proof of stake

1. PROOF OF STAKE Mining new coins takes a lot of computing power because of the proof-of-work algorithm. The idea was first introduced in 1993 to combat spam emails and was formally called “proof-of-stake coin” in 1997. However the technique went largely unused until Satoshi Nakamoto created Bitcoin in 2009. He realized that this mechanism could be used to reach consensus between many nodes on a network and he used it as a way to secure the Bitcoin blockchain. However, the proof-of- stake algorithm works by having all nodes solve a cryptographic puzzle. This puzzle is solved by miners and the first one to find the solution gets the miner reward. This has led to a situation where people are building larger and larger mining farms like this one. According to Digiconomist, Bitcoin miners alone uses about 54 TWh of electricity, enough to power 5 million households in the US or even power the entire country of New Zealand or Hungary. But it doesn’t stop there. Proof-of-stake gives more rewards to people with better and more equipment. The higher your hash rate is, the higher the chance that you’ll get to create the next block and receive the mining reward. If a node is chosen to validate the next block, he’ll check if all the transactions within it are indeed valid. If everything checks out, the node signs off on the block and adds it to the blockchain. As a reward the node receives the fees that are associated with each transaction. Okay but how can we trust other validators on the network? Well that’s where the stake comes in. Validators will lose a part of their stake if they approve fraudulent transactions. As long as the stake is higher then what the validator gets from the transaction fees, we can trust them to correctly do their job. Because if not, they lose more money then they gain. It’s a financial motivator and holds up as long as the stake is higher then the sum of all the transaction fees. If a node stops being a validator, his stake plus all the transaction fees that he got will be released after a certain period of time. Not straight away because the network still needs to be able to punish you, should they discover that some of your blocks where fraudulent. So the differences between Proof-of-work and Proof-of-stake are quite significant. Proof-of-stake doesn’t let everyone mine for new blocks and therefore uses considerably less energy. It’s also more decentralized. How is that? Well in proof-of-work we have something called mining pools.