Mining algorithms — tools of modern miner
Tags: Ethereum Blockchain, Proof Of Stake, Cryptocurrency Mining, Proof Of Work

Blockchain technology, where Bitcoin is the prime example, can be a little tricky to conceptualize and quite hard to understand. Core concepts tend to get lost among the complexity of non-essential details. In this article, I will try to simply explain the main differences between Proof of Work vs. Proof of Stake, and provide a definition of mining, or the process where new digital currencies are released through the network.

1. Mining Method: Proof of Work

When you think about mining, you probably imagine a dirty miner prospecting for gold or coal. Through hard work and by using specialized tools, they expect to find revenue — gold or coal. They must sacrifice time and vital power to receive some prize. The analogy between mining for raw materials and crypto fits nicely.

In both situations you sacrifice time and power, but in the first case you use the strength of machines and tools (or even muscles) and for crypto you use computing power.

In Blockchain, an algorithm is used to confirm transactions and produce new blocks to the chain. With PoW, miners compete against each other to complete transactions on the network and get rewarded by coins (Bitcoin, Ethereum, Litecoin, etc.).

In a network users send each other digital tokens. A decentralized ledger gathers all the transactions into blocks. However, care should be taken to confirm the transactions and arrange blocks.

This important responsibility belongs to special nodes of the network called miners, and the process is called mining. The main working principles involve a complicated mathematical puzzle and the chance to easily provide the solution. This method is energy intensive as you have to use computing power and electrical energy. It is important to remember that the difficulty of mining is increases proportionally to the number of miners in a network. For example, the Bitcoin network uses more power than most African countries!

2. Mining Method: Proof of Stake

Proof of Stake is almost as easy to understand as Proof of Work. We can take again the example of a gold mine. The concept behind Proof of Stake is similar to a situation when you have mined a certain amount of gold and you leverage this wealth to dig for more.

Unlike Proof of Work, where the algorithm rewards miners who solve mathematical problems with the goal of validating transactions and creating new blocks, with Proof of Stake, the creator of a new block is chosen in a deterministic way, depending on their wealth, also defined as their ‘stake’. By staking you „freeze“ some of your coins to approve transactions and for this you receive a reward.

In addition some coins like Dash or Pivx use a special kind of PoS called Masternodes. Masternodes are computers that run a wallet and make decisions, such as locking transactions with InstantSend, coordinate mixing of coins, and voting on budget funding. Dash Masternodes, for example, are required to have 1000 Dash collateral, a dedicated IP address, and be able to run 24 hours a day without connection loss of more than 1 hour. In the case of Dash, masternodes get paid 45% of the block reward on every block, which is distributed to masternodes one at a time. Typically, around 2 dash is paid to each masternode every 7 days.

Advantages of Proof of Stake?

Proof of Stake currencies are more energy efficient than currencies based on Proof of Work algorithms.[10]

Incentives also differ between the two systems of block generation. Under Proof of Work, miners may potentially own none of the currency they are mining and thus seek only to maximize their own profits. It is unclear whether this disparity lowers or raises security risks.[11] Under Proof of Stake, however, those “guarding” the coins always own the coins, although several cryptocurrencies do allow or enforce the lending of staking power to other nodes.

3. What is the future? What should I invest in?

In my opinion there is a lot of space for investing, because PoW and PoS miners have many advantages. When you look at trends in the crypto world, it is clear that many projects are positioning themselves to become more energy efficient. That is why I think Proof of Stake is the future and nowadays much easier way to start a mining adventure. All you need is your personal computer and some coins to stake. It beats worrying about energy prices or heat and loud noises from your mining machine.

Do you agree? Write in comment and share your opinion.

Bartłomiej Lalek for Trivial