What is Meant by Proof-of-Stake?
Proof-of-stake or PoS is an algorithm that states that a person can verify transactions based on the number of tokens in their own wallet. It follows that a larger number of tokens in the wallet also leads to a larger number of blocks and thus more verifiable transactions.
What's the Criticism of the Proof-of-Stake Algorithm?
Basically, the proof-of-stake approach is more passive than the better-known proof-of-work algorithm, which is particularly applied to the popular Bitcoin token. However, this algorithm implies that individuals have a better starting position by having multiple tokens. As a result, it may happen that a concentration of power is limited to a few investors and a small group of users determines the development of the entire token.
In order to prevent this, two further variants for distributing the tokens to be generated have been established. On the one hand, the blocks can be distributed based on the random principle. Here, a random function is used, which determines the lowest hash value in the network. This user account then gets the right to generate this block. On the other hand, the distribution of blocks may be due to the holding time of the tokens in the wallet. As a result, users who keep coins in the wallet for a long time get priority over creating new blocks.
Furthermore, the proof-of-stake algorithm distinguishes itself from the proof-of-work algorithm due to its low energy consumption. Electricity costs are the most important expenses in mining and must be paid in fiat currencies. This results in an enormous advantage for the lower energy requirement of the proof-of-stake. The proof-of-stake algorithm was first used in Peercoin, but even large cryptocurrencies will use it in the future.