Proof-of-Stake Versus Mining
Cryptocurrency mining can be explained as the process by which cryptocurrency transactions are verified and then added to the public digital ledger commonly known as a blockchain. Cryptocurrency mining is also another way that new Bitcoins are generated and released. Miners are responsible for ensuring that any and all transactions carried out on the blockchain are authentic. They also help update the blockchain with the various transactions that take place on it. The mining process is generally a competition between miners to solve complex mathematical algorithms that are encrypted using cryptography. The first miner to successfully solve this algorithm gets rewarded with a set of new cryptocurrencies as payment for their services rendered in updating the blockchain.
Back in 2009, the first Bitcoin block reward started at 50 new coins. Currently, in 2018, a Bitcoin block reward is now at 12.5. While Bitcoin mining was once the staple for gaining new coins and verifying crypto-transactions, the process has become extremely unprofitable for individual miners. Bitcoin mining is no longer profitable on a small scale level due to high maintenance costs such as electricity and increased difficulty of the mathematical algorithms that render consumer-level hardware almost useless. Bitcoin mining has now been reserved only for those who wish to mine Bitcoins on a large-scale operation.
The Proof-of-Work concept or PoW is the current algorithm that the current Bitcoin blockchain depends upon to verify and add transactions to the blockchain. The PoW mining process involves a miner installing powerful computer hardware known as a mining rig to solve complex mathematical algorithms referred to as Proof-of-Work problems. Once a few of these complex mathematical algorithms are successfully solved, they get bundled together and are stored on a new block on the public blockchain. Therefore, in PoW, mining verifies the legitimacy of transactions and at the same time leads to the creation of new units.
Usually, there are multiple miners on the same network who are attempting to be the first to find a solution to the mathematical problem. The miner who solves this mathematical problem first, announces their solution to the entire public blockchain and simultaneously receive newly created units as a reward for updating the public ledger. As more coins get mined, the number of mathematical problems needed to create a new block increases, thereby making the mining process more difficult for the miner. This forces miners to update their mining rig hardware while at the same time to look for cheaper electricity sources.
Unlike the PoW system, the PoS system requires that a user have ownership of a certain number of cryptocurrency units on the network in order to be able to ‘mint’ or ‘forge’ new units. The process of creating new coins on the PoS system is not referred to as ‘mining’ anymore and the people in charge of validating transactions and creating new coins are referred to as ‘forgers’ or ‘validators’ who are the equivalent of miners in a PoW system. In order for these validators to be able to validate transactions and create new blocks or units, first, they need to put their own cryptocurrency holdings as ‘stake’. They, in turn, get rewarded with transaction fees as a reward.
These validators are chosen in a random way depending on the size and age of their stake within the blockchain network. For example, if you held about 400,000 coins in a PoS blockchain for about a year, you’d be more likely to generate the next block of coins than someone who has held 50,000 coins for three months. As stated earlier, these validators must first put their own coins at stake in order to validate transactions. This can be thought of as putting their coins in an escrow account. If they validate a fraudulent transaction, they risk losing their entire stake as well as their rights to participate as a validator on the network in the future.
Origin of Proof-of-Stake (PoS)
Proof-of-Stake was initially introduced in 2012 by Sunny King and Scott Nadal in a paper with the sole intention of solving Bitcoin’s problem of high energy consumption during mining. The PoS concept elaborates that an individual can mine or validate block transactions according to the number of coins that they hold, aka the stake. This ultimately means that if an individual owns a large number of coins such as bitcoins, they typically have more mining power compared to their counterparts. The first ever cryptocurrency to adopt the PoS based blockchain was PeerCoin, followed by BlackCoin, and now ShadowCoin.
Benefits of Proof-of-Stake over Proof-of-Mining
- There is no need to buy expensive hardware
In the PoW system, validating and creating new cryptocurrency units involves solving complex mathematical problems that need sophisticated mining rigs to solve. However, with PoS, any laptop or computer is capable of performing validations and creating new blocks as long as it has internet connectivity.
- Energy efficient
PoW consumes a lot of electricity to keep the mining rig operational. Currently, due to this, many countries have banned cryptocurrency mining due to its high electricity consumption. However, with PoS, large amounts of electricity consumption are not needed to secure the blockchain.
- 51% Attacks Reduced
With the PoW, there is the risk that one day, a user who will have more than 51% control of the network may issue an attack on the blockchain itself. However, with the PoS system, 51% attacks will become extremely expensive to carry out, thus discouraging the very act.
- Reduced Centralization Risks
Through the use of the PoS system, there will be fewer risks of centralization as economies of scale will be much less of an issue.
Apart from PeerCoin, ShadowCoin, and BlackCoin, other cryptocurrencies that are using the Proof-of-Stake concept include Lisk and Nxt.
Delegated Proof-of-Stake (DPoS)
There is a newer version of the PoS system, called DPoS (Delegated Proof-of-Stake). The system was designed to be more “democratic”, and some believe it to be more fair and efficient. Stakeholders still have influence in the system proportional to their stake, however the threshold of entering is lower than it is usually in PoS systems, which makes DPoS more decentralized. But that’s not the central feature of a DPoS system – which of course is the delegates/witness. Users vote for delegates, who will serve on a panel of witnesses. These witnesses are very powerful in the system, and can control things such as transaction sizes and transaction fees. The panel will also select witnesses to confirm (or “witness”) blocks. However, these witnesses have little incentive (if any) to misbehave, as the users can easily vote them out of the witness panel.
“DPoS has been shown to help maintain decentralization, fend off regulatory interference, and has made cryptos like Steem into world players.” ~@Mooncryption on Steemit.com.
Speaking of DPoS, we’re pleased to announce the soon release of a new product and platform by DinarDirham, called DDK – which will be a new platform designed to help economic growth through the development of blockchain solutions, and DDKoin will be the cryptocurrency of the platform. It will be running on a DPoS system. Delegates will earn a percentage of all transactions by users. We’re very excited about this next step, so keep an eye out for further news.
The cryptocurrency industry is a rapidly changing industry. Apart from the above concepts, there are plenty more systems that are in their development and testing stages to make validation and creation of new blocks easier and faster than before. The PoS system is environmentally-friendly and much more efficient compared to the PoW system. It also encourages more people to participate, and thus encouraging more decentralization. With such innovations, it’s easy to have a positive outlook towards the future of cryptocurrencies. On that note, we encourage you to check out our gold price-backed token, the DinarCoin. Based on the PoS system, DinarCoins can either be forged or burned. For more information, you can visit our official website here.