chosen based on a combination of random selection and a determination of their stake, or wealth. A type of leader election occurs within the chain. It is worth remembering that within a proof of stake protocol, participants accumulate the transaction fees thereby adding to their wealth as they go. This approach encourages steady and stable growth of the blockchain and reduces the instances of stalled transactions that can prevent chain growth.

Primary advantages of proof of stake

Some of the primary advantages of PoS over PoW include:

  • rigorous security protocols are incorporated into a PoS protocol
  • reduced centralization - the risk of centralization is reduced by issuing penalties for selfish practices within the network
  • energy efficiency - energy consumption is extremely efficient as a smaller amount of electricity, as well as hardware resources, are needed to produce and run the blockchain
  • cost efficiencies - PoS currencies are far more cost-effective than those operating on PoW protocols.