Proof of Stake

PoS has the same objectives as PoW to secure the network against attack and to allow consensus to occur in an open network. The first digital currency to use this method was Peercoin, and was followed by many others, such as NXT, Dash, PIVX, and so on. In PoW networks, solving the puzzle is what determines which node gets to create the next block in the chain. In PoS networks, blocks are said to be forged instead of mined, as they are in proof-of-work blockchains. In PoS chains, the validators get rewarded by getting paid the transaction fees for each block, and sometimes in additional coins created automatically each time a block is created. In PoS chains, the chance to be the creator of the next block is determined by the amount of investment a node has in the network.

Have a look at the following example:

There are five nodes in a PoS network. They have the following balances:

1. 10,000 coins
2. 200 coins
3. 300 coins
4. 4,000 coins
5. 20,500 coins

The total number of tokens is 35,000 coins. Assuming that each node is staking 100% of their coins, every block and the nodes they contain will have the following likelihoods of being the next block signer:

1. 28.57%
2. 0.57%
3. 0.86%
4. 11.4%
5. 58.6%

It should be pretty obvious that, if a single node ever controls the majority of tokens (or even a large fraction), then they will have substantial control over the network. In this case, node #5 would end up creating more than half the blocks. Moreover, because node #5 would be regularly signing blocks, it would also get the majority of the transaction fees and new coins that are created. In a way, PoS rewards validators with interest on their investment in the form of additional tokens. One criticism of PoS networks is that the rich get richer, which can lead to increasing network centralization and control.