The crypto space has witnessed tremendous growth in the past couple of years, from the initial concept of the blockchain and development of Bitcoin by its creator Satoshi Nakamoto to the current development of several mining models and the types of blockchain.
To make this article a little more educational, it would be necessary to highlight the basic understanding of Blockchain.
What is Blockchain?
Blockchain is a public distributed ledger in which transactions are recorded in chronological order and this can be viewed by users globally. Such that any record or transaction that is added to the blockchain cannot be modified or altered, meaning transactions are safe from manipulation especially by hackers.
Blockchain prevents unauthorized access by using a hash function called SHA-256 to ensure that the blocks are kept secure. SHA-256 takes an input string of any size and returns a fixed 256-bit output, and it is a one-way function. Such that it remains tamperproof and cannot be invalidated by a reversal of the transaction.
To generate these transactions or blocks within the blockchain, there needs to be a mining process, which can take various forms called rewards.
What is crypto mining?
Crypto mining involves producing new digital coins as a reward for solving complex mathematical problems. While they may seem very simple by definition, in some cases, they require a large amount of energy to perform these tasks.
During mining, a process known as Consensus Algorithm is used to determine which of the miners will produce the blocks as they execute the complex mathematical task.
There are two types of algorithms associated with the mining of cryptocurrency now. These include but are not limited to the following: Proof of Work (PoW) and Proof of Stake (PoS)
What is proof of work?
Proof of Work (POW) uses a competitive validation method to confirm transactions and add new blocks to the blockchain. Proof of Work involves bundling a group of transactions in a mempool, and miners must verify validity of transactions by solving a cryptographic puzzle.
Proof of Work consensus algorithms focus on identifying the user who could modify the ledger by leveraging a competitive race.
This is the first algorithm introduced for the Bitcoin network such that it required the solving of computational complexity using some equipment to attain the desired results. This is what is referred to as Bitcoin mining.
This algorithm was also replicated for some other cryptocurrencies like Litecoin, DigiByte, Dash and so on.
Since mining cryptocurrencies requires more energy and resources, developers sought alternatives that would be less expensive and less harmful to the environment. Hence the use of another consensus mechanism called the proof of stake (PoS).
What is Proof of Stake (PoS)?
Proof of stake is a cryptocurrency consensus mechanism for processing transactions and creating new blocks in a blockchain. A consensus mechanism is a method for validating entries into a distributed database and keeping the database secure.
The proof of stake algorithm does not depend on computers competing with each other for generating the suitable hash. On the contrary, the PoS protocol focuses on determining participation according to ownership of the coin supply by users (sometimes referred to as validators).
Basically, proof of stake consensus replaces computational power with currency power. Therefore, the ability to validate transactions depends on the ‘stake’ of the users in the network.
Proof-of-stake changes the way blocks are verified using the machines of coin owners. The owners offer their coins as collateral for the chance to validate blocks. Coin owners with staked coins become the key validators for the consensus mechanism.
Why should developers use proof of Stake (PoS)?
Proof-of-stake is designed to reduce the scalability and environmental sustainability concerns required for validation of the blocks as compared to the proof-of-work (PoW) protocol which is a competitive approach to verifying transactions.
The use of POS as a consensus mechanism would naturally encourage people to look for ways to gain an advantage, especially since monetary value is involved.
This means there should be a drastic reduction in energy consumption since miners can no longer rely on massive farms of single-purpose hardware to gain an advantage.
What are the benefits of Proof of Stake (PoS)?
In the likelihood that there is a 51% attack on the blockchain, which would require an individual to own over 51% of the total coins staked, it is not only very expensive to have 51% of the staked cryptocurrency, as the staked currency will also serve as collateral for the privilege to mine, the miner(s) that attempt to revert a block through a 51% attack would lose all of their staked coins.
It is also a known fact that it would not be expensive to invest in mining equipment. The required resources are large quantities of coins, which would be staked in this case.
It is also worth noting that the proof of stake creates room for a large number of users or investors to stake their coins. This is because they do not require equipment to stake the coins.