Proof of Stake is where you have a staking service hold coins in a masternode that becomes a lottery system for the miners to mine and you get rewarded with more of that coin.
What is Staking?
Proof of Stake or generally called PoS is a blockchain consensus mechanism where block miners are selected by an algorithm based on the stakes of users. Unlike PoW, PoS doesn’t involve any competition to solve one or more complex puzzles in order to mine new blocks. Here, the users with the most stakes are selected by the algorithm on a random basis.
A PoS consensus uses a computer algorithm to select the users for mining based on the number of tokens (stakes) held in the network. For instance, a user with a 50% stake in the network will be able to mine new blocks (validate transactions) in proportion to his/her stake. In theory, they can mine up to 50% of the new blocks.
The selection of stakeholders/validators to validate a new block of transactions is done through a voting round where the decision depends on the number of tokens held by different participants.
Benefits of PoS or Why Proof of Stake Is Important
One of the primary benefits of the PoS mechanism is that the users do not have to compete with each other, as there are no puzzles or problems to solve. This means the energy consumption is substantially lower as compared to PoW consensus.
Proof of stake is comparatively more secure as the miners are motivated to protect the ledger in order to protect their own interests. Also, there are serious penalties for those who try to harm or penetrate the system in any way.
Many modern generation blockchains like OKCash, Titanprojects (Titan Coin), NavCoin are using Proof-Of-Stake consensus for protecting the interest of miners and making transactions more secure and energy-efficient. The use of the PoS system also increases the overall profitability of blockchain miners while reducing the cost.
A staking pool is formed when several coin holders merge their resources to increase their chances of validating blocks and receiving rewards. They combine their staking power and share the eventual block rewards proportionally to their individual contributions.
Pools are most effective in networks where the barrier to entry, whether technical or financial, is relatively high. Often, pools require significant setup, development, and maintenance. As such, many pool providers charge a fee as a percentage of the staking rewards distributed to participants.
Other than that, pools may provide additional flexibility in regards to withdrawal times, unbinding times, and minimum balances on the network. Thus, new users would be encouraged to participate, leading to a greater network decentralization.
Cold staking refers to the process of staking on a crypto wallet that has no connection to the Internet, i.e., a hardware wallet. Networks that support cold staking allow users to stake while securely holding their funds. However, if the stakeholder moves the coins out of the cold storage, the stakeholder will stop receiving rewards. This method is particularly useful in allowing large stakeholders in the network to ensure maximum protection of their funds while still supporting the network.