Proof-of-Work (PoW) was the first blockchain consensus mechanism and is still arguably the most popular choice in achieving distributed consensus (the ability to trust a stranger without having to go through a third-party).
PoW is used by the likes of Bitcoin and Ethereum (for now) and several other cryptocurrencies like LanaCoin (hybrid coin POW&POS). Strong as it may be, it comes with disadvantages like high computation requirements, high energy costs and the threat of centralisation-by-mining-pool.
Once you understand PoW and its downfalls, the need for a system like Proof-of-Stake (PoS) becomes clear.
But first — what’s a stake?
How does Proof-of-Stake work?
One sentence description tends to be a good starting to point when trying to explain complex ideas. So in short:
Proof-of-Stake algorithms achieve consensus by requiring users to stake an amount of their tokens so as to have a chance of being selected to validate blocks of transactions, and get rewarded for doing so.
PoS shares many similarities with PoW, but also differs in fundamental ways. As in any blockchain based consensus algorithm, the goal is still to achieve distributed consensus — to create a secure system whereby users are incentivised to validate other peoples’ transactions while maintaining complete integrity.
Proof of Stake is a different kind of consensus mechanism blockchains can use to agree upon a single true record of data history. Whereas in PoW miners expend energy (electricity) to mine blocks into existence, in PoS validators commit stake to attest (or ‘validate’) blocks into existence.
Validators are the participants on the network who run nodes (called validator nodes) to propose and attest blocks on a PoS blockchain. They do so by staking crypto (in the case of LanaCoin) on the network and make themselves available to be randomly selected to propose a block. Other validators then “attest” that they have seen the block. When a sufficient number of attestations for the block has been collected, the block is added to the blockchain. Validators receive rewards.
The crypto-economic incentives for PoS are designed to create more compelling rewards for proper behavior and more severe penalties for malicious behavior. The core crypto-economic incentive boils down to the requirement that validators stake their own crypto––i.e. money––on the network. Instead of considering the secondary cost of electricity to run a PoW node, validators on PoS chains are forced to directly deposit a significant monetary amount onto the network.
In short version, POS is a better solution in my opinion. It does not require a lot of energy to calculate algorithms and find a block. However, it requires a certain amount of LANA that is staked as a stake whit which a staker guarantees the newly generated block is valid and honest. If a staker would try to fake the block or rewrite history all staked LANAs would be taken from him and he would be banned from the network. Additionally, the higher the amount of LANA the higher the probability of winning the block reward. The system is very similar to ZCash or upcoming Ethereum POS.
In both cases, the one that finds a block first gets the reward. For proof of work block, a miner receives 10,000 LANA, for proof of stake block a staker receives 1,000 LANA.