Proof of Stake (PoS) serves as an alternative process to verify and validate transactions and blocks. Proof of Stake is an algorithm and has the same purpose of Proof of Work, but the process to achieve the end goal differs significantly
Unlike Proof of Work, Proof of Stake deterministically chooses the creator of the new block which is dependent on wealth and also known as stake. There is no block reward in the Proof of Stake system. Rather, miners take the transaction fees. In the Proof of Stake system, miners are known as forgers.
The Proof of Stake system pseudo-randomly selects the validator - which is the equivalent of a miner in the Proof of Work system - by the amount of coins, or stake the validator has and the respective age of the stake. For example, if you own 500K alternative coins that use the PoS system in a wallet, it would have an age attached to it based on how long you owned the coin. Now, if you transfer those coins from one address to another, the age will be reset. This lets the system know the validator who holds a significant stake in an alt coin with a higher age is more committed, giving the validator a higher chance to validate a block. This builds a trusted and distributed network with loyal validators or forgers.
This helps to eliminate some of the challenges from the Proof of Work system such as:
● The need for expensive hardware such as multiple graphic processing units (GPUs). With Proof of Stake, a normal computer running the respective coin’s client would suffice as long the computer is online.
● The need for a high degree of electricity. In other words, PoS is energy efficient and does not consume high electricity as Proof of Work would.
There are also some advantages, such as:
● Faster validations
● More loyal forgers or validators. Since a validator with a higher stake coupled with a longer holding period has a higher probability of being selected for forging, users would want to own more coins and hold them in an attempt to be selected and be rewarded transaction fees.
With the Proof of Stake system, each forger owns a stake in the network. For example, a validator of Ether bonds some stake. A bonding stake means the user deposits capital into the network which serves as collateral in order to vouch for a block.
Now, there are some issues with Proof of Stake because a small group of people could own a majority of tokens or coins, and they would be selected as forgers. However, PoS is still evolving and the system should become more robust over time, and there could be a multitude of forgers, not just a small group who owns a majority of tokens.