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5 Unique Features of Proof-of-Stake Crypto Projects
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Ironically, decentralization, one of crypto assets’ vital features, is a potential Achilles heel too. Eliminating third parties from transactions enables peer-to-peer exchanges. However, the absence of a third party also creates loopholes for double-spending by mischievous parties. It’s for this reason that networks agree on specific consensus mechanisms. They are the rules and procedures that all devices in a network follow to confirm that certain blockchain transactions are correct. They also help in protecting the network against malicious activities, thereby preserving its integrity.
Today, projects can choose to adopt any one of the many crypto verification protocols available to them. One that’s gaining popularity is the Proof-of-Stake consensus protocol (PoS). It developed from the need to address the shortcomings of the Proof-of-Work protocol (PoW), the premier consensus mechanism. It has many unique features that have undoubtedly raised its appeal, and in this article, we look at five of them. But, before that, it’s essential to understand what PoS is first.
What’s a Proof-of-Stake Consensus Protocol?
Proof-of-Stake is a blockchain consensus mechanism where networks allocate the right to verify transactions based on the number of tokens one stake. The tokens guarantee that you, the validator, have good intentions toward the project. You can access the stake once all transactions go through.
Earning the right to verify a block requires showing that you hold some quantity of the crypto. It’s akin to putting up a deposit indicating your goodwill towards the project.
The quantity of tokens you stake determines the capacity to verify the transactions. For instance, if you hold 10% of the crypto, you can only verify 10% of your transactions. Once the transactions go through, each validator earns transaction fees and gets their stake back.
What are the Unique Features of PoS Crypto Projects?
As the opening paragraph indicates, crypto projects are increasingly adopting the PoS consensus protocol. The question is, why is that so? To answer this question, we’d like to shift our attention to the five unique PoS crypto projects’ features.
Validation Replaces Mining
While the PoW projects depend on coin mining to verify transactions, the PoS one mints or forges coins mining involves the solution of complex mathematical equations using specialized machinery. However, in a PoS system, the network randomly selects the person to produce the next block. Users stake their tokens, locking them for a while to become validators.
The system considers several factors when deciding who gets to validate the next block. Notably, the highest stake has the best chance of doing so. However, it may also consider the time one has staked their coins. Once selected, the validator checks that all the transactions are valid; they sign on the block and add it to the blockchain. They then receive the block reward (transaction fees + newly minted coins).
Low Entry
Another distinguishing feature of PoS systems is that they’ve low entry requirements. We’ve already shown that, unlike in the PoW systems, you wouldn’t need to invest in mining equipment to verify transactions. Instead, your stake is your ticket to participating in the validation process.
Mining equipment is costly, and this fact could discourage many from participating in it. On the other hand, its elimination in the PoS systems enables anyone holding the crypto to join the verification process. Besides the stake, you’ll only need your ordinary PC/laptop, a decent smartphone, or a tablet.
Passive Income
One advantage PoS systems have over others is that they allow you to earn passive income. Like mining rewards your effort with a certain amount of cryptos, so does staking.
Staking shows that you are confident in the project. Also, the fact that you’re not trading reduces its circulating volume, raising the token’s value. So the project will pay you for holding it. So you earn income without breaking a sweat.
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Majority Holders Protect the System
The worthiness of a crypto project is determined by how robust it is to withstand attacks. One attack that concerns them is the 51% attack. It is a situation where most nodes collude to attack their network with malicious intent.
In the PoW setup, nodes control 51% or more of the mining power raiding the network. The PoS projects involve controlling a similar amount of the total coins/tokens in that network’s supply.
Besides being unfeasible, the projects have in-built checks to deter majority holders from launching these attacks. First, it locks their stake for a while, even after verifying blocks. Second, their tokens/cryptos act as a guarantee for their honest engagement.
Also, validators Pay for Wrongdoing. Secondly, most holders suffer the most if fraudulent activities occur during the validation of transactions. It’s because the system penalizes the validators for any wrongdoing. Since they hold the majority stake in the project, instigating an attack induces self-harm.
Again, PoS encourages the Decentralization of the nodes. As such, it increased the distribution of validating rights, preventing the possibility of such an attack from taking place.
Validators take the Transaction Fees.
In contrast to PoW systems, where miners get rewards in mined coins, PoS validators earn rewards from transaction fees. The significance is that the verification doesn’t create new coins, which helps control a given coin/token’s supply.
Final Thoughts
A consensus mechanism is central to the sustenance of crypto projects. In addition to helping the system guard against double-spending, it helps secure it from attacks. Today more and more projects are opting for the Proof-of-Stake consensus protocol. It’s an improvement on the Proof-of-Work consensus and has unique features that make it an attractive option.
Btc
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Besides eliminating the need for miners, they are better proof against a 51% attack. Moreover, the PoS projects offer passive income through staking and are affordable for first-time investors. So for them, the future remains promising.
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