Almost everyone has heard of bitcoin mining, but what is Proof-of-Stake (PoS)? It’s an alternate method for validating transactions and minting new coins on a blockchain.

In bitcoin mining, all of the requested transactions are packaged into a “block” on a regular basis and then the 0s and 1s underlying that information is “hashed”, meaning that it undergoes a mathematical function to produce a code for the block. “Miners” then compete to guess the code produced by the hash function and the winner gets to validate the new block. Their reward is the mint of brand new bitcoins as revenue. In a sense it is like a lottery but you need expensive hardware to compete. This is what is called Proof-of-Work (Pow).

Proof-of-Stake (Pos), by contrast, does not require expensive or specialized hardware, instead it requires a financial stake in the blockchain. Those who want to participate in validating transactions on a PoS blockchain set up a server and then “stake” a given deposit on it. Often there are rules around this such as a minimum deposit, minimum time it must remain staked, a given delay before it can be removed or the like. These rules are designed to encourage investment in the blockchain project–the deposits lock value into the blockchain through financial investment–typically raising the price of the token produced on the blockchain.

But since no one is guessing the hash in Proof-of-Stake, who gets to mint the new blocks? The rules differ from project to project, but typically the new blocks are awarded to participants semi-randomly. Most typically there is a variable that makes it increasingly likely to be chosen the longer you have waited since the last block, so it is random but over time everyone gets rewarded roughly equally.

In both Proof-of-Work and Proof-of-Stake, the idea is that participants invest in the project, either financially or through the purchase of expensive hardware and that as a result they have “skin in the game” and are motivated to uphold the integrity and success of the project. Both systems are aimed at maintaining the integrity specifically by ensuring that no fraudulent transactions can be passed through the system. Whether the latest block of transactions is validated by guessing its hash or simply by being awarded to a Proof-of-Stake participant, the block is then attached to the chain of all previous blocks and its validation is witnessed by everyone else participating. This public validation is how fraud is prevented.