What is Proof of Stake (PoS) ?
Mining new coins requires a lot of processing power because of the Proof of Work algorithm.
Bitcoin creator Satoshi Nakamoto realized that this mechanism could be used to reach an agreement between many nodes in the network. He used it as a way to protect the bitcoin blockchain.
The PoW algorithm works when all nodes solve a cryptographic problem. Whoever finds the solution to the puzzle gets rewarded, they are also called miners.
Miners are building larger and larger farms, which leads to very high power consumption. PoW gives more rewards to miners with better equipment. Behind the income race, miners pooled computing power by creating a miner pool, and distributing the rewards evenly among all pool members.
So, Pow forces miners to use huge amounts of power and encourages the use of mining pools, making the blockchain centralized.
The Proof of Stake algorithm is designed to protect cryptocurrency owners. There are no miners in this algorithm. The people who create blocks and confirm transactions are called validators. To become a validator, a node must contribute a certain number of coins to the network as a stake.
The idea behind PoS is that competition with each other in mining is wasteful. So PoS uses a selection process in which 1 node is chosen at random to validate the next block.
There is a block that needs to be signed, each validator contributes their own funds to the blockchain so that there is an opportunity to sign the block. Each of them contributes a different number of coins. The more coins, the more chances to sign a new block.
By random calculation, the systеm chooses the validator with the most coins to sign the block, and it receives all the commissions for the transactions that were in that block.
How do you trust other validators on the network?
Validators will lose some of the rate if they approve fraudulent transactions. As long as the rate is higher than what the validator gets from the transaction fees we can trust it to do its job correctly. This is a financial motivator that lasts as long as the rate exceeds the sum of all transaction fees.
No energy expenditure (the computer does not perform calculations and does not consume large amounts of electricity)
No race to build up computing power (no need for expensive hardware for mining)
Network security (the need to have a large share of tokens available prevents an attack on the network)
Having controlling interest gives you a chance to approve fraudulent transactions.