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How does POS based Currency Work

Since the beginning of Blockchain, it thrived on its decentralized, private and secure network feature, but everything comes at a cost, and Blockchain has its own. As soon as it took off, many challenges came on its way. The most widely known is heavy energy consumption. Bitcoin mining happens through a protocol known as Proof-of-work ( POW), which requires a lot of energy and can’t be done with standard hardware in daily use. So instead, Bitcoin miners use dedicated hardware and energy plants to calculate the hashes, which is of no use except for quickly calculating the hash tokens.

According to research done by Digiconomist’s Bitcoin Energy Consumption, one Bitcoin transaction takes 1,544 kWh to complete, equivalent to approximately 53 days of power for the average US household. As a result, it led to an energy crisis in many parts of the world, and bitcoin attracted many trolls. Still, the world has seen Blockchain technology, and there was no point in going back, so Proof of stake was invented as an alternate technology consensus to validate transactions.

In this article, we will cover :

  1. How does validation and mining work in Bitcoin and Ethereum
  2. What is Proof of Work(POW)?
  3. What is Proof of Stake(POS)?
  4. Difference between POW and POS
  5. Staking and validation in PoW

 

How does validation and mining work in Bitcoin and Ethereum

Blockchain is the base technology on which all other crypto coins get created; these days, even businesses are creating coins for themselves to raise funds from people who believe in them using ELM Coins.

Bitcoin secures its system by making the process of mining harder using POW consensus using a decentralized network to verify transactions. But PoW had some drawbacks, and PoS was built to solve them using user-owned coins as a stake to get existing users to verify new transactions. In proof-of-stake (POS), cryptocurrency owners validate block transactions based on the number of validator stakes coins.

What is Proof of Work(POW)?

Proof of Work(POW) is the original consensus mechanism built to validate a blockchain transaction and add new blocks to the chain. POW is a protocol designed to form digital transactions securely without having to believe the 3rd party. Blockchain builds on the previous chain, and the process of finding a common link between the current and past transactions is known as Proof of work. The work that solves a puzzle between the last trade and the upcoming marketing generates rewards for whoever solves it, and the whole process is called mining.

What is Proof of Stake (PoS)?

Proof-of-stake is a consensus algorithm that decides who gets to validate the next block, which mainly depends on how many coins you stake. So here, instead of miners cracking cryptographic puzzles using computing power to verify transactions, the existing users on the network get to validate new transactions.

The chances of validating a new block are determined by how much stake of money a person is willing to bet on the validity of the new transaction. In return, the validator collects network fees as their reward.

Peercoin was the first cryptocurrency to implement a full-scale PoS consensus model.

Handling Monopoly and Power Consumption.

ference between POW and POS

If you notice, you will see that POW and POS use two different words, coin mining, and validation, respectively. In other words, Bitcoin is mined with a Proof of work algorithm, and POS coins like Ethereum are validated using the Proof of stake algorithm.

Proof-of-stake (POS) was created as an alternative to Proof-of-work (POW). While PoW mechanisms require miners to solve cryptographic puzzles, PoS mechanisms need validators to hold and stake a  minimum amount of tokens from their wallets to give their vote of confidence to validate a new transaction on the chain.

This way, POS incentivizes people to act truthfully by staking their hard-earned currency and saves a ton of energy that might get used to mine the same transaction via POW consensus. It is seen as less risky regarding the potential for an attack on the network, as its compensation is structured in a way that makes an attack less advantageous for the attacker.

taking and validation in PoW

In Proof of Stake, the algorithm randomly selects the next block validators. To become a validator, the owners offer their coins as collateral for the chance to validate blocks. As soon as a node gets selected to validate a transaction, the next block gets validated and verified using the stake coins of coin owners.

This way, the system randomizes who gets to “mine” rather than using an energy-intensive competition-based mechanism like proof-of-work.

To become a validator in a PoS-based crypto coin, the coin owner must “stake” a specific amount of cash. For example – Ethereum requires 32 ETH on the stake for a user to become a validator. Blocks are validated by more than one validator, and when a specific number of the validators verify that the block is accurate, it is finalized and closed.

The Ethereum PoS process is a validation sharing across a cryptocurrency network instead of a validation competition, unlike the PoW consensus mechanism. After the launch of the PoS consensus, the first cryptocurrency to adopt the PoS method was Peercoin. After that, Nxt, Blackcoin, and ShadowCoin soon followed suit.

Reference

https://river.com/learn/proof-of-work-pow-vs-pos-proof-of-stake/

https://www.geeksforgeeks.org/difference-between-proof-of-work-pow-and-proof-of-stake-pos-in-blockchain/

https://www.investopedia.com/terms/p/proof-stake-pos.asp

https://www.investopedia.com/terms/p/proof-stake-pos.asp

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