PROOF OF STAKE
What is Proof of Stake?
The Proof of Stake (PoS) concept states that a person can mine or validate block transactions according to the coin they hold. This is a method to maintain the integrity of a cryptocurrency, preventing users from printing extra coins they didn’t earn.
It is different from the Proof of Work (PoW) method that is being used by Bitcoin and Ethereum (the world’s two largest cryptocurrencies by market cap). However, Ethereum is planning to migrate to Proof of Stake in order to improve the platform’s scalability and reduce energy conception of the network.
Both consensus mechanisms are used to prevent double spending in the digital world and to ensure that no one can take advantage of the blockchain and scam the network. The Bitcoin blockchain was the first one to use proof of work concept and make it famous today. Proof of stake was then created as an alternative and some people think Is more energy efficient and more secure, though there are many controversies on the subject.
Proof of Stake transactions
When a transaction is initiated the data is included in the block and then duplicated across the multiple nodes. The nodes/ computers are the administrative body of the blockchain and verify the validation of the transactions in each block.
In order for the transaction to be verified, the nodes and miners need to solve a complex mathematical equation known as the proof of work problem. The first miner to decrypt the transaction problem get rewarded with a coin.
Proof of Stake vs Proof of Work
In recent years some have argued that proof of work has limitations. Ever since bitcoin mining has become more concentrated some groups have become more powerful that what Bitcoin’s creator expected. This is because bitcoin mining is currently using as much energy as whole Switzerland together. On the other hand, gold mining and other financial systems are also using a large number of energy therefore why should bitcoin be a problem? Few weeks ago, ARK Invest published a research that was controversial to this and that was stating that Bitcoin mining is in fact good for the environment. Find the full article “Cathie Wood Twitted Research Collaboration Debunk The Myth That Bitcoin Mining Is Damaging The Environment”.
Each proof, decides the winner which is basically the entity that will create the next block and keep the blockchain running. With proof-of-work, miners are the participants. They are more likely to add additional blocks to the blockchain if they have more computational power, which is fueled by electricity.
In proof-of-stake, miners are more likely to win additional blocks if they have more money – ETH, in the case of Ethereum. In other words, proof-of-stake relies on “proof” of how much “stake” users have.
Is Proof of Stake better than Proof of Work?
The answer is not necessarily. Proof of stake has drawn many critics because of the Ethereum developers being quick to tout the advantages of proof of stake although it has not been proved yet that it is working. If proof of stake proves that is working, then we can have a very bullish year and it will become a very attractive investment destination.
Ethereum has been waiting to switch to this system since 2013, when Vitalik Buterin added it in the whitepaper.
Cryptocurrencies that use Proof of stake
Proof of Stake and Mining
You now know that mining requires a large amount of computational power to run different cryptographic calculations to unlock the computational complex equations. The computing power translates into a electricity that is much needed for the proof of work concept.
According to previous data releases in 2015, Bitcoin needed to power 1.57 American household in order to complete a transaction. This is not the case anymore, since that number has only been increasing ever since. According to the University of Cambridge’s Bitcoin Electricity Consumption Index, Bitcoin consumers about 119.87 terawatt-hours per year, which is more than countries like the United Arab Emirates and the Netherlands consume annually.
Miners pay the electricity bill buy selling the rewarded coins and withdrawing them as fiat which in the end leads to a downward movement in the price of the cryptocurrencies.
This is where proof of stake steps in. The concept seeks to solve this issue by providing each miner the proportional amount of mining power to the coins they hold. By doing so it will eliminate the utilized energy of PoW and each miner will only be able to mine the coins that they own. So for example, if a miner hold 1% of the coins available he will only be able to mine 1% of the blocks.