Proof of stake (PoS)
Proof of stake (PoS): Proof of stake (PoS) is a way for a blockchain to agree on new blocks. Instead of miners using computing power, validators lock up the network’s own coins as collateral. Validators that follow the rules earn rewards, and validators that act dishonestly can lose part of their stake. Ethereum and Solana both use proof of stake.
How proof of stake works
Validators deposit coins into the protocol and run software that proposes and checks blocks. According to Ethereum’s documentation, a validator who breaks the rules, for example by signing conflicting blocks, can have some or all of their staked ETH destroyed. This penalty is called slashing, and it is what makes cheating expensive.
Proof of stake vs proof of work
Proof of work, used by Bitcoin, secures the network with electricity and specialised mining hardware. Proof of stake secures it with locked capital instead. Ethereum moved from proof of work to proof of stake in The Merge on 15 September 2022, which Ethereum says cut its energy use by about 99.95%. Supporters of each model still debate the trade-offs in security and decentralisation.
How investors take part through staking
Running your own Ethereum validator needs at least 32 ETH and technical setup. Most people take part through staking instead, by delegating to a validator, using an exchange staking service or holding a liquid staking token. Each option adds its own risks, such as the provider failing, lock-up periods or smart contract bugs. Staking rewards are not guaranteed and can change.
Proof of stake rewards and Australian tax
The ATO’s guidance on staking rewards treats the money value of staking rewards as ordinary income when you receive them, and a later disposal of those tokens can create a capital gain or loss. Keep records of each reward in Australian dollars. This is general information, not tax advice.
Frequently asked questions
Is proof of stake more secure than proof of work?
They secure the network in different ways. Proof of work makes attacks expensive through energy and hardware, proof of stake through locked capital that can be slashed. Each has trade-offs, and neither makes a coin a safe investment.
Do I need 32 ETH to stake?
Only to run your own Ethereum validator. Pools, exchanges and liquid staking let people stake smaller amounts, with extra provider and smart contract risks.
Which blockchains use proof of stake?
Ethereum, Solana and many newer networks use forms of proof of stake. Bitcoin uses proof of work.