Why Proof-of-Stake (PoS) Leads to Centralization
In January 2020 a EU regulator demanded a ban on proof of work Bitcoin mining. He was criticizing the energy-intensive system used to mine Bitcoin. He presented the Proof-of-Stake method as a good alternative to Proof-of-Work mining. Nevertheless, Proof-of-Stake mining is very likely to lead to centralization and this is the exact opposite of what Bitcoin had intended to achieve.
Proof-of-Work (PoW) is a mechanism Bitcoin uses to create blocks that are attached to the blockchain. Because the SHA-256 hash function is random, it guarantees fairness and honesty. Proof-of-Work also decentralizes Bitcoin because it incentivizes miners to belong to no organization that could have control over their activity, but also to be geographically decentralized. Bitcoin is safe thanks to its underlying mechanism. Yet due to its decentralization, it represents a threat to centralized systems, such as banks.
There are some alternative cryptocurrencies that use another consensus mechanism than Proof-of-Work, and this mechanism is called Proof-of-Stake (PoS). It is not as energy-intensive as Proof-of-Work, because the cryptocurrency is locked in a smart contract on the blockchain.
With this mechanism, instead of miners, we have stakers. Stakers have funds locked up in a special smart contract. The stakers who can create new blocks are selected by a special algorithm via lottery, according to each staker’s percentage of the total staked funds. The more funds are controlled by a staker, from all staked funds on a given network, the higher his chances are to mine the next block.
Staking isn't available for all types of coins. Bitcoin for example does not use this model. Some of the coins that use the Proof-of-Stake system are Ethereum, Polkadot, Solana, or Cardano. Staked coins still belong to you and if you decide to stop staking, you can unstake them. Nevertheless, you should keep in mind the fact that according to your smart contract, the unstaking may not be immediate. You might have to stake coins for a specific amount of time. When staking, new coins are minted and offered to the validator as a reward whenever a new block is added to the blockchain.