Cryptocurrency - What is Proof of Stake
Why blockchains use Proof of Stake?
Cryptocurrency makes use of various types of the algorithm for handling the various blockchain issues. Proof of stake is one such algorithm that is being used by various blockchain protocols. So here we are going to take a look at what is proof of stake algorithm and what type of the problem it solves for the blockchain.
Why we need Consensus algorithms?
Cryptocurrencies are used to transfer the currency and other information along with it in the blockchain. When this information is recorded on the blockchain each node that verifies it needs to avoid various problems like conflicting verification, duplication, cross usage etc. So for example, let's say you and I make use of cryptocurrency to buy something. Our data gets recorded by the node. And if other nodes are not in sync, then verification of this transaction becomes a problem on chain. And this way a lot of transactions can end up showing past balance of wallet or cross usage of the wallet as well.
Various algorithms are designed to avoid such problems. Some algorithms get rid of the issues like transaction issues are handled by the voting algorithm in the blockchain. Where once the transaction happens, other nodes vote for confirmation. And then more and more nodes confirm it, then the transaction reaches to the wallet. Some blockchains make use of the oracles to handles such management issues. Many blockchains also have proof of work algorithm working behind this which solves the issue of verification of the transaction in and out of wallet.
You can get a short overview of Consensus algorithms and how they are being used in the below video.
These algorithms make the decentralized systems lot easier to setup. And also various types of the verification of the transactions over the node becomes lot easier. And in this process you can also find your transaction happening lot quicker in due process. By employing such type of the algorithms, in an decentralized blockchain, you can find that strangers can trust the system more and can rest assured that system is not manipulating their transactions.
There are many such consensus algorithms being used in the cryptocurrency blockchains. You can check out some of them in the video.
In cryptocurrency, your wallet address is hashed and secured from being visible as your direct identity. Some cryptocurrency even offer you to mask the address in between the transactions giving you more privacy. In case of the cryptocurrency which initiates the transaciton between two parties, once it starts to happen it gets recorded over ledger. This ledger then gets verified from one node to another. And this process goes on till all the nodes verifies this information. More votes of confirmation, easier it becomes for wallet on another end to verify the money arrived in your wallet.
Proof of Work
Here some of the blockchains have an option to make use of the algorithm under proof of work pattern. This algorithm also known as proof of work which validates the data across the nodes. And this verification and validation process is called as the proof of work. While verification and validation, hash is being used and the data stays encrypted between the two ends. Miners or the nodes verify the right amount of block to get rewarded. So the job of verification and validation also leads to the new mining coin in case of blockchains like bitcoin. Some also trigger other permanent data on ledger when they make use of such blocks in the mining process. Apart from bitcoin, there are many other similar coins that makes use of the proof of work as an algorithm to validate the work across miners and the nodes.
Proof of Stake
Now that we have seen what is proof of work in the earlier part. Let's discuss what is proof of stake for the nodes and miners. In this process it makes use of the pseudo random election process to validate a block. And the process is more of forged rather than mined. So you can see is more of building block type algorithm rather than data mined algorithm. Here for each block forged the miners get the reward on system. And the proof of stake process rewards the miners involved in the process. Like this for each block new miner is selected for the reward and verification of transactions.
If you can sum up the process for proof of stake, you can say that miners hash the data that goes to build up the block. And for this proof of stake, they get rewarded. And the user sees that proof of stake transaciton fee as a reward for the miner.
In near future many blockchains will use multiple algorithms in order to sustian their network efficiency and also to bring more transparency in the decentralization.