Proof of Work VS. Proof of Stake

Proof of Work VS. Proof of Stake

Proof of Work is abbreviated as POW, which sounds much cooler than Proof of Stake’s abbreviation which kind of sounds like POS. How do these compare? Is Proof Of Stake a pitiful shadow of Proof of Work? Let’s find out

When it comes to crypto, you’ll hear quite a few strange terms (like snarky SNARKS and abbreviations like POW and HODL). While there are quite a few terms out there that are frankly just weird, Proof Of Work is actually one that makes probably the most sense logically. How? To understand, you’ll need a little bit of context. 

The idea behind Bitcoin is “power to the people”. Here’s what that means. Bitcoin actually emerged, rather conveniently, right after the Global Banking Crisis of 2008, and this new form of currency is intended to be fairer to the people than the dollar, using which (crypto fans claim) the government is taking power from the people and exposes them to all manner of harm.

Learn more about Bitcoin

By way of very smart calculations the government takes people’s purchasing power away. For example, it’s estimated that today you can buy less than 15% of what you used to buy with the US Dollar in the 50s. Which, you have to admit, is a lot less. 

This is achieved through techniques like inflation (which basically means that with 2% inflation if you worked for 30 years, 60% of your savings will be gone, and you can do the rest of the math yourself). 

During the Global Banking Crisis, banks left millions of innocent people in peril and homeless, the government didn’t do much about it, and it was becoming clear that unless the people were to stand up for themselves, no-one would stand up for them. The city needed a hero.

Read more about Satoshi Nakamoto

Another way the crypto crowd posited the government took people for a ride is by printing money. 

…and it’s gone

Up until a certain time, the US promised the world that for every dollar it has, it would have an exact equivalent in gold in the bank, and people could swap these two assets freely if they wanted to - anytime! Soon, countries started to actually do it, getting gold for their USD, which the US didn’t much like, so it just went ahead and ended the gold standard. Which was, mildly put, not fair. But no-one did anything about it. 

These days, the US prints dollars at will, which is an interesting concept for a variety of reasons. Here’s something to take home: every time the US prints $10 TRLN, the money quickly goes all around the world thanks to trading. Economics state that if you add an asset into the mix, it becomes cheaper. So basically, in one elegant move, the US Federal Reserve makes itself $10 TRLN richer and everyone in the world $10 TRLN poorer. Which, just like with The Global Banking Crisis, is devastating for people everywhere. 

Again, this is a point of view put forward by some in the crypto community. We’re not saying they’re right and banks and governments are wrong. Just explaining the technicalities. 

What is POW? 

Satoshi Nakamoto, which was basically Rico Rodrigues of the financial world, invented a system wherein users who wanted Bitcoin would have to, instead of just printing it (which wasn’t an option for all of the reasons above) had to work really, really hard using their PCs computing power to do a lot of very complex calculations, solving a very complicated puzzle. 

It’s all basically done to ensure no-one can create Bitcoins in millions freely, getting filthy rich, and, since money is always a zero sum game, basically making everyone else’s assets cheaper. 

POW (what a cool name!) was invented ages ago as a concept, back in 1993, but it was officially finalized and ready to use only in 1999 by Markus Jakobsson and Ari Juels, and it took it  a few years from there to be included in Bitcoin (but, as it turned out, it was was just in time).

Recap: proof of work is a computer science term used to describe the amount of computing power that has been spent in order to achieve something. In cryptocurrencies, proof of work (POW) means requiring miners to find a solution for a given mathematical problem before they can create the next block and add it to the blockchain. As more blocks are mined, cryptographers can then check all previous transactions on the blockchain without having access to each individual one. The same technique was used to begin with to make spam so resource-consuming that it wouldn’t make sense. 

Proof of stake is a scam. When I say that, I mean that proof of stake is (1) claimed to be a consensus system, and (2) constitutionally incapable of actually producing a consensus. Yanmaani

Proof of stake is a consensus mechanism used to verify new cryptocurrency transactions. Since blockchains lack any centralized governing authorities, proof of stake is a method to guarantee that data saved on the network is valid. Forbes

What is Proof-Of-Stake? 

Proof Of Stake (Proof-Of-Stake, POS) is another version of POW that is thought to be better by some in the community, and some even think it’s the next step in evolution. POS basically doesn’t need miners to do the calculations and just appoints the people with the most money  to be incharge. Yay! That doesn’t look at all like the corrupt banking cartel system crypto was invented to save people from.  

So, how does it work? 

POS stands for Proof of Stake, which means that you are proving your stake in the currency. With money. 

Proof of work is a mechanism where miners compete to find the answer to a computational puzzle and receive the rewards based on their work. In proof-of-stake, instead of solving blocks through computation power like Bitcoin, users can forge money (and history!) by having "stakes". 

POS requires you to have a certain amount of coins before being able to stake them. Those users who have a lot of money provide their coins as a deposit in order to validate blocks. Validators create new blocks and check other people’s. For that they get paid. The more crypto they have, the bigger the reward. 



There are so many problems with that concept (cartel much?) that we’ll get into that concept in another article. 

For now, let’s just say that some users think POS is heart-wrenchingly unfair by giving the rich all the power, but, if you think about it, most mining equipment is now concentrated in the hands of a few whales who hold titanic powers and build and build colossal mining farms (which they make money with to buy more, and so on and so on). That is far from Satoshi’s vision of a democratic mining process. And that’s sad. 

Read more about Mining

Pros and cons of POW

✓ Amazingly secure
✓ Was supposed to be fair for a long while, and was, until people started using it not in the way it was intended and redistributed power by designing complex mining equipment 
✓ Uses a lot of energy, but what most don’t know is that it very often uses energy that would otherwise would be wasted

✘ Does use a lot of energy
✘ Impossible to get paid for mining unless you buy expensive equipment 
✘ Expensive equipment becomes obsolete and stops paying for itself quicker than you can say “Holy Doge Of Venice!”, and now you’re stuck with it, because no-one is going to buy it for the same reason. 

Pros and cons of POS

✓ Not as energy-hungry
✓ Greater scalability 
✓ The math is complicated, but it may turn out to be slightly fairer than POW in the end.

✘ Conceptual security problems

FInal thoughts 

In truth, both of these algorithms have their problems. 

Technically, you could argue the case that neither of them is 100% fair. Without impressive sums of money, you’re not going to either POW or POS (you’ll need either an ASIC or enough tokens to have a stake in the game). And yet, they’re both a massive step-up from the classical banking system: more honest, intelligent, open, and democratic by an order of magnitude.

No doubt, in a few years the bugs will have been worked out of these systems, like they always are by the crypto developers, and we’ll see flawless POW and POS, hopefully working together.

For the greater Justice!

The materials found on the website shall not be taken as individual investment recommendations. The financial instruments or operations mentioned therein may not align with your investment profile or objectives. We assume no responsibility for any missing facts or inaccurate information in the texts. Cryptocurrencies are financial assets with high risk and volatility. Therefore, it is crucial that you conduct your own research on financial instruments and make independent decisions. Before engaging in any actions related to cryptocurrency, you shall study, understand, and comply with the laws applicable in your region and country.

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