To understand the proof of stake, we will need to first understand what proof of work is. Proof of work is simply the validation of transactions in the blockchain by using computational power, the more computational power you have, the more likely you are to ‘write’ the next transaction. You will be rewarded with cryptocurrency for writing the next transaction. Proof of work mechanism is also known as mining, eg. Bitcoin mining. Proof of work mechanism works because you will need over 51% of the total computational power to alter the next transaction, thus making it secure and decentralised. Due to the laws of probability, it is unlikely that one user will be able to write the next transaction twice. Thus, mining pools were introduced where people can contribute their computational power and when the pool is able to mine a block (write the next transaction), the reward will be split amongst the contributor with respect to the computational power provided.

However, one of the main concerns about the proof of work mechanism is that it uses too much electricity. This article¹ states that mining for Bitcoin alone uses around 121.36 terawatt-hours (TWh) a year, which is more than the electricity consumed by Argentina. Besides, if a mining pool gets too big (larger than 51%), it is likely to get hacked and the attacker would have enough mining power to alter the transaction to their benefit, this is known as the 51% attack. These are the two main reasons for the proposal of a new mechanism — the proof of stake mechanism.

What is Proof of Stake?

Proof of stake works by randomly selecting a validator (instead of a miner in Proof of Work) and the selected validator will be able to write the next transaction block and get rewarded. To become a validator, you will need to stake your cryptocurrency. This will prevent validators to perform fraudulent transactions because validators will lose a certain percentage of staked cryptocurrency when they approved such transactions. Thus, as long as the total staked amount is higher than the transaction fees (the reward for writing transactions), we can trust each other to do our jobs.

Instead of using computational power for mining, proof of stake uses less energy to perform the same transaction with a different mechanism. Besides, proof of stake is able to solve the 51% attack issue in the proof of work mechanism. Depending on the value of a cryptocurrency, it is unlikely for an organisation to acquire 51% of the total supply of the cryptocurrency (over 500 billion USD for Bitcoin as of now), which makes it safe from the 51% attack. The need for good hardware for mining in proof of work is also scratched from the proof of stake mechanism, making it much more accessible to the general population, thus more decentralised.

Though it is important to note that the selection for validators is not entirely random because the more money you stake, the higher the chance you get in writing the next transaction. However the same goes for proof of work where the more hardware you can afford, the higher the chance of getting to write the next transaction.

Real-life uses

Currently, there are a lot of top cryptocurrencies that apply the proof of stake mechanisms, such as Binance coin (BNB), Cardano (ADA), Polkadot (DOT), Solana (SOL) and many more. The transition from proof of work in Ethereum to proof of stake is happening now, which is essentially an upgrade to Ethereum 2.0.