OPEN YOUR EYES on POW and POS
WHAT’S BEHIND THE POPULARITY OF NEW BLOCKCHAIN ALGORITHMS.
The Proof of Stake (PoS) algorithm is like a bank deposit: the more and longer you hold, the more bonuses you collect. It’s worth understanding how these algorithms work because they play an increasingly interesting role in the development of distributed blockchain networks, and our FOUND coin currency is based on blockchain.
In 2015, Vitalik Buterin, creator of Ethereum, planned to switch from the first blockchain algorithm Proof of Work (PoW) to the new Proof of Stake (PoS). PoW was considered not ergonomic due to the high energy consumption or involving excavators, when acquiring new blocks.
Proof of Stake, is one of the consensus algorithms that is gaining popularity in the cryptocurrency market. Algorithms in blockchain are used, as everywhere, for clearly defined actions to perform some kind of task, in a way that leads to the solution of the task. In our case, the consensus of transactions in the blockchain network.
What are consensus algorithms
Consensus algorithms, in blockchain technology, verify the creation of a new block and decide whether to approve transactions. They are a fundamental part of the blockchain and are responsible for maintaining the integrity of the blockchain and about the security of the entire chain. They ensure protocol compliance and guarantee that all transactions are done correctly (e.g. that cryptocurrencies are not issued twice).
In addition to PoS and PoW, the consensus algorithm includes Proof of Capacity (PoC), Proof of Space (PoS), Proof of Importance (PoI), Proof of Burn (PoB), and Proof of Storage (PoS).
According to the PoS ranking list, there are currently 140 cryptocurrencies running with the new algorithm. However, this is worth 6.22% of the total number of cryptocurrencies (about 2250) in the global market. The total capitalization of PoS-based cryptocurrencies was $23 billion or 8% of the total market capitalization of the cryptocurrency market (as of June 20, 2019). Despite the relatively small numbers, PoS-based cryptocurrencies continue to grow in price and volume.
PoS has its advantages over PoW
First of all, blockchain based on PoS algorithms is much more efficient, in terms of resource consumption like electricity. Computers connected to the blockchain network in a node, act like excavators in PoW. They find new blocks and confirm transactions.
What is staking?
Staking is related to the shift from PoW to PoS, and it is a way of creating new blocks using the PoS algorithm, with creation based on time and funds rather than digging as with PoW.
The user has to deposit a significant amount of cryptocurrencies in their wallet and keep it connected to the network nonstop.
The algorithm chooses the next block itself, based on the weight of the involved cryptocurrencies across the network. In fact, one user makes a “stake” with their cryptocurrencies by contributing it to the blockchain.
The cryptocurrencies held as collateral cannot be returned to the user when the algorithm searches for new blocks, meaning that the user is benefiting the entire ecosystem because their own money is at stake. The higher the user’s stake, and the longer their cryptocurrencies remain in the system, the higher the chances of profit.
Of course, nodes don’t work for free. Everyone makes a profit on every block generated and pledged cryptocurrencies in the wallet, guaranteeing the return on investment.
Steak is always positive, but it depends on a couple of factors.
There is no clear answer to the question of how much staking on the blockchain, i.e. acquiring cryptocurrencies using the PoS protocol, succeeds. Each network may use a different way of calculating rewards. Some do it block-by-block, taking into account how many and how long a validator stacks, while others use how many total cryptocurrencies are staked on a given network to determine the reward.
Nodes not only validate new blocks and transactions, but actively participate in the development of the entire cryptocurrency ecosystem, which is crucial for new cryptocurrency projects.
PoS is a simpler system, all you need is the computer itself and of course the initial cryptocurrencies. Staking is locking in cryptocurrencies in your wallet, like a bank deposit, to receive additional cryptocurrencies. The longer you hold them over time, the more cryptocurrencies you will earn, as the more blocks will be created in the chain, and the weight grow of your wallet, connected to the blockchain, so there is greater rewards in terms of stake — units of a given cryptocurrency.
Despite being a newer and more advanced algorithm, PoS carries the drawbacks of the old PoW algorithm, as it still consumes too much power.
Despite this, it is used in an innovative cryptocurrency like EOS which boasts of millions of transactions per second with no transaction fees.
For those who are lazy ….
With the rise of cryptocurrencies based on the PoS algorithm, many firms on cryptomarket, have started offering lazy staking. In this model, an investor puts his cryptocurrencies under the management of a company that processes confirmed transactions and other activities performed by blockchain nodes. In return, the investor receives a return on accrued interest, which can be as high as 150% per year.
In March 2021, Coinbase launched a service for institutional investors and offers the opportunity to invest in a PoS-based cryptocurrency called Tezos with a profit of up to 6.6% per year, basing the calculation on the inflation rate. Binance also promotes staking for its customers, paid out depending on the total amount of cryptocurrencies earned.
Currently, there are over $7 billion stored in many PoS-based cryptocurrencies.
To conclude, there are many advantages enumerated by users of the PoS protocol. It plays a role similar to a shareholder; users are given the opportunity to vote on key system issues. In addition, it stabilizes the system, because it plays a long-term role, due to the lack of opportunities for quick and speculative profit.
In general, the system is built in such a way that its participants are primarily interested in the development of the project and its application in the real world, thereby dynamizing the demand and price for the new cryptocurrency.
The PoS-based ecosystem is just beginning to gain momentum.