Proof of stake (PoS) is a consensus algorithm used in some blockchain networks.
It allows a node to validate blocks based on the number of coins native to that blockchain that they hold, meaning that those with the most stake in a network hold the most hash power.
When a transaction is initiated on a blockchain network that uses PoS, it is placed along with other transactions into a block on the network’s blockchain. The creator of each new block — the miner who will receive the block reward — has a probability of producing the next block based on how many tokens the miners stake on the network. Those with more stake in the network have a better chance of being chosen as the block creator.
Though proof of work (PoW) is the consensus algorithm used in Bitcoin, the first cryptocurrency, advocates of PoS feel that it offers some unique advantages to PoW.
PoW requires an energy-intensive validation process known as mining that requires participating miners to compete to solve an algorithm in exchange for a block reward. In a PoS system, this computing energy is not required and no block reward is needed to incentivize participation, as those who produce blocks receive transaction fees as a reward.
However, due to its energy intensiveness, PoW serves as the linchpin that secures the Bitcoin blockchain from bad actors. It would be practically impossible to harness enough energy to double-spend on the Bitcoin blockchain. PoS has no such protection.
Another issue that PoS systems must address is the precise way in which the block creators are selected. A system in which those with the largest token stake in the network have the best chances of validating future blocks could be thought of as partially centralized, as those with the largest stakes in the network would continue to be rewarded and could increase their stakes even further. So, several variants on the concept have been theorized and some have been put into action.
Peercoin, a very early altcoin, instituted a PoS system that took into account the number of days users have been holding their stake, giving those with the largest and oldest stake in the network the best chance of validating blocks.
Delegated proof of stake, the consensus algorithm behind the projects EOS, Steem and Lisk, utilizes a small pool of nodes with stakes in the network for block validation. This means that transactions can be validated quickly, but critics point to the inherent centralization of this method as well.