Proof of stake is the consensus mechanism that determines which participants will handle this lucrative task—lucrative because the chosen ones will be rewarded with new crypto if they accurately validate the new data and do not cheat the system.
"We say that participants have achieved consensus when blockchain participants verify that a transaction is legitimate and add it to the blockchain," says Marius Smith, head of business development at digital asset custodian Finoa.
Proof of stake involves participants known as "validators" locking up specific amounts of cryptocurrency or crypto tokens—their stake—in a smart contract on the blockchain. In exchange, they are given the opportunity to validate new transactions and earn a reward. However, if they improperly validate bad or fraudulent data, they may be penalized and lose some or all of their stake.
Solana, Terra, and Cardano are three of the most popular cryptocurrencies that use proof of stake. Ethereum, the second-largest cryptocurrency by market capitalization after Bitcoin, is undergoing a proof-of-stake transition.