Cryptocurrency are based on blockchain technology: a structure that stores transactional records, also known as the block. Blocks form a chain of data known as the blockchain.
Blockchains maintain a secure and decentralized record of transactions and generate trust without the need for a trusted third party – approval of regulatory authorities like a Central bank for transactions. Blockchain is used in a decentralized way so that all users collectively retain control by dedicating their resource to its working capacity.
To allow genuine users to add new transactions in the secure blockchains, cryptocurrencies require automated consensus mechanisms. One of the most popular and well-known consensus mechanisms is “Proof of Work” (PoW).
The idea of Proof-of-work is that blockchains are secured and verified by virtual miners by adding a specific computational effort. The winner is rewarded by the network with crypto coins.
There are other consensus algorithms like Practical Byzantine Fault Tolerance (PBFT), Proof of Burn (PoB), Proof of Stake (PoS) etc. Proof of Stake is the most common alternative to PoW predicted to become the dominant consensus mechanism in the world of cryptocurrency.
Proof of Work vs. Proof of Stake: What is the difference?
In the PoW mechanism miners compete to solve complex math puzzles to verify new transactions, and add them to the blockchain. In cryptocurrency mining, miners need to use special computers with the greatest chance of solving the puzzle, like Application-specific integrated circuit (ASIC) miners designed for the sole purpose of mining cryptocurrencies that are created through proof of work.
Among disadvantages of ASIC mining rigs are high cost, energy consumption, and heat dissipation.
In the PoS mechanism miners are replaces by validators. The system is similar but rather than using energy-intensive hardware mining, Proof of Stake is primarily designated by the amount of financial collateral a node has committed to the network through what’s known as blockchain staking.
Among advantages of the PoS mechanism are environmental friendliness that eliminates the need for powerful mining equipment, and removes the technical barriers to entry for beginners to participate in a network’s validation process with a minimum staking amount.
|Proof of Stake||Proof of Work|
|Highly energy-efficient||Requires powerful mining hardware and high energy. Governments and public organizations tend to ban energy intensive crypto mining|
|To do a better job of earning only a basic laptop and Internet access are required||To do a better job of earning it requires power-hungry expensive cryptocurrency hardware and significant capital investment|
|Miners’ resources are decentralized||Miners pool their resources together to get more consistent payouts. PoW model is prone to 51% attacks (occurs when a group of people gains control of over 50% of a blockchain’s hashing power)|
|No need to have hardcore technical or finance wizz skills. Compare it to putting money into a savings account||Miners need to have good blockchain-technical skills to be able to operate machinery and equipment and earn profit|
|No authorities could seize crypto mining machines due to non-existence||Any authority could seize crypto mining machines or cut power. Easy to suspect and find a mining farm due to its high energy consumption|
How Proof of Stake works
For a regular user staking is like a bank deposit requiring buying crypto currency with the intention of holding it for a certain period of time. The reward varies from coin to coin and usually depends on a crypto project.
Although the blockchain selects validators randomly, the longer you hold coins in a wallet and the more coins you have, the higher the interest you receive as a reward.
Unlike PoW, the PoS mechanism misses mining rewards — a validator is appointed to create a new block and receives a fee for it.
Disadvantages of Proof of Stake
The model of Proof of Stake exists as a good alternative consensus mechanism and has several advantages over the Proof of Work scheme. However, PoS is not an “ideal” solution. There are still several disadvantages (not serious enough):
- You “freeze” coins for a specified time period you know in advance. The reward grows in proportion to the invested coins. The lockup or “vesting” period depends on a crypto project and is related to the amount of reward.
- Compared to PoW blockchains, PoS is younger, and hasn’t supported as much value to date which may cause for concern as any new idea;
- Both PoS ad PoW risk a 51% attack when a group of people or an entity gains control of over 50% of a blockchain’s hashing power. Although it is possible enough to take control of 51% or more of a blockchain network, a majority PoS attack gaining control of over a blockchain’s hashing power is hardly possible and makes no economic sense.
Proof of Stake Bitcoin mining
For eco-friendly Bitcoin mining you need a fork of Bitcoin backed at a ratio of 1:1. Bitcoin Additional (BTCa) is a good sample of such forks – an environmentally friendly coin developed to spread processing capabilities of Bitcoin.
The Bitcoin Additional masternodes function within the Proof of Stake algorithm. You can invest in masternodes of BTCa coin that underpin a blockchain’s network and get your reward. The BTCa coin is backed by Bitcoin at a ratio of 1:1. You can exchange Bitcoin Additional (BTCa) to Bitcoin (BTC) with no losses. This is how eco-friendly mining works.
It is quite easy to mine Bitcoin Additional since a minimum lockup period is 1 week and rewards are paid out on a daily basis. The annual reward at the moment is 51,83% (see the real-time data at Quan2um Exchange). Thanks to a user-friendly platform intuitive interface and low entry threshold (0.001 BTCa or $31 as of the time of writing) Bitcoin Additional mining is easy-to-understand both for beginners and professional investors.
The Proof of Stake is the future of cryptocurrency
This principle of a decentralized network is the driving ideology for blockchain. However, since blockchain restrictions by computational power of its network of computers lead to centralized computing that violates the basic concept of blockchain technology. The Proof of Stake mechanism is a good solution for some of the most scaling problems within the PoW mechanism solving many of the disadvantages found on Proof of Work blockchains.
Despite the fact the PoS projects are often criticized, the Proof of Stake is positioned as the model of the future. PoS is truly a decent alternative to PoW and a new standard in current industry-leading blockchains.