Cryptocurrency validation is usually done via a Proof of Work protocol or a Proof of Stake protocol. In this article we will discuss the Proof of Stake protocol.
Simply put, Proof of Stake requires that the person or company that is validating a transaction on the blockchain must possess a quantity of tokens on that blockchain. This encourages security and rewards them for holding those tokens. The higher their percentage of tokens that they hold, the more likely they are to be selected to validate transactions. In theory if you hold 5% of all available coins then you can only mine 5% of the transaction blocks for that coin.
In cryptocurrency mining there is the possibility of a “Tragedy of the Commons” attack where a miner acquires 51% of the computing power of a network and then uses that to create fraudulent transactions for themselves while invalidating transactions for other miners in the network. PoS makes it rather expensive for a miner to acquire 51% of the coin being mined plus they would devalue their own holding of they did attempt a Tragedy of the Commons attack,
While some cryptocurrencies use the number of tokens held as the criteria for selecting a validator, others use concepts such as how long you have held the tokens as their selection criteria. The longer you have held your tokens, the greater your stake in the blockchain.
Proof of Stake also encourages a more environmentally friendly operation because you can’t simply buy enough processing power to “force” being selected as the transaction validator. The massive energy consumed with Proof of Work cryptocurrencies is caused by miners that are running vast quantities of incredibly powerful computational hardware to increase their chances of being the first to decrypt the block transaction so that they are rewarded with the coin.
Today, the most popular coin that uses Proof of Stake is probably Cardano (ADA).