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Michael Saylor: Proof of Work is Money. Proof of Stake is Credit.

Have you ever been to a meeting where the attendees had to agree on a particular motion?

If yes;

That is called a Consensus.

In the world of crypto; a consensus is a standardised way in which Blockchain nodes (a computer (s) that runs the blockchain software) efficiently reach an agreement. The major aim of a consensus in the blockchain is to prevent the scenario of double-spending; whereby a person sends a certain amount of tokens to two or more wallet addresses at the same time. With the consensus mechanism adopted by the blockchain, each block has to be proven or validated, and this makes it very difficult for bad actors to manipulate transactions on the blockchain.

In the context of blockchain; the two major consensus mechanisms are; Proof of Work (PoW) and Proof of Stake (PoS).

It is in relation to the above context that the Founder and CEO of Micro Strategy; Michael J. Saylor tweeted on the 5th of June,2022; “PoW is money. PoS is credit.”

It is a known fact that the sole trustee of Saylor Academy is a full-blown Bitcoin Marxist (someone who knows nothing else but Bitcoin) and since Bitcoin adopts the PoW consensus mechanism; it is only normal that he should support its’ ecosystem.

Looking at his Twitter handle alone reveals how much he loves Bitcoin and how he sees Bitcoin as the future of the world’s economy.

What is PoW and PoS?.

PoW is the short form for Proof of Work which is the consensus mechanism that the mighty Bitcoin adopts. The way PoW works is such that miners (validators)have to come up with the right hash (a long string of characters) that matches Bitcoin’s current target. Finding the right hash combination is very difficult but since there are millions of computers all over the world doing this; the process usually takes up to 10 minutes. When a miner gets the right hash combination, a block (simply transaction) is validated and added to the Bitcoin network and the miner gets rewarded in BTC.

In essence, the Pow is like a race, whereby tons of computers have to battle themselves to get the right hash combination in order to get the reward. The chances of a miner winning this race is based on how much computing power they use in the mining process. The more computing power, the higher the chances of getting the right hash.

Proof of Stake (PoS) is a consensus mechanism that is somewhat different to that of Proof of Work. In fact, it is seen as the preferable alternative to PoW, because it requires less computing energy. With PoS, owners of a cryptocurrency will have to lock up their coins (stake); set up their own validator nodes and hopefully get the chance to be picked to validate a block, if the selected validator reviews the transactions in a block correctly, he gets a reward (which is more crypto) but if he doesn’t; he will lose his staked coins. To understand the process of PoS, an example needs to be adopted;

Mr. Ben stakes his Cardano (ADA), and sets up his own nodes, in essence; whenever the Cardano network needs a block to be processed, its’ protocol will choose a validator to review the transaction and then add the block to the Cardano blockchain. If luckily, Mr. Ben gets selected to be the validator and he reviews the transaction correctly; he gets more ADA, but if there is inaccurate information, he loses his staked ADA.

The chances of being selected to be a validator are based on how much of the cryptocurrencies you have staked; the higher your stake, the higher your chances of becoming a validator.

The staking period is the amount of time a validator will need to lock up hiscryptocurrencies, go through the block validating process (and if done correctly) and then get back his crypto and his staking rewards (which is more crypto). What this means is that; through the duration of the staking period, the validator neither has access to his originally staked tokens nor his staking rewards.

The Proof of Work consensus mechanism requires tons of miners racing towards getting the accurate hash combination, whosoever gets it first adds a block to the blockchain and gets a reward. The Proof of Stake consensus mechanism requires validators to pledge their crypto in exchange for getting the opportunity to add a block to the blockchain, if they do it right, they get rewarded, if they do not, they lose their staked crypto. In essence, PoW needs tons of miners to validate a block, PoS only needs one and thus selects the validator needed.

Back to his tweet. “PoW is money. PoS is credit.”

Based on the analysis of the two consensus mechanisms; the concept of Michael Saylor’s tweet is thus:

Miners who work on the PoW get rewarded based on the work they put into validating a block; see this as an “Earn has you work” consensus mechanism, no pledges involved, no risks involved. Whereas the PoS requires a validator to lock up their cryptocurrencies, if the validator gets accepted to add a new block to the network and it is done correctly, they get rewarded but if it isn’t they lose their pledged coins.

Conclusion.

As of this time of writing, no consensus mechanism is proven to be the best; the PoW is slow and it takes up a lot of energy and only a little of that energy is renewable, yet it is proven to be the most secured consensus mechanism. PoS on the other hand is scalable and earth-friendly, but in the case of security, it is not the best option.

We are still early birds in the crypto space, hopefully, in the future, a new and perfect consensus mechanism will be invented, one that resolves the 3 needs of a blockchain consensus mechanism (speed, security and earth friendliness).

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Blockchain Jew

Blockchain Jew is a believer of a Decentralized future. My craved love for the crypto space has no bounds, coupled with his art for writing.