Overview: What is proof-of-stake?
Cryptocurrencies based on proof-of-stake: terra , solana , cardano , polygon , chainlink .
A blockchain based on proof-of-stake adds transactions to the blockchain in a different way than with proof-of-work. Here, a randomly selected person in the blockchain network is responsible for validating the transactions.
This person is also called a validator. The person who is selected as the validator will also receive a reward - but it’s not a newly mined coin, like with proof-of-work. It’s a fee coming from a pool of already existing coins.
The validation work is then also compensation in proof-of-stake. The difference is just that the compensation isn’t also the issuing of new coins, like it is with bitcoin, ethereum and dogecoin.
Let’s say you want to be selected as a validator.
The selection is a drawing of lots, where one lot is equal to a coin. Your coins are not automatically in the draw, and they will only be in the draw if you stake them.
Let’s say you have 500 terra coins. You can stake 300 of them in the draw to become the validator. Let’s also say there are 10,000 coins in total in terra’s network.
Then you would have a 300/10,000th chance of being selected - or 0,3%.
The work as a validator is a demanding piece of work. You need to know a lot of advanced programs and codes - which is why not everyone can handle the work.
That’s why you can pool your coins with a competent validator and thus increase their chances of being selected in a proof-of-stake blockchain. This is also called a stake pool.
Helena works as a validator on terra’s blockchain.
She has 500 terra coins, which she stakes in the draw. Now, she has a 0,5% chance of being selected.
You know Helena is a great developer, and you trust her validation. That’s why you would like to support her in getting selected, and you’re staking some of your coins in Helena’s name.
You’re staking 300 coins - so now Helena has 800 coins in her name and has now increased her chances to 0,8%.
So when Helena gets selected, she will complete the work and get rewarded a certain amount of coins. The reward is spread out over the pool of people, who staked coins in Helena’s name.
Like that, both Helena and the people who supported her are being financially rewarded.
Tip: You can read more about the rewards for staking terra coins and other crypto coins at StakingRewards.com .
But what if Helena ‘cheats’?
If Helena - or anyone else for that matter - tries to cheat with her validation - such as swindling the network out of money - her 500 coins are then confiscated. But the 300 coins you’ve staked in her name also risk being confiscated.
This is where trust in the validator enters the picture. Do you trust Helena enough to stake your coins in her name?