In our earlier post we discussed what is Proof-of-Work. We concluded the article highlighting a major issue that can arise in future if Proof-of-Work algorithm is still continued in Bitcoin mining.
The article was ended by arising a question that what if all bitcoins are matured and nothing is left for rewards? The possible solution to this situation may be Proof-of-Stake(POS) algorithm.
POS also has several other individual advantages as well and it’s not like it came into existence only to replace POW.
So lets understand What is POS?
Proof-of-Stake (POS) is another kind of algorithm used in a cryptocurrency blockchain network. In POW kind of algorithm, those participants (miners) who solves the encrypted mathematical puzzle to verify the set of transactions are rewarded with new set of coins . But in POS kind of algorithm, participants are not rewarded with any new coins. These participants just collects the transaction fees in order to verify the transaction. This is the major difference between POW and POS.
Who will verify the transactions and how much transactions are to be verified by that particular participant is decided by the POS algorithm, based on the holdings of bitcoin( in case of bitcoin mining) or that particular crypto currency for which the mining is being done. The stake in that particular crypto currency will be the determining factor and hence the term Proof-Of-Stake. Also in case of POS, cryptocurrency blockchain is not mined but is said to be forged, or minted.
In order to participate in POS kind of minting, one has to simply just show or submit the wealth in that particular cryptocurrency’s blockchain network for which the minting is taking place.
Lets take an example to understand better. Assume the case of bitcoin mining. Let say a person named Pam holds 5% of stake in Bitcoins submitted to Blockchain network. Now Pam wil get 5% of total transactions to verify. Another person say Anil has 3% stake in bitcoins, Anil will get 3% of transaction to verify. Which means , more the stake in bitcoins, more the number of transactions will be available to verify and thus earning more transaction fees accordingly.
Validating transactions in POS kind of algorithm would be more easy and cheap as compared to POW, because here, no puzzles are required to solve and therefore no ASICS chips or Mining rigs are required. Consider Bitcoins have to be placed instead of mining rigs to mine Bitcoins. This feature of POS forces miners to have more stake in bitcoin in order to mine verify the transactions.
POS is already being used in cryptocurrencies such as Peer Coin, ShadowCash, Nxt,Leo Coin BlackCoin, NuShares/NuBits, Qora and Nav Coin.. Peer Coin was the first cryptocurrency to be launched using Proof-of-Stake.
Rohit Kukreja is a Commerce graduate with Financial Markets expertise involving Stocks, Forex, Futures & Options Market and now Bitcoins & Cryptocurrency Markets. Blockchain Enthusiast but not a techie, Rohit is an active member of various Blockchain & Crypto communities all over India.