Proof of Stake is a consensus algorithm that helps untrusted nodes of a network come to a consensus around the state of the blockchain. Proof of stake was first proposed by Sunny King (pseudonym) in the cryptocurrency Peercoin. Proof of stake is an alternative to Bitcoin’s proof of work consensus mechanism.
Traditional proof of stake works by giving the ability of adding new blocks to the blockchain to the token holders (i.e. those who hold the cryptocurrency), and rewarding them for doing so, if their block ends up in the majority blockchain. Who gets to add the next block is usually determined in a random fashion, weighted by the number of ‘stakes’ that are online at the moment.
Proof of stake consumes less electricity than proof of work systems. It also ties in the security of the network to the stakeholders themselves, and is thought to reduce chances of a 51% attack, because the attacker in this case would need to buy up half of the cryptocurrency and is therefore not incentivized to destroy it. However, it also suffers from certain drawbacks and possible attacks, such as the nothing at stake problem.
Newer types of proof of stake systems deviate from the traditional proof of stake system. These include the delegated proof of stake (which uses are voting mechanism to determine which delegates can produce blocks, thus providing greater blockchain scalability), and coin-age based proof of stake.