# Understanding Proof-of-Stake: How PoS Transforms Cryptocurrency

## What Is Proof-of-Stake (PoS)?

Proof-of-Stake (PoS) revolutionizes the way cryptocurrencies process transactions and build new blocks by utilizing a consensus mechanism that relies on randomly selected validators, rather than the computationally intensive process seen in Proof-of-Work (PoW) systems.

This method involves coin owners staking their cryptocurrency to earn the opportunity to validate transactions, thereby enhancing security and reducing environmental impact. As blockchain technology continues to evolve, understanding the differences and advantages of PoS over traditional PoW protocols is crucial for addressing the challenges faced by the cryptocurrency industry today.

### Key Takeaways

*   Proof-of-Stake (PoS) is a consensus mechanism that reduces the need for computational power by using randomly selected validators to confirm transactions and create new blocks, significantly lowering energy consumption compared to Proof-of-Work (PoW).
*   Validators in a PoS system must stake a certain amount of cryptocurrency as collateral to be selected for block validation, promoting network security and reducing environmental impact.
*   Ethereum's switch from PoW to PoS reduced its energy usage by 99.84%, highlighting the potential of PoS to address sustainability concerns in the cryptocurrency industry.
*   A potential downside of PoS is the high entry cost for becoming a validator, as seen with Ethereum's requirement of 32 ETH, which may lead to network centralization.
*   The PoS mechanism also mitigates risks of a 51% attack by making it prohibitively expensive to control the majority of staked cryptocurrency, thus maintaining network integrity.

![Proof of Stake](https://www.investopedia.com/thmb/t_mYty9AU-AWPblL9h26Md16Z3E=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Term-Definitions_Proof_Of_Stake_V1-2fe2af764d9c404e8c387224e4f69f60.jpg)

*— Investopedia / Crea Taylor*

## How Proof-of-Stake (PoS) Works

Proof-of-stake reduces the computational work needed for verifying [blocks](https://www.investopedia.com/terms/b/blockchain.asp) and transactions. While proof-of-work relies on heavy computing for security, proof-of-stake allows coin owners to use their machines to verify blocks with less computational effort. Owners stake their coins as collateral, earning the opportunity to validate blocks and receive rewards.

Validators are chosen randomly to confirm transactions and validate block information. This setup randomizes fee collection, unlike the competitive rewards system in proof-of-work.

To become a validator, a coin owner must "stake" a specific amount of coins. For example, [Ethereum](https://www.investopedia.com/terms/e/ethereum.asp) requires users to stake 32 ETH to operate a node. Multiple validators must confirm a block's accuracy before it is finalized and closed. Blocks are validated by multiple validators, and when a specific number of validators verify that the block is accurate, it is finalized and closed.

> **Fast Fact**
>
> To activate your own validator, you'll need to stake 32 ETH; however, you don't need to stake that much ETH to participate in validation. You can join validation pools using "liquid staking" which uses an ERC-20 token that represents your ETH.

Different proof-of-stake mechanisms use various methods to achieve consensus. For instance, in Ethereum's sharding, a validator checks transactions and adds them to a shard block, needing up to 128 validators to form a voting "committee." After shard validation, two-thirds of validators must concur on the transaction's validity to close the block.

## Comparing Proof-of-Stake (PoS) to Proof-of-Work (PoW)

Both consensus mechanisms help blockchains synchronize data, validate information, and process transactions. Each method has proven successful at maintaining a blockchain, although each has pros and cons. However, the two algorithms have very different approaches.

Under PoS, block creators are called validators. A validator checks transactions, verifies activity, votes on outcomes, and maintains records. Under PoW, block creators are called miners. Miners work to solve a hashing problem to verify transactions. In return for solving it, they are rewarded with a coin.

To become a block creator in PoS, you need to own enough coins or tokens to qualify as a validator. In contrast, PoW miners must invest in processing equipment and pay high energy costs to solve computations.

 High equipment and energy costs in PoW limit mining access and enhance blockchain security. PoS blockchains need less processing power to validate blocks and transactions. The mechanism also lowers network congestion and removes the rewards-based incentive PoW blockchains have.

## Objectives of the Proof-of-Stake (PoS) Mechanism

Proof-of-stake is designed to reduce network congestion and address [environmental sustainability concerns](https://www.investopedia.com/nfts-and-the-environment-5220221) surrounding the proof-of-work (PoW) protocol. [Proof-of-work](https://www.investopedia.com/terms/p/proof-work.asp) is a competitive approach to verifying transactions, which naturally encourages people to look for ways to gain an advantage, especially since monetary value is involved.

Bitcoin miners earn bitcoin by verifying transactions and blocks. However, they pay their operating expenses, such as electricity and rent, with [fiat currency](https://www.investopedia.com/terms/f/fiatmoney.asp). So what's really happening is that miners exchange energy for cryptocurrency, which causes [PoW mining](https://www.investopedia.com/tech/how-does-bitcoin-mining-work/) to use as much energy as some small countries.

PoS addresses these issues by replacing computational power with staking, allowing the network to randomize mining ability. This means there should be a drastic reduction in energy consumption since miners can no longer rely on massive farms of single-purpose hardware to gain an advantage. For example, Ethereum's transition from PoW to PoS reduced the blockchain's energy consumption by 99.84%.  

> **Fast Fact**
>
> The first cryptocurrency to adopt the PoS method was Peercoin. Several others followed soon after, but Ethereum was the blockchain where it made the biggest impact.

## Security Features of Proof-of-Stake (PoS)

Long touted as a threat to cryptocurrency fans, the [51% attack](https://www.investopedia.com/terms/1/51-attack.asp) is a concern when PoS is used, but it is doubtful it will occur. A 51% attack in PoW happens when an entity controls over half the network’s miners and alters the blockchain. In PoS, this would require owning 51% of the staked cryptocurrency.

It's very expensive to control 51% of staked cryptocurrency. Under Ethereum's PoS, if a 51% attack occurred, the honest validators in the network could vote to disregard the altered blockchain and burn the offender(s) staked ETH. This incentivizes validators to act in good faith to benefit the cryptocurrency and the network.

Most other security features of PoS are not advertised, as this might create an opportunity to circumvent security measures. However, most PoS systems have extra security features in place that add to the inherent security behind blockchains and PoS mechanisms.  

## What Is the Difference Between Proof-of-Stake and Proof-of-Work?

Proof-of-Stake (POS) uses randomly selected validators to confirm transactions and [create new blocks](https://www.investopedia.com/terms/u/uncle-block-cryptocurrency.asp). Proof-of-Work (POW) uses a competitive validation method to confirm transactions and add new blocks to the blockchain.

## What Is Proof-of-Stake for Dummies?

Proof-of-Stake is a consensus mechanism where distributed cryptocurrency validator programs share the task of validating transactions.

## What Are the Disadvantages of Proof-of-Stake?

Under Proof of Stake (POS) consensus, users must generally own a cryptocurrency before they can participate in consensus and earn more crypto. To host a full validator node on Ethereum, a user needs to stake 32 ETH, which is very expensive. Another disadvantage of PoS is that on blockchains with smaller networks, a large minimum stake could lead to centralization.

## Is Ethereum a PoS or PoW?

Ethereum uses proof-of-stake as its consensus mechanic. Full validator nodes require a stake of 32 ETH, but other participants can take part in consensus by delegating their ETH to a validator or participating in staking pools. Users can also stake small amounts of ETH on their own, but no rewards are earned.

## The Bottom Line

Proof-of-stake is a mechanism used to verify blockchain transactions. It differs from proof-of-work significantly, mainly in the fact that it incentivizes honest behavior by rewarding those who put their crypto up as collateral for a chance to earn more.  

_The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read our [warranty and liability disclaimer](https://www.investopedia.com/legal-4768893#toc-warranty-and-liability-disclaimer) for more info._

> **Article Sources**
>
> 1.  Ethereum. "[Proof-of-Stake (PoS)](https://ethereum.org/en/developers/docs/consensus-mechanisms/pos/)."
>     
> 2.  Ethereum. "[Staking With Ethereum](https://ethereum.org/en/staking/)."
>     
> 3.  Github. "[Ethereum | Consensus Specs](https://github.com/ethereum/consensus-specs/blob/dev/specs/phase0/beacon-chain.md#get_committee_count_at_slot)."
>     
> 4.  University of Cambridge. "[Cambridge Bitcoin Electricity Consumption Index](https://ccaf.io/cbeci/index/comparisons)."
>     
> 5.  Digiconomist. "[Ethereum Energy Consumption Index](https://digiconomist.net/ethereum-energy-consumption)."
>     
> 6.  Peercoin. "[Peercoin The Sustainable Cryptocoin](https://www.peercoin.net/)."