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Most cryptocurrencies work on 2 major models, or a hybrid of both: Proof of Work (PoW) and Proof of Stake (PoS). Both PoW and PoS ensure users are honest with transactions in various ways, and are in place so the cryptocurrencies they power can function without human intervention and to help prevent anyone hacking the network.
PoW involves an arbitrary mathematical puzzle that can, really, only be completed by computers in order to create the next block in the chain and the network progresses. This process is called mining, and miners effectively compete with each other to create the next block, with the ‘winner’ being awarded with crypto. Bitcoin (BTC) is, unsurprisingly, the most famous PoW model: a series of computers compete, or ‘work’, to form the next block in the chain and, in return, be rewarded with BTC. PoW was first introduced back in 1993 as a model to deter spam email.
PoS, on the other hand, is very different: there is no competition between miners. Instead, ‘stakers’ are randomly selected (proportional to the size of their stake) to be the ‘validators’ of the next block. Cardano (ADA) is a good example of a PoS model; stakers have to lock their ADA tokens for an agreed period of time. This is their stake. The more tokens they lock, the higher chance they have of being selected as the ‘validator’ of the next block.
Let’s imagine there are only 2 stakers: Jorge has staked 100 ADAs, but Fatima has staked 1,000 ADAs. Fatima is 10x more likely to be randomly selected as the validator than Jorge. PoS removes the need for computing competition by working on this system; Fatima is selected as the next validator, and is rewarded with ADA for creating the next block.
*The content hereby presented is for informational purposes only. Nothing of this content that is available to you shall be considered as financial, legal or tax advice. Please, keep in mind that trading cryptocurrencies pose a considerable risk of loss.
PoW has come under much scrutiny recently due to the amount of electricity used by miners. The nature of the model encourages competition, so people will continually purchase and power more computers in order to have more of a chance of solving the algorithm first and being rewarded.
It is also possible for PoW to become a more centralised process, as miners can join together in a mining pool and split the rewards equally between them. So there can be a monopoly of miners that have significantly more control over others, adding a sense of centralisation.
PoS is the evolved model of PoW; by removing the competition aspect and making the validator randomly selected, electricity costs are far lower than PoW. It is also much cheaper to setup a node (a computer connected to other computers which follows rules and shares information) on a PoS system, making it more secure, inclusive and - most importantly - more decentralised.
However, the selection process for PoS favours those who stake more tokens, so the system can sometimes be dominated by the rich. Furthermore, should these rich people decide to club together and own over 51% of the stake then they would effectively control the entire network. This is incredibly unlikely, but in theory it is an often-mentioned downside to the PoS model.
PoS evolved from PoW to patch many of the existing holes it had - we are seeing Ethereum (ETH) moving entirely to a PoS model, for example, as many see it as the future. The system encourages decentralisation and a more secure network. As mentioned, PoS is not without its flaws, and in the future we will inevitably see new processes and models that improve on the previous.
*The content hereby presented is for informational purposes only. Nothing of this content that is available to you shall be considered as financial, legal or tax advice. Please, keep in mind that trading cryptocurrencies pose a considerable risk of loss.
Most cryptocurrencies work on 2 major models, or a hybrid of both: Proof of Work (PoW) and Proof of Stake (PoS). Both PoW and PoS ensure users are honest with transactions in various ways, and are in place so the cryptocurrencies they power can function without human intervention and to help prevent anyone hacking the network.
PoW involves an arbitrary mathematical puzzle that can, really, only be completed by computers in order to create the next block in the chain and the network progresses. This process is called mining, and miners effectively compete with each other to create the next block, with the ‘winner’ being awarded with crypto. Bitcoin (BTC) is, unsurprisingly, the most famous PoW model: a series of computers compete, or ‘work’, to form the next block in the chain and, in return, be rewarded with BTC. PoW was first introduced back in 1993 as a model to deter spam email.
PoS, on the other hand, is very different: there is no competition between miners. Instead, ‘stakers’ are randomly selected (proportional to the size of their stake) to be the ‘validators’ of the next block. Cardano (ADA) is a good example of a PoS model; stakers have to lock their ADA tokens for an agreed period of time. This is their stake. The more tokens they lock, the higher chance they have of being selected as the ‘validator’ of the next block.
Let’s imagine there are only 2 stakers: Jorge has staked 100 ADAs, but Fatima has staked 1,000 ADAs. Fatima is 10x more likely to be randomly selected as the validator than Jorge. PoS removes the need for computing competition by working on this system; Fatima is selected as the next validator, and is rewarded with ADA for creating the next block.
PoW has come under much scrutiny recently due to the amount of electricity used by miners. The nature of the model encourages competition, so people will continually purchase and power more computers in order to have more of a chance of solving the algorithm first and being rewarded.
It is also possible for PoW to become a more centralised process, as miners can join together in a mining pool and split the rewards equally between them. So there can be a monopoly of miners that have significantly more control over others, adding a sense of centralisation.
PoS is the evolved model of PoW; by removing the competition aspect and making the validator randomly selected, electricity costs are far lower than PoW. It is also much cheaper to setup a node (a computer connected to other computers which follows rules and shares information) on a PoS system, making it more secure, inclusive and - most importantly - more decentralised.
However, the selection process for PoS favours those who stake more tokens, so the system can sometimes be dominated by the rich. Furthermore, should these rich people decide to club together and own over 51% of the stake then they would effectively control the entire network. This is incredibly unlikely, but in theory it is an often-mentioned downside to the PoS model.
PoS evolved from PoW to patch many of the existing holes it had - we are seeing Ethereum (ETH) moving entirely to a PoS model, for example, as many see it as the future. The system encourages decentralisation and a more secure network. As mentioned, PoS is not without its flaws, and in the future we will inevitably see new processes and models that improve on the previous.
*The content hereby presented is for informational purposes only. Nothing of this content that is available to you shall be considered as financial, legal or tax advice. Please, keep in mind that trading cryptocurrencies pose a considerable risk of loss.
