Proof of Stake

Proof of Stake is a way to confirm transactions on a blockchain. It’s one type of consensus mechanism: a set of rules that helps everyone agree on what’s legitimate and what’s not.

Consensus mechanisms are used in everyday life, too. Company boards use formal rules to make decisions about business strategies. Lawmakers follow strict procedures to propose new legislation. These are different mechanisms (systems) for achieving consensus (agreement).

With Proof of Stake, the rules are simple: some people are selected to check and confirm blockchain transactions. If they follow the rules, they’re rewarded. If they don’t follow the rules, they’re penalized.

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Peering under the hood

How are the people selected to validate blockchain transactions (also known as validators) rewarded or penalized? Validators “stake” their cryptocurrency in advance so that they’re financially invested in the outcome of their behavior.

This staked crypto is kind of like a security deposit: if a validator engages in bad behavior (for example attempts to re-route a blockchain transaction so they, rather than the rightful recipient, get paid), a portion of their deposit is taken from them–their stake is “slashed”.

If they engage in good behavior, however, they’re rewarded for their efforts–they earn more cryptocurrency.

Suppose Jane decides she wants to be a validator on a Proof of Stake blockchain…

Things you should know

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