Proof of Stake (PoS) model states that a person can validate block transactions according to how many coins he or she holds. This means that the ownership (stake) of more coins leads to the increase of the validating power and the associated rewards.
What all these mean in simple words ?
In the Proof of Stake model, the users are required to buy and hold coins in their wallet. There are no miners using their equipment for validating transactions. Instead, users who hold coins in their wallets involve in the process of verifying transactions. The more coins and the longer they hold them in their wallets, the more likely they will be rewarded by a new block reward.
These rewards are in the form of newly created coins (creating new coins into circulation) or in some cases where the max supply has been already attained, the participants only receive transaction fees as reward. These fees may not be as high as the block rewards which they would receive from mining, but the costs of validation are much lower in this Proof of Stake than in the Proof of Work model.
Proof of Stake = non-minable coin?
The fact that some informative sites associate the PoS model with “mining” is something that requires clarification.
The definition “mining” is used to describe the participation of the Community in the verification of the transactions with their devices (proof of work model). This way they “extract” new coins and get rewards for their contribution.
Before the blockchain introduction and the Bitcoin’s Proof of Work model, there was no mining wording for cryptocurrencies.
The proof of Stake is a different approach for achieving network consensus. This means that the validation of transactions is made in a different way. However the definition of mining has been used for the Proof of Work model in order to describe the whole scenario of participation and getting rewards for your work of finding solutions and empowering the network.
How some misused the “mining” definition for the most Proof of Stake coins?
The proof of stake model rewards the stakers (holders) of a coin’s supply. So those who own the biggest percentage of the already existing coin’s supply, earn a bigger reward for each new block.
Of course this means that for the pure PoS coins, there should always be a circulation supply, already created out of nowhere (premine). Otherwise the “solution finders” cannot have their future rewards defined.
Thus, some people pay for it in order to buy it. In any case the supply is allocated in some certain addresses, usually the founder’s ones.
In the most scenarios, there is just a small percentage of the supply that remains as “not yet mined” and is going to be distributed as future “mining” reward. Of course this takes place proportionally, according to the percentage of the already obtained (staked) coins of each “miner”.
The quotes (“”) in all the definitions that are related with mining in this paragraphs have been used intentionally. Because easily someone can understand the huge difference between the original use of the mining definition for the Proof of Work model and the improper use of the same definition for the Proof of Stake.
In the first case (PoW) we have real mining and contribution of the whole Community in a validation procedure.
In the second (PoS) the “mining” word is used in order to describe a procedure that looks more like an interest providing account after purchasing a certain amount of a coin. This is why the coins using the Proof of Stake model are the negative champions in the Initial Coin Offerings (ICO sales). A procedure that has given a very bad name in the cryptocurrency world with countless scams.
A better usage of the Proof of Stake model
There are some cryptocurrencies using a better approach with a combination of the Proof of Work and Proof of Stake models (hybrid PoW-PoS) in order to avoid some of the aforementioned negative points.