Proof of Work, Proof of Staking, and Crypto Staking
In this overview, we’ll cover topics related to Proof of Work (POW), Proof of Stake (POS), and crypto staking. In follow up posts, we’ll dive deeper into staking and the different protocols available for earning various types of yield.
While it seems we are flying by the seat of our pants as retail investors, so much interest continues to pour into the crypto markets on all ends, including how the institutional crowd continues to show an appetite for risk on assets such as Bitcoin, Ethereum, stable coins, and NFTs.
Satoshi Nakamoto’s invention of the Bitcoin Network and the Proof of Work model, is the foundational bedrock for all the new innovations that have spawned since the Genesis Block was mined in 2009.
Let’s review the Proof of Work model:
What is Proof of work?
- Describes a system that requires effort through the form of mining to deter malicious uses of computing power. This concept was led by Hal Finney in 2004 through the idea “reusable proof of work” using the Sha-256 Hashing algorithm *(investopedia)
- Example Bitcoin Blockchain Network, which has formed the basis of many other cryptocurrencies for securing a decentralized consensus mechanism
Many new crypto projects are moving away from the Proof of Work model in favor of a POS manner. What has caused all this interest? What’s interesting is that Ethereum started off as a POW with plans to fully migrate over to Proof of Stake by the end of 2022.
Lets take a look at Proof of Stake:
What is Proof of Stake (POS)?
Compared to Ethereum (former POW migrating to Proof of stake)
- Proof of stake is a consensus mechanism, innovated from the original POW model, for processing and creating new blocks in a blockchain. POS was created as an alternative mechanism, some see as less risky in terms of a network attack, due to the nature of structured compensations in a way that doesn’t incentivize attackers to do so.
- Examples include Ethereum.
POW has been effective in keeping the Ethereum network secure since its existence, but has caused many cases where the ETH network gets clogged up causing massive increases in gas fees to operate the network. Therefore, the Ethereum community has rallied against the POW model in support of POS.
Within POS, this allows users to stake within the network to earn rewards. For this portion, we’ll stay focused on the Ethereum POS model.
So what exactly is Crypto Staking?
- The process of locking up crypto holding to receives rewards or interest. Depending on the type of cryptocurrencies you have, each goes through its own validation process either through “POW” or “POS” to achieve consensus. When staking in POS , investors are actively participating in the blockchains consensus by approving and verifying transactions on the blockchain
The hot debate of POW vs POS continues to this day, with even campaigns and pressure from the Bitcoin network to consider changings its code to be more conducive to a POS model.
POS vs POW
Proof of Work
- High level of Security
- Decentralized method of verification
- allows miners to earn crypto rewards for processing each transaction
- Slow and expensive transaction speeds
- Mining can be expensive with energy costs and equipment fees
- POW at scale required huge amounts of energy, which has been a huge topic of debate with the push to sustainable, renewable energy
Proof of Stake
- More energy efficient , since miners expend a lot of energy to mine each transaction
- Limited barriers to entry since there are no investments in hardware required compared to POW
- Higher transactions per second
- Cheaper costs and faster transactions speeds
- Once coins are staked, tokens must remain locked up within contract period or risk slashes
- POS newer concept, with no guarantees to have proven security compared to POW
- Lower rewards for staking compared to mining transactions
- Investors can hold a large portion of the staked network, which can influence consensus on the protocol
In our next article, we’ll dive into Proof of Stake protocols and how to earn yield on these assets through Centralized Finance or Decentralized Finance tactics.
Popular POS Staking Coins
What Is Proof of Stake (PoS) in Crypto? | The Motley Fool
Since cryptocurrencies are decentralized and not under the control of financial institutions, they need a way to verify…
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