The Future of Cryptocurrency: Proof of Stake and How it’s Changing the Industry
Cryptocurrency is constantly changing. However, one of the biggest recent changes is the shift away from proof-of-work and toward proof-of-stake. This has a pretty massive impact on how cryptocurrencies work.
But what is proof of stake? How will it change crypto? What do you need to understand about it? Keep reading to find out the answers to these questions and more.
Every blockchain requires a consensus mechanism to function and even exist. A consensus mechanism allows the blockchain to process transactions and add new blocks to the chain. It does this by validating entries in the database while simultaneously securing it. Proof of stake is one type of consensus mechanism.
With this mechanism, owners of a cryptocurrency stake their coins to get a chance at validating block transactions. With most systems, a minimum amount of coins need to be staked for a cryptocurrency owner to become a validator. However, this varies from blockchain to blockchain.
A block writer is chosen randomly, but the chance of being selected depends on how many coins a user has staked. The more coins they own and stake, the higher the chance they will be selected.
This structure has the added bonus of helping to deter attacks on the network. This is because an attack on a system structured in this way does not lead to as much gain for the attacker as an attack on a different system.
Proof of Stake vs. Proof of Work?
Proof of work is another type of consensus mechanism. This is the original system upon which most initial blockchains were founded. It is also the system most people are familiar with.
This system involves mining for coins. In it, miners solve a series of cryptographic puzzles using their computer’s processing power. This validates transactions and adds blocks to the chain, which is helpful for all users. As a reward for doing this, the miners are given coins.
Meanwhile, in a proof of stake system, transactions are validated, and blocks are created by validators through the system described earlier. Anyone can be a validator as long as they own enough of the blockchain’s coins or tokens.
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The main difference between this mechanism and the proof of stake mechanism is the disproportionate use of a computer’s processing power. Proof of work systems require powerful computers to function. This causes a number of different problems.
For one, it makes it difficult to buy into a system like this. Computers are expensive already, and powerful computers are even more expensive. It can cost several thousand dollars to build the ultimate mining rig. Plus, mining doesn’t make a ton of money right away, so you won’t see a return on this initial investment for a long time.
Alongside this, running a computer in this way uses up a lot of electricity. This creates a new cost for the miner. It is also a generally wasteful pull of energy, which is a big part of where the environmental concern about crypto comes from.
On top of this, proof of stake mechanisms have lower network congestion because they have more control over the number of people working on them at once. In addition, they are also safer, as they create less incentive for malicious attacks.
Why Shift to Proof of Stake?
The main reason people prefer proof of stake over proof of work is the fact that proof of stake uses less electricity. For many miners, the amount they spend on electricity eats a large portion of their mining profits. This, along with the bad publicity from wasted energy, has led to many crypto enthusiasts preferring proof of stake methods.
This and the other benefits provided by a proof of stake system are enough for most people. For these people, there simply isn’t a valid reason for sticking with proof of work.
While proof of stake systems are generally less concerned about malicious attacks than proof of work systems, there are still threats. At the top of most peoples’ minds is the 51% attack.
In a proof of stake system, a 51% attack involves an individual or a group of people gaining control over 51% of the staked cryptocurrency on a blockchain. If a person or group can do this, they can use this power to alter the blockchain itself.
While this is a possibility, it is highly unlikely. Gaining 51% of a cryptocurrency’s staked coins is insanely expensive. In the case of large coins, like Ethereum, this would cost billions of dollars.
In addition, most cryptocurrencies have policies in place if this were to happen. Validators can ignore the changes brought on by the bad actor and keep using the currency like normal. Or, validators could vote to remove the bad actor from the system and, in doing so, destroy their coins. The risk of spending billions only to lose it all for nothing is enough to deter most people from even thinking about a 51% attack.
How Can You Start with Proof of Stake?
With a proof of work system, you need a powerful computer to start mining. So, what do you need with a proof of stake system?
The answer to this question will vary depending on the blockchain. Each chain will have different requirements to follow before you can become a validator. For example, to become an Ethereum validator, you need to stake a minimum of 32 ETH. Make sure you check out the specifics of any cryptocurrency and do your research before diving in.
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Will Bitcoin Move to Proof of Stake?
With Ethereum’s move to proof of stake, many people wonder if Bitcoin will follow the same path. While this is a possibility, it won’t happen anytime soon.
It took Ethereum years and a lot of work to move to a proof of stake mechanism. For Bitcoin to do the same, it would require similar resources. Plus, Bitcoin users would need to vote on the issue in the first place, and there is no guarantee that there will be a consensus there.
Understanding Proof of Stake
Proof of stake is bringing about a massive change in the entire cryptocurrency industry. It requires less investment and less energy when compared to proof of work and does so in a more secure way. Understanding why this change is taking place will allow you to understand different cryptocurrencies on a deeper level.