Proof-of-Work vs. Proof-of-Stake

There are currently discussions about Ethereum switching from Proof of Work to Proof of Stake. This change could affect the overall market related to crypto mining. This is an important risk factor that you, as an investor, should know.

Proof of Work

Proof-of-Work (PoW) happens when a miner solves an exceptionally difficult math problem and gets credit for adding a verified block to the blockchain. Finding a solution is an arduous guessing game that takes a considerable amount of computing power to compete for the correct answer. Once the computer guesses the answer it then sends a message to the other computers in the community for verification. The solution is easy to verify because the other computers are given the answer. Imagine being handed a ring with several million numbered keys on it and you’re racing to find the one that fits the keyhole first. Everyone keeps trying keys until one fits. The person who finds the key first then yells out to everyone….”hey, it’s key number 23,458”. Everyone in the community pulls out key number 23,458 and verifies that …yes…indeed….that key does fit the keyhole. The person who found the key first is paid the prize. Then everyone is handed another ring with another several million keys on it …..and the guessing game begins again.

Unfortunately, while mining offers real world solutions it also uses a large amount of real world resources. Mining requires ongoing purchasing of hardware and an immense amount of electricity. These two issues are troublesome to people concerned about the planet and its environment. It takes a lot of power to run the computers, or clusters of computers, that calculate different potential solutions. And the constant turnover of equipment creates a massive stockyard of obsolete parts. From an ecological standpoint, this isn’t ideal.

Additionally, the fact that you need a serious amount of computing power, more than the average person can afford, means the mining community is getting smaller and more exclusive. This goes against the idea of decentralization and can create the risk of a take-over by someone who controls more than 51% of the network’s computational power. Given the enormous cost — some believe in the billions, we consider this to be a lower risk factor.

ASIC Miner deployed in one of HydroMiner’s hydro plants

Proof of Stake

Proof of Stake (PoS) happens when a miner puts up a stake, or locks up an amount of coins, to verify a block of transactions. The cryptographic calculations in PoS are much simpler for computers to solve. You only need to prove you own a certain percentage of all coins available in a given currency. For example, if someone owned 2% of all Ether (ETH), they’d be able to mine 2% of all transactions across Ethereum. Some believe that PoS would be a more fair system than PoW, as technically anyone could become a miner. PoS offers a linear scale regarding the percentage of blocks a miner can confirm based on that person’s stake in the cryptocurrency. That means someone with ten times more coins (e.g. $10,000 vs. $1,000) you could only mine ten times more blocks.

Some believe that switching to PoS could help to encourage more community participation, as well as aid decentralization. Taking mining out of the hands of the few pools of GPU farms, would distribute the work evenly across the network, leading to a more democratized system.

Other Consensus Models

There are other consensus algorithms coming onto the market as well. For example, Proof of Space proportions voting power based on how much data storage space a node has. There’s also PoET (proof of elapsed time) and a whole host of other “proofs-of” algorithms, most of which are still unproven. It’s fair to say, however, that technology continues to develop exponentially and there’s no way to know what might come along and disrupt the crypto community, either partially or entirely. We do feel, nevertheless, that Hydrominer is structured in a way that we can be fluid and flexible when new ideas and technology come along. With multiple lines of businesses and services, we can move agilely between departments as needed for revenue production.

Why We See Proof of Work Continuing to Grow and Be Viable

While PoS definitely has its place, we believe that there will be an ongoing need and desire for PoW.

PoW provides benefits to clients and the industry that PoS doesn’t.

The reality is that while Proof of Stake does manage some of the problems posed by the Proof of Work mechanism, it creates several new completely different problems. In the world of cryptocurrencies, proof of work is the most common protocol. In the Bitcoin world, proof-of-work is the only protocol. In the PoS world, most cryptocurrencies currently use a combination of both. Understanding the reasons behind this gives us confidence in our premise that PoW will continue to be a driving force in the blockchain community. Additionally, Hydrominer is directly attacking the main issues surrounding mining. By decreasing the carbon footprint and utilizing alternative energy sources, the Company is able to justify the mining resources. Furthermore, the company has a hardware resale program in which older equipment is sold to smaller mining operations or companies wanting to self-mine. Both of these strategies directly attack the biggest concerns surrounding PoW and position Hydrominer to be the leader in alternative energy mining.

Written by Kellee Bergendahl, Managing Director at Ascendiant Capital Markets LLC. She is Co-Manager of tZero’s capital raise, the most important Security Token in the USA and is financial advisor to HydroMiner.

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