Bitcoin is not only the oldest, but also the best known crypto currency in the world. Accordingly Bitcoin is not to be compared from purely technical criteria with modern crypto currencies. Especially the consensus mechanism, the proof-of-work algorithm, has numerous disadvantages. It is considered particularly energy-hungry, since miners regularly make more computing power available to successfully verify new blocks. The proof-of-stake algorithm (PoS), on the other hand, offers a modern approach that is being used in more and more projects. Why the PoS crypto currencies will become more relevant in the future is shown in the following.
What is Proof of Stake actually?
- On August 19, 2012, an anonymous developer under the pseudonym Sunny King published the white paper on Peercoin. King described for the first time a proof-of-stake algorithm for validating transactions in the network. But the actual algorithm had already been discussed in circles of Bitcoin developers a year earlier.
- In contrast to the Proof of Work (PoW), the computing power of the PoS is rather secondary. Accordingly, it is not the computing power that is relevant for the successful validation of a block. Instead, the hash rights are distributed according to the share of the respective coin. This means that users with a higher capacity in a crypto currency are more likely to validate the block.
- However, there are again different approaches for the allocation of the rights. For example, coins that are held for a particularly long time can be given a higher relevance. The talk here is of the Coinage, the age of the Coin. The calculation of the respective hash range is comparatively simple, because the coinage times the number of coins results in the target hash range. The higher the target hash range, the higher the probability that an investor will receive the rights to hash a new block.
What advantages does Proof of Stake have over Proof of Work?
When comparing PoS and PoW, there are some basic differentiators. A look at the crypto-currency market, for example, shows that PoW coins currently have a higher market capitalization. Furthermore, investors can buy Bitcoin via PayPal – this shows that Bitcoin already enjoys a high level of acceptance.
But also the second largest coin on the market, Ethereum, is a PoW coin. However, there are signs of change, because with Ethereum 2.0, the probably biggest upgrade of the block chain is already imminent. A change from Proof of Work to Proof of Stake is also planned. The upgrade should solve several problems at the same time. These include the current high power consumption. A PoW-Coin consumes more energy, with increasing difficulty. BTC and ETH in particular are responsible for high energy consumption today.
The individual now has no chance of success in mining. For this reason, more and more mining pools are being created, which concentrate the computing power on themselves. This leads to a centralization in the network – this contradicts the decentralization idea of the crypto currencies. At the PoS every investor has the chance to participate in the validation of new blocks.
It can also be assumed that the PoW Miner benefits those who invest more money in high-performance hardware. The higher the investments in potent hardware, the higher the returns achieved. At the same time, investors with weaker hardware lose out. The investment ensures exponential increases in profits. At the PoS the chances can also be increased by holding larger stocks. But the chance with the Staking crypto currencies grows only linearly. Other investors do not have to fear disadvantages through the increasing investments of individual investors.
Proof OF Stake not without disadvantages
Although Proof of Stake basically has numerous advantages over Proof of Work, there are also some disadvantages. For example, in the case of a fork. If you are staking, i.e. blocking coins to verify blocks, there is no technical limitation here. If a fork occurs, the coins exist on the old and the new version of the block chain. Accordingly, stakers can simply use their new resources to stake on both chains – this does not work in mining because of the limited hardware.
It also shows that the choice of the block producer is more random in mining. Here the user who finds a block hash the fastest wins. In staking, the algorithm must be random and public in order to create the necessary trust. However, publicly visible algorithms can be manipulated with a higher probability – at least the users can optimize their actions a bit.
Furthermore, a PoS coin carries the risk of a hostile attack. Of course, this is also possible with any PoW block chain, but over time, the difficulty of PoW increases and with it the required computing power. It is precisely this computing power that is limited and cannot be scaled freely. With PoS, however, the chain and all processes can be simulated with computers. Accordingly, there are so-called checkpoints, which help to ensure that the network only accepts a unique chain. All alternative variants are simply rejected. However, the nodes must be permanently online to communicate with the chain. This is precisely where the potential risk of all proof-of-stake crypto currencies lies.
Why are proof-of-stake cryptocurrencies still gaining in relevance?
There are several reasons why proof-of-stake is becoming more relevant. Above all, external factors contribute to increasing acceptance. On the one hand, we live in a time in which environmental protection is becoming increasingly relevant. However, Bitcoin alone is responsible for an energy consumption of 46 TWh – the annual energy requirement of the whole of Jordan. In times when we are pushing the reduction of CO2 emissions, this is simply too much.
In addition, more and more people are looking for interesting ways to invest money. This is where staking crypto-currencies comes into play, because staking is a particularly passive way to increase one’s wealth. Especially the operation of a master node during staking can lead to high returns. The entire DeFi sector also benefits from the PoS crypto currencies and could grow even further through their acceptance.
Conclusion: Proof of Stake – the future of crypto currencies
Proof of Stake is certainly not the perfect solution. But compared to PoW, there are numerous advantages that speak for this consensus mechanism. For example, validations can be distributed to the nodes. Ethereum 2.0 shows in its approach that PoS is also perfectly suited to tackle the problems of scalability. For example, numerous nodes can take over the validation of transactions on sidechains, thus increasing the number of transactions per second. Staking is also an approach to build up a passive income. In the long term, the successful implementation of PoS chains should help to increase their acceptance.