update 18 October 2021

5 Unique Features of Proof-of-Stake Crypto Projects

Ironically, decentralization, one of crypto assets’ vital features, is a potential Achilles heel too. Eliminating third parties from transactions enables peer-to-peer exchanges. However, the absence of a third party also creates loopholes for double-spending by mischievous parties. It’s for this reason that networks agree on specific consensus mechanisms. They are the rules and procedures that all devices in a network follow in confirming that certain blockchain transactions are correct. They also help in protecting the network against malicious activities, thereby preserving its integrity. 

Today, projects can choose to adopt any one of the many crypto verification protocols available to them. One that’s gaining popularity is the Proof-of-Stake consensus protocol (PoS). It developed from the need to address the shortcomings of the Proof-of-Work protocol (PoW), the premier consensus mechanism. It has many unique features that have undoubtedly raised its appeal, and in this article, we take a look at five of them. Before that, though, it’s essential to understand what PoS is first.

What’s a Proof-of-Stake Consensus Protocol?

Proof-of-Stake is a blockchain consensus mechanism where networks allocate the right to verify transactions based on the amount of tokens one stakes. The tokens act as a guarantee that you, the validator, have good intentions towards the project. You cannot access the stake until all transactions go through.

Earning the right to verify a block requires you to show that you hold some quantity of the crypto concerned. It’s akin to putting up a deposit indicating your goodwill towards the project. 

The quantity of tokens that you stake determines the capacity you’ll have to verify the transactions. For instance, if you hold 10% of the crypto, you can only verify 10% of your transactions. Once the transactions go through, each validator earns transaction fees and gets their stake back.

What are the Unique Features of PoS Crypto Projects?

As indicated in the opening paragraph, crypto projects are increasingly adopting the PoS consensus protocol. The question is, why is that so? To answer this question, we shall now shift our attention to five unique features of the PoS crypto projects.

  • Validation Replaces Mining

While the PoW projects depend on coin mining to verify transactions, the PoS ones mint or forge coins. Mining involves the solution of complex mathematical equations using specialized machinery. However, in a PoS system, the network randomly selects the person to produce the next block. To become validators, users stake their tokens, locking them for a while.

The system considers several factors when deciding on who gets to validate the next block. Notably, the highest stake has the best chance of doing so. However, it may also consider the duration that one has staked their coins. Once selected, the validator checks that all the transactions are valid; they sign on the block and add it to the blockchain. They then receive the transaction fees.

  • Low Entry

Another distinguishing feature of PoS systems is that they’ve low entry requirements. We’ve already shown that, unlike in the PoW systems, here, you wouldn’t need to invest in mining equipment to verify transactions. Instead, your stake is your ticket to participating in the validation process. 

Mining equipment is costly, and this fact could discourage many from participating in it. On the other hand, its elimination in the PoS systems enables anyone holding the crypto to join the verification process. Besides the stake, you’ll only need your ordinary PC/laptop, a fairly decent smartphone, or a tablet.

  • Passive Income

One advantage that PoS systems have over others is that they allow you to earn passive income. Just like mining rewards your effort with a certain amount of cryptos, so does staking. 

Staking shows your confidence in the project. Also, the fact that you’re not trading reduces its circulating volume, which in turn raises the token’s value. So the project will pay you for holding it. So you earn income without breaking a sweat.

  • Majority Holders Protect the System

The worthiness of a crypto project is determined by how robust it is to withstand attacks. One attack that concerns them is the 51% attack. It is a situation where the majority of the nodes collude to attack their network with malicious intent.

In the PoW setup, nodes control 51% or more of the mining power raiding the network. The PoS projects involve controlling a similar amount of the total coins/tokens in that network’s supply.

Besides this being unfeasible, the projects have in-built checks to deter majority holders from launching these attacks. First, it locks their stake for a while, even after the verification of blocks. Second, their tokens/cryptos act as a guarantee for their honest engagement.

Also, validators Pay for Wrongdoing. Secondly, the majority of holders suffer the most if fraudulent activities occur during the validation of transactions. It’s because the system penalizes the validators for any wrongdoing. Since they hold the majority stake in the project, instigating an attack is inducing self-harm. 

Again, PoS encourages Decentralization of the nodes. As such, it increased the distribution of validating rights, preventing the possibility of such an attack from taking place.

  • Validators take the Transaction Fees.

In contrast to PoW systems, where miners get rewards in mined coins, PoS validators earn rewards from transaction fees. The significance is that the verification doesn’t create new coins, which helps control a given coin/token’s supply.

Final Thoughts

A consensus mechanism is central to the sustenance of crypto projects. In addition to helping the system guard against double-spending, it helps secure it from attacks. Today more and more projects are opting for the Proof-of-Stake consensus protocol. It’s an improvement on the Proof-of-Work consensus and has unique features that make it an attractive option. 

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Besides eliminating the need for miners, they are better proof against a 51% attack. Moreover, the PoS projects offer passive income through staking and are affordable for first-time investors. So for them, the future remains promising.

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