Proof-of-stake is a method of maintaining the integrity of a cryptocurrency, preventing users from printing extra coins they didn’t earn. While a different method, called proof-of-work, is currently used by Bitcoin and Ethereum – the two largest cryptocurrencies by market capitalization – Ethereum has plans to migrate to proof-of-stake to make the platform more scalable and reduce energy consumption of the network.
Both proof-of-work and proof-of-stake are what are called “consensus mechanisms,” the method by which a blockchain maintains its integrity. Consensus is what addresses the “double spending” problem of digital money. If there were any way the user of a cryptocurrency could spend their coins more than once, it would undermine the entire system. The currency would be worthless.
This is a tricky problem, especially with online currencies that have no central authority, such as a bank or a government, to keep track of how much money each person has, how they’re spending it, and whom they’re paying.
The Bitcoin network was the first to solve this problem with proof-of-work. Proof-of-stake has emerged as a possible alternative that some researchers think is both more energy efficient and more secure, though there’s debate about this.
Why is proof-of-anything needed?
It’s not so hard to prevent double spending in a centralized manner, when there’s one entity managing a ledger of all the transactions. When Alice sends Bob $1, the manager of the central ledger simply takes $1 from Alice and gives $1 to Bob. PayPal does exactly that.
But cryptocurrencies are different. The goal is not to have one leader or entity in control of the system, which makes this record-keeping more complicated.
Instead of just one leader, thousands of users run the Bitcoin software all over the world. These “nodes” ensure the rules of the network are followed. This sprawling infrastructure needs to be tied together so all the software is in agreement. Otherwise…