Cryptocurrencies like Bitcoin and Ethereum use consensus protocols to keep their networks secure and running smoothly. Consensus protocols are key to decentralization, as it creates a source of truth for valid and invalid transactions.
One of the most popular types of consensus protocols in crypto today is Proof of Stake (PoS).
In this article, we’ll walk you through what Proof of Stake is, how it works, and how it compares to another consensus protocol called Proof of Work (PoW).
We'll also look at how you can earn staking rewards on Ethereum and whether staking is a worthwhile investment option.
A consensus protocol or consensus mechanism is a set of rules that helps stakers or miners agree on the validity of transactions.
In a decentralized network, there’s no single person or company in charge. Instead, the network relies on many computers (also called "nodes") to verify and record transactions.
These computers must come to an agreement, or "consensus," on which transactions are legitimate before adding them to the blockchain. Consensus protocols help these nodes stay in sync and maintain the integrity of the network.
For example, let’s say someone sends 1 ETH to a friend. All the nodes in the Ethereum network need to check and confirm that the sender has enough ETH in their wallet, and that the transaction follows the rules. Once enough nodes agree, or reach "consensus," the transaction is added to the blockchain, and the transfer is complete. If the nodes didn’t follow a consensus protocol, there would be no way to make sure the transaction was valid, and the network wouldn’t be reliable.
Consensus protocols make decentralized networks secure and trustworthy by ensuring that all participants are following the same rules. Whether it's for sending cryptocurrency or creating new blocks in a blockchain, these protocols are essential for keeping everything running smoothly.
Proof of Stake (PoS) is a type of consensus protocol used by many cryptocurrencies, including Ethereum. In a PoS system, validators (people who help confirm transactions) are chosen to verify transactions based on how much cryptocurrency they “stake” as collateral. The more tokens you stake, the higher your chance of being selected as a validator.
When you stake your tokens, they’re locked up and used to help secure the network. If you act honestly and verify transactions correctly, you earn rewards in the form of more cryptocurrency. However, if you try to cheat the system, you could lose some or all of your staked tokens as a penalty. This process is known as "slashing."
Investors often use large amounts of staked cryptocurrency to earn passive income. We’ll discuss how this works with a proof of stake system like Ethereum in a section below.
Proof of Work (PoW) is another type of consensus protocol used by older cryptocurrencies like Bitcoin. In a PoW system, validators (called "miners") must solve complex math problems to confirm transactions and add them to the blockchain.
Miners compete against each other to be the first to solve these problems, and the winner gets to add the next block of transactions to the blockchain. As a reward, they earn cryptocurrency, but solving these problems requires a lot of computer power and energy. This is why PoW is considered energy-intensive.
To help illustrate, imagine Bitcoin miners as people in a competition to solve a really tough puzzle. Each miner works on the puzzle using their computers, and whoever solves it first gets to write the next page (or block) in the Bitcoin ledger. As a prize for solving the puzzle, the miner gets Bitcoin rewards. However, the more miners compete, the harder the puzzles get, and the more energy their computers need to use.
Because PoW uses so much energy, it has faced criticism for its environmental impact. The high energy consumption is necessary to keep the network secure, but newer consensus protocols, like Proof of Stake (PoS), are designed to be more energy-efficient while still maintaining security.
The main difference between Proof of Stake (PoS) and Proof of Work (PoW) lies in how the protocols choose validators. In PoS, validators are chosen based on how many tokens they have staked, while in PoW, validators are chosen based on how much computing power they can contribute.
Proof of Stake cryptocurrencies are generally seen as more energy-efficient and environmentally friendly because they don’t require such vast amounts of computing power. On the other hand, PoW can be considered more secure by some because the high energy costs make it harder for bad actors to take over the network.
Both systems have their pros and cons, but PoS has become more popular in recent years, especially after Ethereum upgrades to this system.
Ethereum now uses Proof of Stake, which means that Ethereum holders can earn rewards by staking their ETH to help secure the network. There are different ways to earn staking yield on Ethereum, and we’ll cover two of the most common methods: solo staking and liquid staking.
Solo staking means that you set up and run your own validator node. To do this, you need to stake at least 32 ETH, or roughly $85,000 at the time of writing. The benefit of running your own validator is that validators receive rewards directly from the network for validating transactions.
However, setting up a validator requires technical knowledge, and if your validator goes offline or behaves incorrectly, you could lose some of your staked ETH. So while the economic incentives for solo staking can be very rewarding, it’s not for everyone because of the high amount of ETH required and the technical skills needed to manage the validator.
Liquid staking is a simpler way to stake your ETH without needing to run your own validator node. With liquid staking, you stake your ETH through a service provider, and in return, you receive a liquid staking token (LST) like Origin Ether (OETH). These tokens represent your staked ETH and can be used in other DeFi (Decentralized Finance) activities, like lending or trading.
Origin Ether (OETH) allows you to stake your ETH and earn rewards, but unlike solo staking, your ETH isn’t locked up. You can still use your OETH for other DeFi opportunities while earning staking rewards, making it a more flexible option for many users.
Staking is generally considered safe, but there are still some risks to keep in mind:
There’s also a risk if you use liquid staking tokens in other DeFi activities. If the token’s value drops or if there’s a sudden loss of liquidity, it could affect your investment. That’s why it’s important to choose reliable and secure platforms, like Origin Ether (OETH), which is backed by strong security measures.
What is Proof of Stake in Crypto?
Proof of Stake (PoS) is a consensus protocol where validators are chosen based on the amount of cryptocurrency they stake. By staking in staking pools, users help validate cryptocurrency transactions while earning rewards, all with less energy usage compared to Proof of Work.
Is Proof of Stake Safer than Proof of Work?
Proof of Stake is considered safer in some ways because it reduces the risk of double spending by requiring validators to have a stake in the network. However, both PoS and Proof of Work offer different security benefits depending on how they’re implemented.
Is Ethereum Proof of Stake or Proof of Work?
Ethereum used to rely on Proof of Work but has now transitioned to Proof of Stake. This change allows users to participate in staking, earn rewards, and help secure cryptocurrency transactions through staking pools.
