4: Proof of Work vs. Proof of Stake
If you didn't read the previous post...go do that :) Then, pop back here and read on.
For one to acquire cryptocurrency and for it to be recorded on an immutable ledger (the blockchain), their transaction must either go through/ be verified through a Proof of Stake (PoS) protocol or a Proof of Work (PoW) protocol. The type of protocol is dependent on the type of cryptocurrency, and bitcoin is the only dominant cryptocurrency that uses PoW.
Proof of Work (PoW):
Let’s say I want to buy bitcoin. For my purchase to be recorded on the ledger (the blockchain), “miners” have to compete against each other to solve a cryptographic (trial and error) puzzle (the ability to do so is increased when the energy expended is increased). The first miner to solve the puzzle gets the reward. The reward is property: bitcoin. However, the key action of bitcoin mining is not mining bitcoin, it’s securing the nextwork. The reward for doing the job of securing the network is bitcoin.
Bitcoin mining is a deep and fascinating rabbit hole in itself, but here’s a quick few (fundamental) facts you should also know:
A new block is added to the blockchain about every 10 minutes. However, to ensure blocks are being added every 10 minutes, bitcoin has what is called a “difficulty” adjustment evert 2016 blocks. If blocks are being added at a rate < 10 minutes, then the difficulty increases. If blocks are being added at a rate > 10 minutes, then the difficulty decreases.
It will take 131 years for all 21,000,000 bitcoin to be mined. From 2009 - 2140.
Every year, the bitcoin reward for adding a block to the blockchain is halved. There will be 32 halvings.
These ^ numbers are fascinating to me, so I wrote this article.
Series describing bitcoin upper bound of 21,000,000
Proof of Stake (PoS):
Let’s say I want to buy Ethereum. For my purchase to be recorded on the ledger (the blockchain), there is no competition. Whoever holds the largest stake, in this case, Ethereum, will have the highest probability of being chosen (by the protocol (software)) to record my transaction. In return, they do not get a reward; they do not get property; they only get a transaction fee.
