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WHY DON'T ALL CRYPTOCURRENCIES SWITCH TO PROOF OF STAKE?

CRYPTOCURRENCIES SWITCH TO PROOF OF STAKE

April 29, 2021 | 

JOHN K MWANIKI |  0 Comments| 

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Cryptocurrency mining has dramatically changed since its inception. Initially, proof of work was the only game in the blockchain, and new cryptocurrencies entering the market copied the bitcoin model as a starting point for their slightly varying ideas. However, most developers recognized the downsides of PoW, such as the requirement for high computing power and high energy, and started looking for an alternative way to secure cryptocurrencies; thus, proof of stake emerged.

What is proof of stake?

Proof of stake (PoS) refers to a protocol of maintaining the integrity of cryptocurrencies on the blockchain. That hinders users from printing more cryptocurrencies they did not earn. In proof of stake blockchains, a user can only validate block transactions or mine depending on how many coins they hold. As such, the more coins a user owns, the more mining power they have.

In proof of stake blockchains, users can add new blocks to the ledger by staking their coins or assets to the network. These users or participants are called validators, block proposers, or bakers, depending on the blockchain in question. 

In PoS, participants are randomly picked from the pool of validators, unlike PoW, whereby miners compete to add a block in the blockchain. A validator has a higher chance of being selected if their stake in the network is higher. Therefore a validator proposes a block, and if the other validators agree, it is added into the blockchain. Then the validator receives a reward in the form of the blockchain's native currency. 

Upsides of Proof of stake

Proof of stake came as an alternative to proof of work (PoW), the original mechanism in blockchain technology for confirming transactions and adding extra blocks to the chain. Basically, proof of work requires a lot of energy, with many miners having to sell their coins to foot the costs of mining but proof of stake offers a miner mining power based on the number of currencies they hold. 

PoS is perceived as less risky when it comes to the possibility of miners attacking the network because it puts the compensation in a way that an attack would be less advantageous for the miner.

The scalability under a proof of stake blockchain is also easier. Bitcoin and other PoW based cryptocurrencies struggle to achieve double-digit transactions per second on the blockchain. Bitcoin is currently at 8. However, by utilizing PoS, the transaction capability can get to thousands per second based on the number of validating nodes being used (the fewer the nodes, the faster it is).

Since there is a reduction in cost for those who wish to validate proof of stake cryptocurrency, the transaction fees are also lower. The miners don't have to invest in expensive mining rigs, so creating blocks is achievable with lower equipment rice and energy.

Consequently, that impacts the overall revenue for miners in PoS cryptocurrencies. However, the ease of starting mining and the low overhead costs makes PoS cryptocurrency mining a viable option for those willing to try.

Downsides of proof of stake

First, there is the problem of distributing a new PoS cryptocurrency. Some cryptos have pre-mined coins, and once the network is operating, mined coins hinder miners who would like to join later. For many PoS based cryptocurrencies, one has an advantage if they already have huge amounts of cryptos to stake from the beginning. More transactions per second translate to higher fees per second.

Secondly, what is to mitigate validators from engaging in malicious behavior? Suppose there are two candidate blocks, and validators vote for both to receive rewards for whoever block gets added to the blockchain. That is called the 'nothing at stake problem. On PoW, this problem is solved by the high mining cost. Luckily, PoS blockchains enforce incentive mechanisms and penalties. They punish malicious validators by 'slashing' (taking some or all of their stakes).

Why don't all cryptocurrencies migrate to proof of stake?

Proof of stake is a new model that has gained widespread popularity as an energy-efficient and new alternative to proof of work. However, its future and the possibility of cryptos switching to it depend on how it proves itself in real applications and what alternative solutions emerge in the market to address decentralization, security, and scalability.

Another reason why cryptocurrencies might be hesitant to adopt PoS is that keeping coins staked and locking them into a smart contract means that they are not available for trading elsewhere, which ties up capital. That is similar to locking up cash into a time-sealed vault.

The question of whether PoS addresses the problems of PoW is still up for debate. One of the reasons is, Ethreium has been quick to point out the advantages of PoS but has not yet tested it to work.  

Could bitcoin move to proof of stake? There is a debate about whether bitcoin could switch to PoS due to the technical challenges involved in the transition that would affect who has put the most effort into bitcoin. But many analysts, including the founder of Swiss cryptocurrency broker Bitcoin Suisse, have predicted that in the end, bitcoin might adopt the PoS model.

Apart from the energy problem, the PoS vs. PoW debate concerns network security, economic fairness,  decentralization, and barriers to entry.

CONCLUSION

Proof of stake provides a solution to the sustainability and scalability of cryptocurrencies. It seems to lend itself more to the practical uses of digital currencies than speculation. Whether cryptos will live to the expectations of bullish investors is unknown, but PoS provides a positive outlook. Four of the leading nine crypto assets by market cap are on the way to PoS.

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