This is part 12 of a series of short cryptocurrency “explain it like I’m five” posts. If you’re just joining us, start here: Crypto ELI5 Part 1: What is a blockchain?
This series of blog posts is meant for the absolute beginner in cryptocurrency. They are also meant to be concise and easy to understand. If you’re interested in learning about crypto, some of the history of crypto, and how to get started with using crypto, follow along! We’ll be adding a new post daily and each post will build on the one previous to it.
What is Proof-of-Stake?
Proof-of-Stake (POS) is a system in which an entity is given the opportunity to create blocks based on how many coins they hold. The more coins held by an entity the more mining power they have. POS addresses some of the issues with a POW system.
One criticism of Bitcoin is that it requires more power to run the network than the power consumed by some small countries. This is because POW requires a massive amount of computational power to solve POW puzzles for minting blocks. To pay the electricity bill for POW computing, miners have to sell part of their rewards for fiat, which can drive crypto prices down.
When China banned Bitcoin mining and trading, it triggered “the great mining migration.” Miners had no choice but to either liquidate their assets and start over somewhere else, or relocate their existing hardware. This is no easy feat considering how much computer hardware is needed to mine on a POW system.
In a POS system, there are no puzzles to solve. A person can run a node anywhere in the world on a home computer with an internet connection. An person simply needs to have a large enough stake to mint blocks.
Check back in soon for Crypto ELI5 Part 13: What is a stake pool?
Stake with GUI Pool! Single, small, mission-driven-pool donating 33% of profits to code.org, expanding access to computer science in schools.