Emerging as an alternative to Bitcoin’s Proof of Work protocol, Proof of Stake (PoS) is a protocol that considers digital asset ownership rather than a system based on computational power. Presented in an article published by blockchain developers Sunny King and Scott Nadal in 2012, the PoS protocol focuses on eliminating the high energy consumption and some other problems required for Bitcoin mining. Peercoin was the first cryptocurrency to use the PoS protocol.
The Proof of Work protocol used in the Bitcoin network is a system in which miners, who hold most of the processing power, have more say in the network and therefore earn more returns. Bitcoin mining requires high energy consumption, but the Proof of Stake protocol does not allocate network power based on processor power. In PoS, the generation of the next block can be performed by operators who execute several combinations simultaneously. There are multiple types of Proof of Stake protocol.
In the Proof of Stake protocol, users who want to be able to verify transactions and receive a share of the revenue must lock their cryptocurrency holdings to be used for verification. In this locking process, which is called “staking” (taking a share of the revenue), in the wallet, the amount desired to be used for this transaction cannot be withdrawn from the wallet until it is unlocked and is marked on the network as the user’s stake.
In blockchains using proof-of-stake protocol, users share block verification rewards and transfer fees (miner fee) paid by other users in proportion to their shares. We can compare this process to owning the shares of a publicly traded company. Users who allocate more cryptocurrencies for “staking” get a higher share of revenue, just as people who own more shares get a higher share of the company’s profits.
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