Different Proof-of-Stake (PoS) mechanisms use various methods to reach a consensus. For example, when Ethereum (ETH) introduces sharding, its PoS validator will verify the transactions and add them to a shard block, which requires no more than 128 validators to form a voting “committee.” Once shards are validated and a blockchain block is created, two-thirds of the validators must agree.
They must agree that the transaction is valid, and only then is the blockchain-based block closed. Wait a minute… Did you know that Peercoin was the first form of digital currency (Cryptocurrency) to adopt the PoS consensus mechanism? Launched in 2012, it’s an alternative Cryptocurrency based on the Bitcoin framework. Soon after, Cryptos like Nxt, Blackcoin, and ShadowCoin followed.
Like Bitcoin, Litecoin, and Dash, Peercoin stores value, offers complete anonymity, and can be sent online without any central authority (such as a bank). Initially, Peercoin was the first Altcoin to target the issue of Bitcoin’s high energy consumption. It came in handy in verifying the blocks using blockchain technology by utilizing a Proof-of-Stake (PoS) to reduce computational work.
Technically, Proof-of-Stake (PoS) is a consensus mechanism where cryptocurrency validators share the task of validating transactions—there are currently no certificates issued. But with Proof-of-Stake (POS), Cryptocurrency Wallets holders and digital currency owners can easily and quickly validate block transactions based on the number of validator stakes coins. So, what does it offer?
Understanding What The Proof-of-Stake (PoS) Consensus Mechanism Means
Proof-of-Stake (PoS) is a trading consensus mechanism for processing Cryptocurrency 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. In the case of Cryptocurrency, the database is called a blockchain—so the consensus mechanism secures the blockchain assets.
Under Proof-of-Work, hefty computing requirements keep the blockchain secure. PoS reduces the amount of computational work needed to verify blocks and transactions. It changes how blocks are confirmed using the PoS machines, so there’s no need for much computational job done. The owners offer their coins as collateral—staking—for the chance to validate blocks and earn rewards.
Validators are selected randomly to confirm transactions and validate block information. This system randomizes who gets to collect fees rather than using a competitive rewards-based mechanism like proof-of-work. To become a validator, a coin owner must “stake” a specific amount of coins. For instance, Ethereum (ETH) requires 32 ETH to be staked before a user operates a node.
Multiple validators validate the blockchain blocks, and when a specific number of validators verify that the blockchain-based block is accurate, it is finalized and closed. To activate your validator, you’ll need to stake 32 ETH; however, you don’t need to put into stake that much to participate in validation. You can join validation pools using “liquid staking,” which uses an ERC-20 token for your ETH.
The Key Difference Between Proof-of-Stake (PoS) Vs. Proof-of-Work (PoW)
Bitcoin’s substantial energy requirements have undoubtedly harmed the Cryptocurrency market’s reputation. At the same time, this results from the network’s Proof-of-Stake (PoS) mechanism and Proof-of-Work (PoW) consensus. However, many Cryptocurrency projects now look to offer a more energy-efficient solution, making them more appealing to environmentally-conscious investors.
Investors may wish to consider projects with reduced energy consumption when looking for the crypto with the most upside. This is because the most energy-efficient Investing In Cryptocurrency and trading projects often employ cutting-edge technology, which helps them become ‘futureproof.’ Proof-of-Stake (PoS) and the Proof-of-Work (PoW) consensus mechanisms are vital here…
Moving forward, as per our heading definition, in both cases, the Proof-of-Stake (PoS) and the Proof-of-Work (PoW) consensus mechanisms help blockchains synchronize data, validate information, and process transactions. Each method has proven successful at maintaining effective blockchain processes, although each has pros and cons. However, the two algorithms are very different.
Under PoS, block creators are called validators. A validator checks transactions, verifies activity, votes on outcomes, and maintains records. Under PoW, block creators are called miners. Miners work to solve for the hash, a Cryptographic number, to verify transactions. As a result of every successful Crypto asset transaction, they are rewarded with a coin for solving the hash equation.
|Block creators are called validators||Block creators are called miners|
|Participants must own coins or tokens to become a validator||Participants must buy equipment and energy to become a miner|
|Proof-of-Stake is often energy efficient||Proof-of-Work is not very energy efficient|
|Security through community control||Robust security due to expensive upfront requirement|
|Validators receive transactions fees as rewards||Miners receive block rewards|
To “buy into” the block creator position, you must own enough coins or tokens to become a PoS validator. PoS blockchains reduce the processing power needed to validate block information and transactions. They also lower network congestion and remove Proof-of-Work (PoW) blockchains’ rewards-based incentives. But the PoW equipment and energy cost mechanisms are expensive.
As such, they limit access to mining and strengthen the security of the blockchain. For PoW, miners must invest in processing equipment and incur hefty energy charges to power the machines attempting to solve the computations. It’s important to realize that the first Cryptocurrency to adopt the PoS method was Peercoin. Followed by Nxt, Blackcoin, and ShadowCoin soon after.
Why The PoS Consensus Mechanism Is Better Than PoW In Mining Cryptos
The Proof-of-Stake goals are to increase security, reduce the possibility of centralization, and decrease energy consumption. PoS addresses these issues through its pseudo-random selection process for validators, designed to make it more difficult for bad actors to gain control over the consensus mechanism. It also reduces energy consumption by requiring stakes to lock up their coins.
This lock-up allows them to participate in staking rather than continuously running high-powered computers. At the same time, Proof-of-Stake can help prevent centralization by making it more difficult for a single entity or group of entities to gain control over the network. One advantage of Proof-of-Stake over Proof-of-Work is that the PoS mechanism is more energy-efficient.
Markedly, with Proof-of-Work, miners compete to solve complex mathematical problems, validate transactions, and create new blocks. As a result, this requires a lot of energy, as miners must continuously run high-powered computers. On the other hand, Proof-of-Stake does not need miners to run high-powered computers continuously. Making PoS more energy efficient than PoW.
Proof-of-Stake (PoS) is designed to reduce network congestion and address environmental sustainability concerns surrounding the PoW protocol. Proof-of-Work (PoW) is a competitive approach to verifying transactions, naturally encouraging people to seek ways to gain an advantage, especially since monetary value is involved. Bitcoin miners earn by verifying transactions and blocks.
Resource Reference: Why Smart Contracts Matter In Decentralized Applications (DApps)
However, they pay their operating expenses like electricity and rent with fiat currency. So what’s happening is that miners exchange energy for cryptocurrency, which causes PoW mining to use as much energy as some small countries. Usually, the Proof-of-Stake (PoS) consensus mechanism seeks to solve the fundamental computational power problems by effectively substituting staking.
Essentially, this is whereby the network randomizes an individual’s mining ability. 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. For example, Ethereum’s transition from PoW to PoS reduced blockchain technology’s utility energy consumption by 99.84%.
In a nutshell, Proof-of-Stake (PoS) is a newer, more efficient way to secure blockchains and validate transactions. Proof-of-Stake (PoS) differs significantly from Proof-of-Work (PoW), mainly because it incentivizes honest behavior by rewarding those who put their Cryptocurrency up as collateral for a chance to earn more. The PoS process is also less energy-intensive than Proof-of-Work (PoW).
At all costs, being less energy-intensive than PoW makes PoS a more sustainable option for long-term Cryptocurrency marketplace investors. Remember, rather than having miners compete to solve complex mathematical problems to validate transactions and create new blocks (as with PoW); PoS allows users to stake their coins to validate transactions and create new partnerships.
How Is Proof-of-Stake (PoS) Security Like For Crypto Marketplace Investors
Long touted as a threat to Cryptocurrency fans, the 51% attack is a concern when Proof-of-Stake (PoS) is used, but there is doubt it will occur. Under Proof-of-Work (PoW), a 51% attack is when an entity controls over 50% of the miners in a network and uses that majority to alter blockchain technology. Still, a group or individual must own 51% of the staked Crypto assets in Proof-of-Stake.
Technically, our cloud computing experts believe that Proof of Stake has a lot of potential, and it may eventually replace Proof of Work as the most common consensus mechanism driven by autonomous algorithms for the Cryptocurrency marketplace. If you want to use blockchain technology in your business transactions, we recommend Cyberium Studio for its Proof-of-Stake (PoS) capabilities.
Unfortunately, it’s costly to control 51% of staked Cryptocurrency. Under the Ethereum (ETH) PoS, if a 51% attack occurred, the honest validators in the network could vote to disregard the altered blockchain and burn the offender(s) staked ETH. This incentivizes validators to act in good faith to benefit the Cryptocurrency and the network. Most other PoS security features are not advertised.
Eventually, this might create an opportunity to circumvent the strategic cybersecurity measures already implemented. However, most PoS systems have extra security features that add to the inherent security behind blockchains and PoS mechanisms. Whether or not Proof of Stake (PoS) will ultimately prove more secure in the Crypto market than Proof of Work (PoW) remains to be realized with time.
If you’re new to Cryptocurrency and find “crypto-speak” a bit dizzying, it’s probably because the technology and terms are still evolving, and definitions tend to morph over time. Even those who speak crypto may be unwittingly conflating terms because there aren’t many standardized definitions yet. Take, for instance, the most basic terms identifying Crypto: Coins, Altcoins, and Tokens.
Are they synonymous? According to many sources, they’re not. Yet they’re used synonymously in different contexts (see more details in our ”FAQs Answered” section below). Is your head spinning? That’s OK; even Cryptocurrency pros don’t always get it right. Despite the difficulties in trying to tell Crypto apples from Crypto oranges—or whether there is a difference—it helps quite a lot.
In particular, it helps us understand the basic lingo, even if the meanings change or remain uncertain. A semantic rabbit hole, it may be! Luckily, here is a complete guide to help you explore Altcoins, Coins, and Tokens without falling in. Though Bitcoin remains the most popular Cryptocurrency, it tends to suffer from high volatility in its price or exchange rate in the Crypto marketplaces.
For instance, Bitcoin’s price rose from just under $5,000 in March 2020 to over $63,000 in April 2021, only to plunge almost 50% over the next two months. Intraday swings also can be wild; the Cryptocurrency often moves more than 10% in a few hours. All this volatility can be significant for traders, but it turns routine transactions like purchases risky for Cryptocurrency buyers and sellers.
Topmost Frequently Asked Questions Answered
1. What Is Proof-of-Stake (PoS) Vs. Proof-of-Work (PoW)?
On the one hand, Proof-of-Stake (PoS) uses randomly selected validators to confirm transactions and create new blocks. So, Proof-of-Stake (PoS) is a mechanism used to verify blockchain transactions. On the other hand, Proof-of-Work (POW) uses a competitive validation method to ensure seamless transaction confirmation and add new blocks to the blockchain.
2. What is the most efficient Cryptocurrency in the market?
Realistically, Stablecoins are Cryptocurrencies whose value is pegged or tied to that of another currency, commodity, or financial instrument. Stablecoins aim to provide an alternative to the high volatility of the most popular Cryptocurrencies, including Bitcoin (BTC), making Crypto investments less suitable for everyday transactions. Ethereum (ETH)–the most popular energy-efficient Cryptocurrency–comes first. Stellar (XLM)–the most promising energy-efficient Cryptocurrency for payment processing–comes in second. Avalanche (AVAX)–the most energy-efficient Cryptocurrency with high scalability, like Ethereum (ET)–comes third on the list. At the same time, Solana (SOL)–the most emerging energy-efficient Cryptocurrency for dApp developers–takes the fourth position.
3. What is considered an Altcoin (Alternative Coin)?
Altcoins (Alternative Coins) is a term used to describe all Cryptocurrencies other than Bitcoin (BTC -0.05%). Their name comes from the fact that they’re alternatives to Bitcoin and traditional fiat money. The first altcoins were launched in 2011, and now thousands exist. Some of them include Filecoin (FIL), ApeCoin (APE), Lido DAO (LDO), Conflux (CFX), etc. If the entire Cryptocurrency universe expanded from a single point, like a big bang, that point of singularity would be Bitcoin (BTC), the first Cryptocurrency. Every Cryptocurrency that’s not the original Bitcoin is considered an “alternative” to it, hence an “alternative coin” or altcoin.
4. Can Bitcoin be converted into Proof-of-Stake (PoS)?
As mentioned, Proof of Stake (POS) is a built-in consensus mechanism used by a blockchain network. It cannot be earned, but you can help secure a network and earn rewards using a client who validates in PoS validating or becomes a validator. However, it’s possible that Bitcoin can change to PoS. But it takes years to implement successfully, and the community must agree to the change.
5. Is a Cryptocurrency token a form of an Altcoin?
Take, for instance, the most basic terms identifying Crypto: Coins, Altcoins, and Tokens. Are they synonymous? According to many sources, they’re not. Yet they’re used synonymously in different contexts. Usually, some tokens are launched through the Initial Coin Offering (ICO), although not technically coins. Still, some are also considered Altcoins, despite a technical difference. One of the largest Crypto marketplace exchanges weighs all tokens, Altcoins, yet refers to all Cryptocurrency assets as (technically) tokens.