reason #13 
BITCOIN IS BUILT TO LAST FOREVER

In the world of crypto, you need to understand the difference between proof of work and proof of stake. Both are algorithms that are used to keep the blockchain secure so users can add new cryptocurrency transactions but there are great differences between the two.

 

Cryptocurrencies are decentralized and need to be verified by computers to make the transactions visible. Both proof of work and proof of stake help users perform secure transactions by making it difficult and expensive for bad actors to commit fraud. They make participants prove they have supplied a resource to the blockchain such as energy, computing power, or money. The key difference between the two is how the blockchain algorithm qualifies and chooses users for adding transactions to the blockchain.

 

Proof of Work

The five biggest cryptos that use proof of work are Bitcoin, Dogecoin, Litecoin, Ethereum Classic, and Monero. As of the end of November 2022, the total market cap of proof of work coins was $350 billion of which Bitcoin contributed 90 percent. The proof of work consensus algorithm uses complex mathematical problems for miners to solve using high-powered computers. If you cast your mind back to high school algebra, you will remember you had to solve for x or y. The equation that Bitcoin miners need to solve is far more complex.

 

To keep it simple, the only equation mining mode that needs to solve is the below one.

 

HASH (previous transaction data + Nonce) = Previous HASH

 

Here HASH is a mathematical function (SHA 256) that produces a 64-character string for given input data. The only way to solve this problem is through reverse engineering, which is a fancy way of saying trial and error of millions of iterations.

 

The first miner to complete the puzzle or cryptographic equation gets the authority to add new blocks to the blockchain for transactions. When a block is authenticated by a miner, the digital currency is then added to the blockchain. The miner also receives compensation with coins.

 

Most Bitcoin mining takes place in the United States (37 percent), followed by China (21 percent), Kazakhstan (13 percent), Canada (6.5 percent), and Russia (4.6 percent). Three years ago China was by far the biggest miner accounting for 75 percent of Bitcoin mining but the crypto ban in China has seen their market share decline.

 

A proof of work system requires fast computers that use large amounts of energy resources. As the cryptocurrency network grows, the transaction times can slow since it requires more energy and time. The blockchain network remains secure because it would require a bad actor to take over at least 51 percent of the network and its computing power.  For crypto mining, a large amount of investment is required in the way of high-quality computers. To overcome this situation, mining farms have been developed. A Bitcoin farm is a large space that looks more like a warehouse where computer equipment is stored with central cooling or air conditioning systems preventing the machines from overheating and getting damaged. The world's five biggest farms are in Moscow (600 BTC mined per month), Linthal in Switzerland, Dalian in China (750 per month), Reykjavik in Iceland, and in Washington DC.

 

Proof of Stake

Miners pledge and invest in digital currency before validating transactions with proof of stake. To validate blocks, miners need to put up stakes with coins of their own. Miners also show how long they have been validating transactions. The choice of who validates each transaction is randomly using a weighted algorithm, which is weighted based on the amount of stake and the validation experience. After a miner verifies a block, it is added to the chain, and the miner receives cryptocurrency for their fee along with their original stake. If the miner does not verify the block correctly, the miner's stake or coins can be lost. By making miners put up stakes, they are less likely to steal coins or commit other fraud - providing another layer of security.

 

The proof of stake system was designed to be an alternative to proof of work, addressing energy usage, environmental impact, and scalability. The biggest move from proof of work to proof of stake took place in September 2022 and the Ethereum merge. It is important you understand this merge. Since 2020, there have been two versions of Ethereum running in parallel. One has used the traditional method of recording transactions, while the other relied on another method. To understand the difference between these two versions you need to understand two big cryptocurrency concepts: blockchains and consensus mechanisms.

 

How the Blockchain Works

A traditional bank keeps a huge ledger of all its customer transactions. For example, it tells the bank which customer has what amount of money in each account, which has sent money, which received money etc. This register of records is known as a centralized ledger. Nobody can claim they have more money than they actually do or have made a transaction they did not make. Blockchain on the other hand is a decentralized ledger. This means the information is not held by a financial institution like a bank, but by normal people who volunteer to maintain it. It records every transaction made and it cannot be edited, providing a definitive account of which holds what assets.

 

So why would anyone offer to maintain the blockchain? The answer is that there are lucrative rewards for those lucky few volunteers. Every volunteer has their own independently held copy of the blockchain, and they update the ledger with the information that is "broadcast" to them as a member of the network. As they receive updates, they update their copies of the ledger. If somebody adds an incorrect entry, that would be picked up by the other volunteers.

 

Again, why would you trust random anonymous people on the internet, to be honest about how much digital money was in their accounts and in the accounts of others? This comes down to the consensus mechanism.

 

When a new entry is made into the blockchain ledger, 51 percent of the members need to agree to this entry. This means that in order to cheat the system, a bad actor would need to control at least 51 percent of the devices connected to the network. This would require a huge amount of computing power or money to pull off.

 

Ethereum started as a Proof of Work consensus mechanism. In 2016, the network split in two with one using proof of work and then another proof of stake. In September 2022, these two both merged into proof of stake.

 

So let's put proof of work and proof of stake head to head.

 

Pros and Cons of Proof of Work

It rewards miners for work done with cryptocurrency. It is a decentralized method of validation and is very strong in terms of security. The downside of proof of work is that expensive equipment is needed to mine. It uses a lot of electricity. The transaction speed is slow and this means that transaction fees are high.

 

Pros and Cons of Proof of Stake

It does not require expensive equipment. Transactions can be executed quickly and make efficient use of energy.