Most cryptocurrencies usually validate transactions over their network with the help of miners, employing what is known as the Proof of Work (PoW) system. A rival concept, however, named proof of stake, may finally change all of that and transfer the power of decentralization from miners to actual users of the cryptocurrency. Coins that are mined using PoW are termed as PoW coins, while PoS works by holding the coins of those cryptocurrencies in a staking wallet.
Proof of Work is a protocol initially coined by Cynthia Dwork and Moni Naor back in 1993. However, the term has been recorded to have been used in 1999 by Markus Jakobsson and Ari Juels as well. In the Bitcoin white paper published by Satoshi Nakamoto in 2009, PoW was explained in a rather detailed and elaborate manner. Since then, the Proof of Work concept has always been at the core of almost every blockchain-based system and is vital for keeping any cryptocurrency network decentralized. The protocol was built with an aim to deter distributed denial-of-service attack (DDoS) attacks on the network. A DDoS attack is an attempt to make an online service unavailable by overwhelming it with traffic from multiple sources.
The blockchain is a public ledger of all transactions in the network and miners verify any new transaction that needs to be added to it. Several of these new transactions are bundled together and are collectively known as a block. The miners then mine these blocks, while also ensuring to eliminate any case of double spending by a wallet address in each block.
In the case of the Bitcoin blockchain, a new block enters after an average waiting time of ten minutes. Miners in the network then race to solve of a mathematical puzzle, which is dubbed as the proof of work problem. The first computer to solve the problem is rewarded one bitcoin for his efforts. However, the main issue with mining cryptocurrencies using the PoW algorithm is the high demand for electricity. Nevertheless, proof of work is employed by most popular cryptocurrencies such as bitcoin and ether.
Examples of Proof of Stake Cryptocurrencies
Ethereum developers are currently considering switching to switch to the proof of stake consensus system shortly future, as part of the Casper project.
Proof of stake, on the other hand, is a very different approach to validating transactions as compared to the traditional PoW. In 2012, Peercoin became the first digital currency to confirm network transactions using the PoS concept. A PoS digital currency eliminates the need for the process of mining altogether. Wallet holders can keep their digital coins stored in a ‘staking wallet.’ Users are then rewarded a fraction of their balance coins after they have successfully saved it for a fixed period. This process of holding digital tokens in a wallet and simultaneously, contributing to the security of the network, is known as staking.
NEO is one of the most popular cryptocurrencies using the proof of stake concept. Users who stake NEO in their wallets are awarded GAS, a digital token on the NEO blockchain. OKCash is yet another example, with a 10 percent annual return observed so far. staking cryptocurrencies can generate a decent passive income similar to mining. Thirdly, Decred (DCR) has a hybrid PoW-PoS system, where blocks mined by miners need to br confirmed by those staking the cryptocurrency. You can buy tickets to stake your DCR, with a cost of approxiamtely 83 DCR ($4,980). The estimated return on investment is 1.58 percent per ticket, according to Dcrstats. Finally, Stratis is another altcoin where you can earn passive income by staking, although the rewards are relatively lower than other PoS coins.
It is possible that more cryptocurrencies will be willing to fork themselves into a proof of stake system. A continued high electricity demand, after all, is unsustainable in the long run, especially as digital tokens wish to become prominent global currencies in the future.