For those of you who are familiar with the technological processes behind the creation and distribution of cryptocurrencies, you may have heard of the term, “Proof of Stake”. Proof of Stake is an alternative to the Proof of Work system that has managed to create a rift in the crypto community. In order to determine whether or not the Proof of Stake system is effective or problematic, however, we first need to know what it is and how it functions.
What is Proof of Stake?
Proof of Stake is a system utilized by digital currencies such as Blackcoin, Peercoin, and Nxt in order to verify transactions on their network. With Proof of Work, those who seek to solve complex algorithms (miners) in order to verify transactions and create new blocks to be mined are rewarded with small amounts of cryptocurrency if they have enough computing power to solve the complex algorithms first.
With the Proof of Stake system, blocks are created and rewards are given to those who hold the largest amount of a given cryptocurrency (forgers). The more coins that you hold, the better your chances are of discovering a block.
Advantages of This System
- Energy Benefits– Coins that use the Proof of Work method require more and more energy to mine over time. For example, an article published on the CBS News website identified that it takes 29.05 terawatt hours annually in order to power the computers and equipment that mine Bitcoin and support the Bitcoin network. With the Proof of Stake system, there is no need to mine coins and use this amount of energy, making it an eco-friendly alternative to cryptocurrencies such as Bitcoin.
- Affordable for Users– In addition to less energy consumption, the Proof of Stake system allows more users to take part in the forging process. A good mining rig can cost a miner anywhere upwards of $3,000. Along with the special hardware that is needed in mining, miners also need to calculate the costs for electricity, cooling, and other factors when they start trying to participate. With Proof of Stake, forgers need no special hardware and users only have to purchase more coins in order to take part in the forging process.
Disadvantages to Proof of Stake
- The Likelihood of an Oligarchy– The Proof of Stake system gives coin owners the ability to monopolize the entire network. If they purchase large amounts of coins at once and hold onto the majority of the coins in existence, they increase their likelihood of monopolizing the network, forging most of the future blocks, and earning the coins made from these blocks. This creates an oligarchy whereby it is in the best interest of these coin holders to make changes that benefit them the most. For this not happen, users will have to rely on the majority of the wealthy coin holders to all be altruistic in nature. History has shown that this does not work out well.Bitcoin is secure because there is an economic incentive for miners to “compete”. There is more profit to be made when miners compete for rewards rather than trying to dominate the system. This keeps the technical side secure, as others miners will destroy their entire wealth and the wealth of their infrastructure (infrastructure cost is important).In a Proof of Stake system where there is an oligarchy, it is far more advantageous for those controlling the system to “collude” rather than “compete”. In every oligarch system throughout history, people have ended up colluding, eventually taking from everyone else for their own benefit. There has not been a single oligarch system that has lasted the test of time.Some argue that the only way an oligarchy in the Proof of Stake system would work is if 51% of the richest users were all altruistic and if that heavier percentage remained altruistic for the remainder of that cryptocurrencies lifetime.
- The Negative Effects of Hacking– When you hold Bitcoin and someone hacks your wallet, all of your coins are lost. If you hold a cryptocurrency that uses the Proof of Work system, the only thing you have lost is your coins, but as a miner your mining infrastructure still exists, your “vote” in the network. If you hold a cryptocurrency that uses the Proof of Stake system, you have lost your investment as well as your place as a forger, if this gets stolen not only do you lose your wealth, but you also lose your “vote” in the network. Miners will never have to deal with this issue since a hack has no effect on their ability to mine blocks. This is one major reason why people choose to support Proof of Work cryptocurrencies over Proof of Stake cryptocurrencies.
Is the Proof of Stake system better than Proof of Work? As of the moment, it is too early to tell. There are some amazing benefits to using Proof of Stake but there are also some tremendous issues that can make it hard to attract new users. Hopefully, we will see improvements and more implementation as the crypto community develops.
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