In order for cryptocurrencies to remain secure, fair, and decentralized, they need a system of achieving distributed consensus among all the computer nodes processing transactions and writing new blocks. There are a number of different means for achieving this consensus. One of them is known as proof-of-stake (PoS).

PoS is essentially an algorithm run on all the nodes on a cryptocurrency network. The algorithm has a built-in protocol that all computer nodes interested in writing blocks must adhere to. The best way to understand how PoS works is to compare it to another algorithm known as proof-of-work (PoW).

A Separate Means of Consensus

We will start with PoW because Bitcoin uses it, and Bitcoin was the first available blockchain on the market. Whenever a Bitcoin transaction occurs, all the computer nodes on the network get busy verifying it. They take the data from the transaction and run it through a complicated mathematical formula. Coming up with the correct answer verifies that the received data is correct.

This system is known as proof-of-work because it guarantees that the computer nodes have done some sort of work to prove both their legitimacy and the integrity of the transaction data.

In a PoS system, no actual work is done. Instead, users willing to volunteer their computers as nodes and present a certain number of tokens to be used as leverage for getting the chance to write the next block. The network itself randomly chooses the node for writing that block. All the remaining nodes must vote on the chosen node’s results in order to confirm data before the block is written.

Important PoS Terms

PoS algorithms make transaction confirmation faster and simpler. However, they do not lead to coin mining in the same way that Bitcoin does. Rather than earning new coins for writing blocks, users are rewarded with the crypto equivalent of interest on the coins they already own. This understanding is essential to understanding the following PoS terms:

• Validating – A validator runs the blockchain’s PoS software and acts as a node on the network to validate new blocks. The validator stakes coins in order to participate in the PoS network. The validator ultimately receives a reward.
• Staking / Delegating – A staker or delegator owns coins of the PoS blockchain and delegates / stakes / bake them toward a validator / baker. The delegators receive a portion of the rewards that the validator they delegate to receives at each round.

Note that all of this takes place automatically using computer software. As just an example, a validator is not necessarily represented by a human being. There is no person physically looking at the transaction data to make sure blocks are correct. The validator is computer software.

Likewise, a validator chosen to process the next block does not actually do anything other than allow his or her computer to act as a node for that block. Network software takes care of all the real work.

Another Way to Verify Transactions

At the end of the day, proof-of-stake is yet another way to verify cryptocurrency transactions as they occur. Every crypto network needs some form of validation to ensure the integrity of the ledger and the legitimacy of every transaction. PoS proponents claim that PoS does it in a way that is less resource-intense and faster than PoW.