Proof-of-Stake is the most used consensus algorithm after Proof-of-Work. These two algorithms differ a lot in the way how they secure the blockchain and add new blocks to the blockchain.
Proof-of-Stake mechanism was first discussed in the Bitcoin talk forum in 2011.

How Proof-of-Stake work?

A stake is owning a part of a business or in a network. In proof-of-stake, the nodes in the blockchain have to deposit coins into the network. For example, if you want to stake a coin named Tron, you have to buy Tron and deposit them in the network address provided in the staking software. Nodes in a proof-of-work blockchain are called Miners, but in a proof-of-stake blockchain, nodes are called Validators.

These validators validate the new transactions and add them to a block, which will be added to the blockchain after verification by the other nodes. The Validator of the next block will be selected based on a random selection process. The election of a validator may depend on various factors. These include Staking age, Wealth of a node(Amount of stake), Randomization, or a combination of those.

proof of stake vs proof of work everything you need to know

In proof-of-work, new blocks are mined and block reward and fee reward is awarded to the miners. Block reward is the way new coins are created. But, in proof-of-stake, the creation of new blocks is called Forging. New blocks are forged. A validator of a block receives the transaction fees associated with the transactions in a block. Now, new coins are created by proof-of-stake. Premined coins are sold and are used for staking or network which previously had proof-of-work shifts to proof-of-stake network.

Generally, the size of the stake determines the chances for the node to be selected as the next validator. But, in order to not to favor only the wealthiest nodes, some methods are implemented like Randomized Block Selection and Coin Age Selection.

In Randomized Block Selection, nodes whose block has the lowest block hash and highest wealth are selected. In Coin Age Selection, the age of a stake is taken into consideration. Once a node is chosen based on the Coin Age Selection method, his coinage will be reset to zero so that the other nodes will get a chance to validate the block.

As we have discussed, it's the developer of the cryptocurrency who decides which consensus algorithm to be used for their blockchain, similarly, they also chose which methods and rules are better for their Proof-of-Stake algorithm. When a new cryptocurrency is created, users should benefit from it, like faster transactions, faster smart contract settlements, different and new use cases, otherwise, there is no reason one would use it.

To be a node in the Proof-of-Work network, you have to invest in mining equipment dedicate a space for them, and also bear the electricity bills associated with mining. But, for Proof-of-Stake, you just have to buy some coins which run on this algorithm and have to download the staking software from the official websites of those cryptocurrencies.

That trend is also gone now, top exchanges like Binance offer staking services, just buy some coins in the exchange and hold them in your exchange wallet, staking rewards will be added to your wallet every month. For example, Binance offers Algorand staking, which gives you 8-10% rewards per year. If you buy 1000 ALGO for 100 USD and hold it in your wallet for a year, you will earn 80 to 100 ALGO tokens in a year as staking rewards, and additionally, if ALGO is up 10% in its value, it would be worth 121 USD.

However, there is also a downside while investing in staking coins. If its value goes down, let's assume the coin goes down by 10%, you may earn staking rewards but now your portfolio will be of worth 99 USD. Up by 21% and down by 1%. And investing always should be about minimizing the risk. Thus, staking coins has developed to be considered as best investment options, if you buy them at a good price, then no looking back. Different cryptocurrencies offer different amount/percentage of staking rewards.

As the node deposits coins in the network, if they attempt or try to manipulate transactions while being a validator, part of their stake i.e., the coins they deposited will be deducted. The amount of coins that will be deducted depends on the fraud. The amount deducted will always be greater than the potential reward that one gets for fraudulent action. If a node wants to stop staking, he cannot redeem his stake and staking rewards right away but after some time. In case, if he had committed fraud, the network must be able to punish him. Once verified, the node can withdraw his stake and staking rewards.

51% attack:

In a proof-of-work network, more than 51% of the network's mining hash rate is required to launch a 51% attack. But, in a proof-of-stake network, to launch a successful 51% attack, a node needs to own more than 51% of the circulating supply. For example, if the circulating supply of a coin is 100 Million, a node needs to own 50 Million coins and it is not possible as coins will be distributed to various activities.

Proof of Stake is developed to be an energy-efficient way as it doesn't consume any electricity during the process and it is less expensive to be a node in the network. Recently, Ethereum is shifting from a proof-of-work network to a proof-of-stake network, and the founder of Ethereum, Vitalik Buterin has announced that in order to be an Ethereum node, he has to stake a minimum of 32 Ethereum.

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