Why Proof of Stake won’t make mining farms irrelevant

As cryptocurrency makes its recovery, many companies have taken steps to enter the market. Could the slow shift towards Proof of Stake (PoS) make mining farms irrelevant?

One of the big questions hanging over the cryptocurrency world today is whether there will be a full-scale shift away from Proof of Work (PoW) towards PoS. Indeed, the debate has raged through the crypto community for years now, and an increasing number of younger cryptocurrencies have either adopted or seriously considered adopting PoS consensus methods.

There are concerns that a switch to PoS could mean that profitable mining farms would become obsolete. The PoW-PoS argument should be of particular concern to companies like PotNetwork Holdings, Inc. (OTCMKTS: POTN) that are just beginning to enter the cryptocurrency market using mining farms.

Despite the risks associated with PoS becoming the preferred method, it still seems that many companies are taking the leap. Why aren’t they concerned? And is PoS truly the future?

The ongoing argument between PoW and PoS advocates

Both PoW and PoS are consensus methods. Their purpose is to ensure the integrity of the blockchain by preventing malicious users from sending bad transactions through the said software. The most commonly quoted example of this is the “double-spend” or a user spending the same money twice.

Banks and other centralized institutions solve this problem by having a program or person process the transaction. By their very nature, blockchains are decentralized. This means that all transactions need to be checked in a “trustless” environment. One of the earliest solutions to this problem was PoW.

When a block of transactions becomes full, it is converted into a series of complex equations. Computers, or miners, then compete in order to be the first to solve these equations. Once a miner has found the correct solution, then others will verify it. Once it has been accepted as a correct solution, the said miner is rewarded with some tokens for his or her efforts.

PoW is effective because it would require someone to control 50 percent of the network’s hashpower — the amount of computing power involved in mining — in order to forge transactions. This would be difficult but not impossible to achieve. The problem with PoW is that it consumes a lot of energy and can lead to unacceptably high transaction costs. The latter problem was laid bare during the end of 2017 as transactions either took a very long time to process or cost a lot to fast-track.

PoS is often touted as the logical solution to this problem. It removes miners, and thus expensive ASIC computers, from the equation and helps to democratize the power on the blockchain. It also requires far less power to operate, allowing for faster transactions.

Rather than using mining computers, PoS methods require users to “stake” a portion of their cryptocurrency. These tokens can’t be used and will generate their holder “interest” so long as it is staked. The system then uses these wallets to determine whether an individual transaction is valid. There’s a number of variants on this system, the most commonly known of which is NEO’s Delegated Byzantine Fault Tolerance (dBFT).

People argue that PoS, or PoS-like, consensus methods solve almost all of the problems associated with PoW. There is merit to this argument; PoS would certainly reduce the energy costs related to PoW, and it does reduce the chance of a 51% attack from happening. The problem is that it is very difficult to create a truly secure PoS system, and it all falls down to randomness.

The challenge of creating a truly random selection

At the time of publication, there have been no truly random PoS methods rolled out in a decentralized manner. The possible exception here is the innovative research-led cryptocurrency platform Cardano, which distributes the Ada cryptocurrency. The tokens are created through the world’s first provably secure PoS algorithm, Ouroboros.

Ouroboros is essentially the method by which a specific stakeholder is chosen to process a transaction. It is also the first blockchain PoS protocol to have successfully undergone peer review and been confirmed as secure because it is truly random. NEO’s dBFT uses similar solutions but hasn’t been reviewed yet.

The main problem with both NEO’s and Cardano’s PoS systems is that they require a centralized startup. In other words, at the moment, it is NEO’s and Cardano’s own “stakeholders” who are processing any transactions. This is problematic because it means that most PoS methods are not truly “trustless.” While both NEO and Cardano are taking steps to develop a decentralized network, there is no guarantee at this time that they will work.

The right time to set up a mining farm

Despite the promising nature of PoS, it is likely that most tokens will continue to favor PoW in the near future. That being said, there are plans from some of the big three cryptos to gear towards PoS. Ethereum has already taken serious steps towards changing the consensus method. With that in mind, why are so many companies willing to take the risk of setting up a mining farm now?

The answer is simple. Companies like POTN have the necessary resources to set up very high-tech mining facilities in low energy areas. This gives them the unique opportunity to acquire large amounts of many cryptocurrencies for a relatively low cost.

For the uninitiated, POTN is a cannabis company that recently ventured into the crypto market. It provides a vast selection of products infused with a substance called CBD, which is the non-psychoactive compound found in hemp, via its Diamond CBD subsidiary.

Last April, the company announced that its new subsidiary, Blockchain Crypto Technology Corporation, bought a cryptocurrency mining facility equipped with 115 rigs. This move will give POTN more variety in its investments.

Aside from mining, the rigs will also help POTN deal with upcoming transactions concerning its cryptocurrency. Additionally, International Business Times reported that its Ucrypto mining pool is “highly energy optimised” and lets the company check if its crypto mining operations affected the environment.

Even if Ethereum were to switch to a PoS method, then these companies could potentially use their mined tokens to participate in the PoS consensus system, all at a lower cost than simply buying the tokens.

Cryptocurrency and blockchain technology are still relatively young, and there is still room for change. It is entirely possible that today’s household names will all fail and that we will see a new vanguard over the next decade. Despite this, mining farms have an important role to play today, and they will likely continue to do so over the coming months and years.