Proof-of-Stake (PoS)

Proof of Stake is a consensus mechanism that selects validators to create new blocks based on how much cryptocurrency they have locked up as collateral, rather than on how much computational work they have done. Instead of burning energy to prove commitment, validators put their own money at risk. If they behave honestly, they earn rewards. If they try to cheat or go offline too often, they can lose a portion of their staked funds — a punishment called slashing.

Someone who holds a significant amount of the network’s currency has an inherent economic incentive to keep the network honest, because attacking it would damage the value of their own holdings. The more you stake, the higher your chance of being selected to validate a block and earn rewards. Ethereum moved to PoS in September 2022 in an event called the Merge, reducing its energy consumption by over 99%. The main critique is that wealthier validators have more influence, which some argue could lead to centralization over time.

Example: Imagine a city that needs honest judges. Instead of having judges prove their dedication by doing years of exhausting physical labor, the city asks each judge to deposit their life savings in an escrow account. If they rule dishonestly, they lose everything. Their skin in the game is what keeps them honest. Proof of Stake applies exactly this logic to blockchain validators.