Ethereum / EOS / Proof of Stake vs Proof of Work
There has been so much fanfare and excitement revolving around the EOS blockchain and its proof of stake protocol. Will the proof of stake protocol attract different types of investors to crypto currencies? There are particular characteristics of this new algorithm that may have great rewards for those that have the foresight to get involved now. The proof of stake algorithm has the potential to change the way cryptocurrencies are created in the future. Vital information critical to crypto investments is available to you now.
What will proof of stake mean to you?
How does proof of stake affect your investment in a cryptocurrency?
Are proof of stake coins worth more than proof of work coins?
Will crypto mining continue to have investment potential for the average Joe or Joanna?
When institutional investors realized substantial revenue could be produced from cryptocurrency investments. The average Joe may have lost one of the greatest get rich quick opportunities left on the planet Earth, mining Ethereum and other cryptocurrencies. The big boys, with their access to millions of dollars worth of capital, have bullied many common investors out of the their seats in the cryptocurrency mining arena. And now there is chatter in the crypto world that Ethereum may move from the proof of work protocol to the proof of stake protocol. How will that change affect the common investor?
Let’s first understand the terminology involved in these two processes. Participants in a network that uses the proof of work protocol to add and verify blocks of data to the blockchain are called miners, and the process is called mining. Whereas participants in a network that uses the proof of stake protocol to add and verify blocks of data to the blockchain are called forgers or minters, and the process is currently known as forging or minting. We’ll see which term wins out over time.
There are very distinct differences as to how these two processes achieve the same result. Which is, verifying and adding blocks of data to a particular blockchain. Proof of work requires a validator to use computing power to solve a complex mathematical riddle to achieve this. Afterwards, if successful, the miner will receive a reward of the currency being mined. While proof of stake requires a validator to put up, bet, or risk, a stake, or investment, in the cryptocurrency being forged. Because the validator has a stake in the cryptocurrency, that entity (man, woman, or conglomerate) has a chance of being selected by a vote of other stakeholders to validate the block of data and receive a fee, in the currency being forged, for adding that validated block of data to the blockchain. Inside the proof of work protocol, the more computing power you possess the greater your chances are of solving the mathematical riddle and receiving your reward of crypto coins. Within the proof of stake protocol, simply put, the more coins you have at stake the greater are your odds of being selected to validate a block of data and receive the fee. This aspect of the proof of stake protocol definitely favors institutional investors.
Within proof of work, the more computers that are involved in the network, maintain that network’s blockchain security and validity. Within proof of stake, the risk of losing your stake for validating improper or illegal transactions, maintains the security and validity of the blockchain. At the time of this writing the proposed stake to become a forger within the Ethereum platform is rumoured to be about US$1,000,000 worth of Ethereum cryptocurrency coins. Risking $1,000,000 for a chance of being selected to receive the fee for validating and adding a block of data to the blockchain is quite a substantial investment. It is challenging to appreciate the comparative expense of purchasing a $2,000 – $5,000 computing system and running it for $100 – $200 a month for a chance to win a comparable reward of cryptocurrency.
Unless the proof of stake fee can be likened to an ‘offer that cannot be refused,’ why bother. The forging fee for EOS has been incentivized. The top EOS block producer receives approximately 1000 EOS tokens daily for validating and adding blocks of data to the EOS blockchain. Currently that’s approximately $9,000 daily! If EOS’ token price rises above $20 a coin, it is an offer that cannot be refused! The top producer of EOS could earn as much as $600,000 monthly from their stake.
There are some things that really need to be reflected on within the two scenarios. Proof of work mining consumes enormous amounts of electricity. The amount of electricity used to mine bitcoins in a calendar year can supply the electrical power needs of nations like Iceland over the same time period. It also requires a substantial amount of computing power to solve the mathematical riddle at the core of this algorithm. The computational power needed to compete for a chance to guess the riddle requires a sophisticated and expensive configuration of computing hardware. The cost of these hardware components range from US $2,000 – $5,000. If a miner of Bitcoin is successful at verifying a block of data and solving the riddle, a miner of Bitcoin is rewarded 12.5 coins every 10 minutes.
The proof of stake validation can be completed with less computational power and less electrical energy. Proof of stake is definitely more friendly to the environment than its counterpart. The environmental friendliness of the proof of stake algorithm, may be one of the fundamental reasons for its probable acceptance into the cryptocurrency world. The fee associated with validating a block to the blockchain within the proof of stake protocol will probably be ‘incentivized’ for success. The incentives will most likely have the potential to induce investors to stake amounts of capitol of $1,000,000 and more. Surely, it will probably be better than buying a comparable amount of US Treasury notes yielding about 2%.
The creators of the proof of stake protocol have also implemented penalties for those that want to get in, get paid, and get out fast. If you choose to withdraw your stake in forging, it’s a process that takes time. The time required to withdraw your stake insures that all the transactions you verified were accurate and not part of any misdealing. If any invalid transactions are found that were verified by you, you will be penalized a very large portion of your stake.
Another factor to consider when making investments in the proof of stake protocol is that all the coins available within a particular currency are issued at the beginning of the life of that currency. More coins are not produced within the proof of stake protocol. It will be very interesting to see how Ethereum will handle this hurdle. And create opportunities for non institutional investors.
Word on the street is that a new protocol named Casper, that combines aspects of proof of work and proof of stake will be the protocol of choice for Ethereum. Beta versions of this protocol are already being tested. Will Casper be the friendly ghost that some of us grew up with, and benefit the ordinary Joe, or will it be a friend only to those that are rich already. We’ll keep you informed!
One thing that investment history has made clear, is that sitting on the sidelines, while technology advances, gains nothing. Getting in the game early has been beneficial to many investors involved in improved technology. Proof of stake has the potential to be a great investment for those with the capital and foresight to get involved now.
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