Understanding Blockchain: PoW versus PoS
Nowadays, crypto and Bitcoin are no longer a TABU subject and more of a trend. It doesn’t matter if you know the anything about the project or the technology behind a certain token, people are investing in the hope to earn more money.
The pandemic epoch helped even more this trend. As the media is talking about certain domains affected and lots of people losing their job, economists are predicting the next economic crisis, Twitter and other Social Media platforms are presenting an easier way of earning more money: buy crypto and get rich. But is this enough to get rich?
The purpose of this article is to give more information about the technical side of crypto. If you want to read more about what crypto is, the difference between trading and staking, reach out to this article too.
Meanwhile, let’s have a closer look at some important aspects that helps any beginner understand Blockchain.
What does Blockchain mean?
Blockchain is a system that records the information in a way that no one can change, hack or cheat the system. So, a blockchain is a ledger of transactions that is duplicated and then distributed across the entire network of computer systems on the blockchain. Each block from these chains will contain a number of transactions, and every time a new transaction takes place on the blockchain, a record of that transaction is added to every participant’s ledger. This makes everything decentralized and the way the database is managed by multiple participants has a named: DLT (Distributed Ledger Technology).
Blockchain is a DLT type of system in which the transactions are recorded with a type of signature that cannot be changed back. The name of this signature is hash. Basically, when a transaction is verified and needs to be added to a block in a chain, the transaction will be put in a hash algorithm.
What is PoW?
PoW comes from ‘Proof of work’ and it’s basically the system that is used by currencies such as Bitcoin and Ethereum, each one of them using it in their own way.
Did you know? At first, POW was developed as a solution to the growing problem of spam emails.
But what does it do? POW is a decentralized consensus mechanism that requires other members of the network to help solving an arbitrary mathematical puzzle by expending effort; this way, it prevents anybody from cheating the system. Usually, proof of work is a system used in cryptocurrency mining, for validating transactions and mining new tokens.
Due to PoW, Bitcoin and other cryptocurrencies can be transferred peer to peer in a secure manner and without involving a third party to the process.
Does it have disadvantages? Just like any other systems or things in this world, of course there are disadvantages. The biggest one for POW is the fact that it requires huge amounts of energy, energy that comes only from other miners joining the network.
Did you know? In 2015, it was estimated that only for one Bitcoin transaction it was required the amount of electricity needed to power up 1.57 American households a day. You can imagine that since then, the number has only gone up.
What is PoS?
PoS means Proof of Stake and it’s a system that comes as an alternative way of verifying and validating a transaction or a block. POS concepts is that a person can mine or validate a block /transaction according to the amount of coins they hold. This way, instead of using energy to answer POW puzzles, a POS miner is limited to mining a % of transactions that is equivalent with his ownership stake. For example, if a miner owns 5% of the coins/tokens available, he will be able to mine only 5% of the blocks.
Did you know? The first coin that adopted POS method was Peercoin. Peercoin was launched in 2012 and it’s based on Bitcoin framework, however it became the first altcoin that targeted Bitcoin’s high energy consumption problem.
Even though, the largest cryptocurrency in the world (Bitcoin) is not using PoS, this is still a less risky system then the one used on BTC. Why is that? Simple! The way the system is created, it makes the compensation for the attack less advantageous for the miner to attack it. Funny, right?
Why do I need to know the above?
Although you are not a programmer, you still need to learn a few things about what Blockchain is and how it works. Every person that wants to get into crypto should be able to understand and differentiate different technologies the projects are based on, the approaches, the use cases and value proposition of each of them. Not knowing can make you the perfect target for a gaming or simply helps you make bad choices.
So.. Knowledge doesn’t affect you, but not knowing does!