For some, how cryptocurrencies reach consensus and validate transactions without the intervention of a third party can be a jarring concept, so I have taken it upon myself to explain these terms as simply as one can. First, we will explore Proof of Work and where/how it is used. Secondly, we will explain Proof of Stake, where it is used, and how YOU can profit off of it.
Proof of Work
Bitcoin, the first ever cryptocurrency, is a peer to peer internet currency that runs on Proof of Work (PoW), thus, making Proof of Work the first consensus mechanism used as it applies to crypto. Proof of Work ultimately solves the “double spending problem” without the need for a central authority. The double spending problem states that if users can generate more coins than they actually have, said currency would become worthless because the money would be constantly inflated.
Bitcoin is a public ledger that is made up of a series of blocks (hence Blockchain) that contain every Bitcoin transaction that has ever occurred since the currencies creation. Every 10 minutes a new block is minted by the miners, AKA specialized computers, in the ecosystem. In return for validating transactions and, thus, minting new blocks the miners are rewarded with the native currency, in this case, bitcoin. These miners are all competing to solve a highly complex mathematical equation that will mint the next block on the chain, the winning miner is rewarded 6.25 bitcoin (about $306,000 at today’s price). This is why we have seen many set up massive warehouses in Canada where the electricity is cheap and the temperature is cold to keep the miners from overheating. It has truly become the next gold rush!
Proof of Stake
Staking is a way to earn rewards by owning a particular cryptocurrency. If a cryptocurrency you have allows staking you can "stake" those tokens on the network and earn yield (return on investment) for contributing to the network. The reason you earn yield when staking is because the network is using your coins to verify transactions in the ecosystem. One of the most notable developments happening in the Proof of Stake, also known as PoS, world is the transition of the Ethereum blockchain from PoW to PoS. This transition in a consensus mechanism is all part of what the Ethereum community is calling the “Eth2 upgrades”. According to Ethereum.org “Eth2 refers to a set of interconnected upgrades that will make Ethereum more scalable, more secure, and more sustainable. These upgrades are being built by multiple teams from across the Ethereum ecosystem.” Many in the Ethereum community believe Eth2 will arrive, however, there is still a lot of work to be done as this transition to PoS poses many technical issues. Although Ethereum has not made the full transition to PoS yet, there are many tokens that already run on PoS that are exciting in their own right. For example, Algorand (ALGO) is a token that's main purpose is to provide low-cost cross board payments and run 100% on PoS. Algorand is just one of many as there are several other PoS tokens such as Tezos, Icon, and, as I mentioned, Ethereum 2.
If you are now interested in staking your own tokens to gain yield I would recommend doing so through any of the following exchanges:
If you have any questions or topics you would like me to cover in my next article please feel free to leave them in the comments below! And if you are not already you can follow me on Instagram, TikTok, Facebook, and Linkedin @TheCredibleCrypto.