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What is a Proof of Stake?

The Proof-of-Stake concept was started as an alternative to the Proof-of-Work concept. It states that any person can “mine” block transactions depending on how many coins he owns. So, the greater the numbers of Bitcoins you own as a miner, the greater will be your mining power. Peercoin was the first of the cryptocurrencies to use the PoS method, followed by Shadow coin and Blackcoin. The main idea behind the PoS was to rectify the loopholes in the PoW.

Whenever a transaction is started, the data is placed in a block which has maximum 1megabyte capacity. This is then replicated across many computers on a network. These nodes will verify whether the transactions are legitimate or not. To do this, miners have to solve a mathematical puzzle which is called the Proof-of-Work. Once the block is verified, it gets added to the existing block chain.

Since mining needs a lot of electricity and computing power to run complex calculations, miners ended up selling their coins for fiat money. This would mean a downward spiral for prices of cryptocurrencies. This problem is sought to be addressed through the PoS method. It will give mining power depending on number of coins a miner holds. This means that rather than using energy to resolve the PoW puzzle, the miner can only mine a percentage of transactions which stands for his ownership stakes.

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