Beginners series: proof of stake cryptocurrency

Beginners series: Proof of Stake Cryptocurrency

We have written extensively about proof of stake in previous blogs. Today we’ll be focusing on proof of stake cryptocurrency, what it is, and why it exists! Welcome to the beginners series!

What to expect:

• What is cryptocurrency?
• Why does it exist?
• What does consensus mean?
• What is proof of stake?
• Why does proof of stake exist?
• Is it secure?
• Where to from here?

What is cryptocurrency?

Cryptocurrencies are digital and decentralized currencies that use cryptography to remain secure. Using consensus mechanisms, cryptocurrencies operate in a trustless and decentralized way. This means there is no need for third parties to secure or validate funds. This is the responsibility of the network of users.

What does consensus mean?

Consensus refers to the way in which cryptocurrency networks decide if transactions are valid. Consensus must be reached before a transaction is processed. In proof of work, validators are called miners, and they race to solve complex mathematical equations (work).

What is proof of stake?

Proof of stake refers to a specific type of consensus mechanism. In PoS, stakers validate transactions and keep the network secure. To do this, they must allocate collateral in the form of that coin. They then receive rewards in that native currency for doing so. The security of proof of stake comes from this collateral requirement. For anyone to take over the network, they would be required to own 51% of the coins in existence, making any attack incredibly costly. The purpose is to incentivize good behavior and disincentivize bad behavior.

Why does it exist?

Proof of stake was developed due to the concerns with energy usage in Bitcoin. Proof of stake uses collateral as a security measure, rather than the difficulty of work (crypto mining), which Bitcoin is known for. Proof of stake is not only more energy-efficient, but it’s also more equitable. Proof of work suffers from economies of scale, which is leading to increasing centralization of miners. The cost required to mine (proof of work) is in the energy and processing power. The cost of proof of stake is purely in the ownership of that coin.

Is it secure?

We have a full blog on this subject, but here’s a quick summary: Many newcomers want to know about the security of cryptocurrencies, and how a currency without central control works. There have been many high-profile ‘hacks’ over the past few years, but it’s important to understand that none of these have occurred on the blockchain. Hacks occur when centralized exchange wallets are targeted and compromised. To keep it simple, essentially, these hacks are similar to a bank robbery. The flaw was in the institution, not the currency itself.

The decentralized nature of blockchain means that security responsibility is distributed across multiple computers, all over the world. This eliminates the ‘single point of failure’ that many technologies face. This distributed mechanism makes it extremely difficult (if not impossible) for a blockchain to be compromised. Yay for decentralization!

What does the future of proof of stake look like?

Cryptocurrencies were created as an alternative. An alternative to the centralized and inequitable system that fiat currencies continue to support. Proof of stake provides the opportunity to continue toward a more equal financial system, by ensuring our peer-to-peer networks are just that, run by our peers.

Proof of work coins are inherently more susceptible to centralization due to economies of scale, and major concerns already exist regarding the centralization of Bitcoin. At this moment in time, proof of stake provides cryptocurrency networks a more centralization-resistant method of consensus and a more inclusive ecosystem. For more information, continue reading about proof of stake viability.

Where to from here?

Consensus mechanisms will continue to grow and change, as more efficient and secure options become available. Blockchain development is in its infancy and is a dynamic and rapidly evolving space. We’re excited you found this blog, and we hope you learned something about cryptocurrency!

If you enjoyed this beginners article, our blog explores many cryptocurrency topics, from Proof of Work, to staking profitability and longevity. If you’re interested in exploring, we encourage it!

Stay tuned for more articles in the series!