Definition
Proof of stake (PoS) is a way for a blockchain to agree on new blocks in which validators lock up the network's coins as collateral and are chosen to propose and confirm blocks in proportion to their stake.
How it works
To become a validator, a participant stakes, meaning locks, an amount of the network's native coin. The protocol then picks validators to propose new blocks and others to check and vote on them, and the chance of being picked rises with the size of the stake. Validators who do this work correctly earn rewards, which come from newly issued coins, transaction fees or both, depending on the network.
The stake is what keeps validators honest. If a validator breaks the rules, for example by signing two conflicting blocks, the protocol can destroy part of its stake. This penalty is called slashing. Smaller penalties can also apply for being offline when the validator is supposed to take part. The size of rewards and penalties and the minimum stake are set by each network's rules.
Proof of stake differs from proof of work, the system Bitcoin uses, where miners compete with computing power and electricity to add blocks. Because PoS does not require that race, it uses far less energy. Critics point out that those who already hold the most coins can earn the most rewards, and that large staking providers can concentrate influence over a network.
Example (hypothetical numbers)
Suppose Network P has 1,000,000 coins staked in total, and Validator V stakes 20,000 of them.
V's share of the stake = 20,000 ÷ 1,000,000 = 2%, so over 50,000 blocks V can expect to be picked to propose about 50,000 × 2% = 1,000 of them.
If the network's rules slash 3% of the stake for signing two conflicting blocks, V would lose 20,000 × 3% = 600 coins.
Selection follows the size of the stake, and that same stake is what a validator puts at risk if it breaks the rules.
Common mistakes
- Assuming staked coins carry no risk, when slashing can destroy part of them.
- Treating a validator's chance of being picked as fixed, when it changes whenever the network's total stake changes.
- Confusing proof of stake, the consensus method, with staking products offered by third parties.
Related calculators
This glossary is for education only and is not investment advice. Examples use hypothetical numbers.