Proof of Stake

Another popular consensus mechanism is proof of stake. This attempts to minimize the use of resources while still maintaining the decentralized nature of the proof of work mechanism. Here, blockchain internal coins are used to validate blocks. The participants who use their "stake" to validate blocks are called "validators." The Coins act as digital property. The more coins a participant has, the greater his chance of being allowed to validate the next block. The probability of being allowed to validate a block is the same as the percentage of coins the participant holds. Thus, if a participant holds five percent of the coins, his probability of being allowed to validate the next block is also five percent.

In contrast to the proof of work mechanism, not every participant can take part in the consensus. A basic requirement is the possession of the internal currency (coins). Likewise, no computing power is needed to validate blocks. This results in a significantly better energy balance.

Validators receive for their use of coins, proportionate transaction fees for the blocks, which they validate themselves. This ensures that the validators act correctly and in the interest of the network. As security, the validators deposit their "stake" and lose it if they validate incorrect blocks. Validators have an intrinsic motivation to keep the network alive, as they hold coins themselves.

The mechanism scales very well. A disadvantage can be the loss of decentralization. If a participant owns a lot of coins, the probability that he will become richer and richer is very high. The reason for this is that he is more likely to be allowed to validate the other blocks. This can lead to the formation of an oligopoly.