Proof of Work and Proof of Stake: what are the differences and what is better for mining. Passive income on cryptocurrencies

14.03.2018

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Unlike conventional networks, blockchain allows users to contact directly, without the involvement of intermediaries and third parties, and all transaction data is entered into a public distributed ledger. This is very convenient, but for such a scheme to work, the so-called consensus is necessary. In other words, you need to set a single mechanism for confirming transactions. For this, special computer algorithms, the most popular of which are Proof of Work (PoW) and Proof of Stake (PoS). about them and will be discussed In this article!

What is the Proof of Work (PoW) algorithm and how did it come about?

This algorithm appeared long before the creation of cryptocurrencies..

In 1993, researchers Moni Naor and Cynthia Dvor voiced the idea that access to a network resource becomes possible only when a certain, rather complex task is performed.

Three years later, Adam Back implemented this idea in the Hashcash project, created to protect electronic systems from spam.

The term “Proof of Work” itself appeared three years later and described an algorithm designed to protect servers from DDoS attacks.

In 2004, Satoshi Nakamoto introduced Hashcash technology into Bitcoin.. Thus, Bitcoin became not only the first cryptocurrency in general, but also the first PoW-cryptocurrency.

Proof of Work Algorithm: how it works

The Proof of Work algorithm works as follows:

1. transactions within the blockchain are randomly grouped into separate blocks;
2. miners confirm transactions by solving a complex mathematical problem (Proof of Work Problem);
3. the miner (or ), who first solved the problem, receives a reward for revealing the block;
4. confirmed transactions are added to the blockchain.

Problem solving is confirmation (proof) that some work has been done (work). And this is exactly what Naor and Dvor were talking about - access to the system only when performing certain actions.

It is important that the problem being solved be mathematically asymmetric: it should be difficult to perform it, but it should be easy to check. That is, the miner must make an effort to solve the Proof of Work Problem, but the system will check his calculations instantly.

This effect is achieved through cryptography. To solve the problem (find the hash), the miner needs to find the only correct solution among the many possible ones. Of course, he does this not manually, but with the help of special equipment (ASIC, and so on).

It's obvious that a miner with more powerful hardware is more likely to solve the problem first.

The reward for revealing blocks is also distributed in accordance with the processing power of the node (hashrate).

For example, the block reward is 10 BTC. It was revealed by 3 miners - with a hashrate of 100, 200 and 300 H/s. Their reward will be 2, 3 and 5 BTC, respectively.

Thus, PoW is an algorithm for reaching consensus, in which the probability of discovering a new block and the amount of the miner's reward depends on the amount of his useful (for the system) work.

Not only Bitcoin works on this algorithm, but also most well-known cryptocurrencies, including others.

But, despite all the advantages of PoW (in particular, a high level of protection against spam attacks), it cannot be called an ideal option for reaching consensus.

Proof of Work Algorithm: Disadvantages

Among the disadvantages of the Proof of Work algorithm are the following:

• Huge electricity bill.

What is the Proof of Stake (PoS) algorithm and how did it come about?

The idea of ​​a new consensus algorithm was announced in 2011 on the bitcointalk.org forum.. The main idea is that the validators are not miners with more powerful equipment, but users who own a larger share of the internal coins of the network.

In PoW mining, the participant who first solved the problem receives a reward, and the disclosed block of transactions is added to the blockchain.In PoS mining, the user with the largest stake becomes the “creator” of the new block. That is, it confirms transactions.

In the first case, the miner receives a reward for confirming transactions, in the second, the right to confirm them.

In general, in PoS technology, the very concept of mining coins is inappropriate. They are already mined, and validators only confirm transactions. That's whyPoS mining is also called forging.(from the English “forging” - “forging”).

Does the forger get a reward?

Yes. But not a clearly defined amount for the discovery of the block, which changes with increasing complexity, as in PoW mining, but the amount of coins equivalent to its share in the network.

Proof of Stake algorithm: how it works

Proof of algorithmStakeworks like this:

1. The user chooses a cryptocurrency that supports PoS, buys coins and puts them on his .
2. Then he downloads a special miner program, reprograms his wallet for forging and registers it on the network.
3. Waits for the activation of the wallet (on average, 24 hours) and launches the program on your PC.
4. The program performs the necessary calculations, as in normal mining, and after 30 days the earned funds are credited to the wallet.

The main condition is that the money in the account cannot be moved.They just lie and literally take part in the confirmation of transactions. And then you get paid for it.

For example, you deposited 100 coins into your account, and there are 1000 coins in total in the system. So your share is 10%. In 30 days, the developers released another 300 coins. Of these, 10%, that is, 30 coins, will be credited to you automatically. Now you have 130 coins, and the total emission is 1300 coins.

However in many networks, profit also depends on the duration of forging(the longer you keep funds in the account, the greater the profit) and the volume of emission (the more coins are issued, the greater the reward).

PoS is an example of how money makes money. Or how you can mine coins without buying special equipment.

Forging software can be installed on any computer. The main thing is that the connection with the network is maintained constantly. However, the cost of running a PC around the clock is not comparable to how much electricity is consumed by powerful mining farms.

The algorithm was liked by many developers. Peercoin, Nxt and ShadowCash were the first to adopt it. A now the number of PoS-cryptocurrencies is in the tens. But not everything is smooth here either.

Proof of Stake Algorithm: flaws

Among the disadvantages of the Proof of Stake algorithm are the following:

• Activity restrictions

As already said, there are two conditions for forging - do not move coins on the account and maintain a constant connection with the network.

As a rule, there are no difficulties with the first condition. You can simply have a separate wallet for forging and a separate one for your own transactions. But there are often problems with round-the-clock communication.

If the Internet is lost on the computer, the electricity is turned off, or something else happens, because of which the wallet goes offline, the extraction of coins will stop.

This problem can be solved with the help of cloud PoS mining. You need to register on a site that offers such a service, make a payment and replenish your balance. This way you will get a forging wallet that will be constantly online. True, it is more expensive than just paying electricity bills.

• Increasing centralization

If you deposit 10 coins into an account and another user deposits 1000, his income will be 100 times greater. However, often during forging, there are expenses that do not depend on the state of the balance in any way.

For example, a fee for accruing interest or sending messages within the system (sometimes this is necessary for block validation). It turns out that the profits of richer investors will gradually increase, while those of less wealthy investors will decrease. In the long term, this may lead to the centralization of the network and even the violation of its original rules.

The fact is that in many PoS cryptocurrencies, user voting is carried out to make changes to the blockchain. And the greater the share of ownership, the more weight the user's vote has.

• The threat of collusion

This point is directly related to the previous one. According to experts, it is possible that a group of influential nodes (nodes responsible for validating transactions) conspire to change the original rules. Hypothetically, they can even take possession of all the coins, simply by creating and confirming such a transaction.

However, so far, most experts agree that PoS is a more practical, economical and secure consensus algorithm than PoW.

Moreover, it plays into the hands of ordinary investors.

How the Proof of Stake Algorithm Affectsto the cryptocurrency market?

IN Lately there are more and more cryptocurrencies that are abandoning PoW in favor of PoS. In some reviews, the presence of PoS is even noted as an advantage of cryptocurrency. Vitalik Buterin, who announced the imminent transfer of Ethereum to PoS, added fuel to the fire of the popularity of the algorithm.

Many experts are sure that over time, PoS cryptocurrencies will replace coins with the PoW algorithm.(except perhaps Bitcoin). And they even advise investors to bet on the first ones.

Moreover, the new algorithm provides new opportunities for earning on cryptocurrencies. Previously, there were miners who used their computing power to mine coins, and traders who played on cryptocurrency rates.

Now there are also forgers – in fact, they receive coins for the fact that their wallet is constantly connected to the system.

According to experienced users, with the right choice of cryptocurrency and good starting capital (which will lie on the forging wallet), such earnings become safer, and sometimes more effective than.

PoS mining is a good option for long-term investment. And it is great for beginners who have not yet learned how to catch the best moments for buying and selling coins on the exchange, are not ready to spend money on expensive equipment and are afraid.

Experts advise to pay attention to several new, but promising PoS-cryptocurrencies: NovaCoin, ClubCoin and LEOCoin.

And we must not forget that when Ethereum switches to PoS, ETH holders will be able to mine top coins simply by running the program on a PC.

So the introduction of PoS not only solved the problem of increasing the complexity and energy consumption of mining, but also opened up new opportunities for investors.

The terms Proof of Work and Proof of Stake for the general public remain a form of Chinese "letter". Most are not going to delve into their essence at all, even if they plan to further invest in cryptocurrency or engage in trading.

Understanding what Proof of Work (PoW) and Proof of Stake (PoS) are will help in evaluating a particular cryptocurrency. So, at least basic information about them will not be superfluous for you. Perhaps this additional knowledge will even help you in the future.

What is Proof of Work and Proof of Stake

Literally, Proof of Work is translated as “proof of work” or proof of the work done. If we interpret this translation to the sphere of crypto-currencies, then the computing operations of the equipment are taken to work here. Proof of Work is such a mechanism for checking that the work (calculation, aka mining) has been carried out.

It is the principle of PoW that underlies the validation of transactions in the Bitcoin blockchain. Also, this consensus algorithm is used in dozens of other cryptocurrencies that have the possibility of mining.

In contrast to Proof of Work, another mechanism was created - Proof of Stake. Literally, this term can be translated as proof of ownership. If the cryptocurrency uses this consensus algorithm, then the validation of transactions occurs through the nodes of the network. Roughly speaking, the more cryptocurrency a person has on his wallet, the more chances he has to find a new block and confirm the authenticity of the transaction, receiving a reward for this.

What is Proof of Work

The Proof of Work mechanism appeared even before the conception of cryptocurrencies. Its main goal is to protect the server from constant requests (DDOS attacks, spam) by adding a special task, which requires a certain amount of time and resources to solve. In this case, the server (or just a validator) will spend much less time on verification. The PoW mechanism is designed specifically for computing.

You can explain the principle of its work on the example of a regular lesson at school. At the math lesson, the teacher gave the task to the whole class and promised a good mark (reward) to the one who did it first. The student needs to “think about it” in order to carry out a series of mathematical operations and eventually solve the problem. In the case of PoW, computer technology acts as a student, a class is, for example, a Bitcoin network with miners, a student is one miner or a computer, “brainstorm” means to spend strength or energy in the case of machines, and a good grade is this is a mining reward.

This concept was first presented back in 1993 in a scientific article. The authors, Cynthia Dvor and Moni Naor, proposed making it so that access to some abstract resource appeared only if a certain resource-intensive task was performed.

Three years later, Adam Back launched the Hashcash project, the main task of which was to protect against spam. He described the mechanism as follows: “We need to find such a value of X for which the SHA (x) function would contain nth quantity zero bits.

And in 1999, the term Proof of Work first appeared - it was proposed by Markus Jacobsen and Ari Jewels in a scientific article for the journal Communications and Multimedia Security.

Back in 2004, Hal Finney, who would later conduct the first transaction in the history of the Bitcoin network, proposed to “tokenize” PoW, or rather RPoW. (Reusable-Proofs-of-Work). That is, the result of the checks would be tokens, which could later be used as an electronic currency.

Well, then Satoshi Nakamoto took (took, took) the initiative in his own hands, laying the Hashcash mechanism as a consensus algorithm in the Bitcoin network, and also introducing a hashing algorithm SHA-256. The PoW mechanism is used in the Bitcoin network to generate a block and secure the entire blockchain. These blocks contain a hash function, the sum of which is always less than the target (intended goal). This, as it were, shows or proofs (proof) that the necessary calculations (work) to find the block have been made and gives a signal that the block can be written to the general chain (blockchain).

This whole process is random. That is, it is impossible to say which miner will eventually find the signature. And even if he managed to do this, this does not mean that he will receive 12.5 BTC (the current reward for finding a block). All miners receive rewards that are proportional to their mining "effort". As for the difficulty level, it is recalculated every 2016 blocks mined (approximately 2 weeks). If the miners managed to find a given number of blocks earlier than in 14 days, then it is difficult to grow, if it took more time, then it decreases.

What is Proof of Stake

But the Proof-of-Stake consensus mechanism is already a “cryptocurrency” brainchild. That is, this protection method was invented purely for use in cryptocurrencies. By the way, this idea was proposed on the BitcoinTalk forum in 2011 by the user QuantumMechanic as an alternative to the Bitcoin Proof-of-Work used in the blockchain.

Already in 2012, the first PoS-cryptocurrency appeared - Peercoin (PPC). Although it used a "hybrid" algorithm. At first it was PoW - at the stage of the initial distribution of coins, and when they were all mined, the transition to PoS had already taken place. The first cryptocurrencies with a 100% Proof-of-Stake consensus mechanism are Nxt and Blackcoin.

In PoS, the share size (Stake) is used as a resource, which determines which of the nodes will eventually find the block and receive a reward. To put it simply and very illiterately, here mining (extraction of new coins) occurs due to the presence of coins on the wallet, and the more of them, the higher the reward. True, not quite mining, but forging. A node that receives a reward for holding a certain share (stake) is also called a masternode.

The motivation for implementing Proof-of-Stake is as follows:

• This network consensus mechanism requires much less resources compared to proof of work;
• There can be no classic 51% attack in a PoS blockchain - since computing power does not play a role in ranking nodes;

• A potential attack can only happen if 51% of all coins are concentrated in the hands of one node - and this is very, very expensive;
• Even if an attack occurs, the blockchain will be disrupted and it will be difficult for the attacking party to benefit from it;
• In the long term, fees for transactions in PoS networks are lower. In general, Proof-of-Stake seems to be a cheaper, simpler and less resource intensive algorithm. The benefits seem to be obvious.

Meanwhile, PoS also has an obvious drawback - a monopoly can potentially arise in the network when the size of the Stake of one participant exceeds 51%. Although it is difficult to benefit from this in a destabilized blockchain, other participants may suffer damage.

Another problem is the potential collusion of a group of nodes, which can lead to a change in the rules of the blockchain. That is, there is a certain problem of centralization in PoS.

Proof of Stake vs Proof of Work

Proof-of-Work and Proof-of-Stake do not have much in common. Unless they have their own 51% attack, which ultimately leads to the collapse of the network.

In general, Proof-of-Stake seems to have a number of obvious advantages: faster validation speed, less resources for protection, lower fees.

But at the same time, attacking a network with the Proof of Work algorithm is actually unrealistic - this requires a super (many times) supercomputer and several power plants to service it.

In Proof-of-Stake, everything is built in such a way that participants strive to capture the largest possible share of coins in order to receive more rewards for the commission. This results in centralization. But even if the destabilization of the network does not bring anything to the owners of the majority Stake, this consensus algorithm still has one drawback.

We are talking about the Nothing-at-Stake attack - this is when a chain of empty blocks is created by a group of users, which can eventually lead to double spending, a conflict of blockchain versions and an inevitable fork. It is precisely this problem that the developers of the new Casper protocol are working on, which will be implemented in the . So far, there is no specifics: no transition date, no technical details. According to one version, in the platform, participants will bet their shares in order to receive rewards - but this has not yet been confirmed. The creator of Ethereum, Vitalik Buterin, believes that switching to PoS will help reduce fees and the overall cost of maintaining the network. And mining as such will have to be abandoned.

Both protocols have their advantages and disadvantages. It seems that Proof-of-Stake is more cost-effective and more rational from a technical point of view, but in such global platforms as the Bitcoin blockchain or other billion-dollar cryptocurrencies, PoW seems to be a more reliable option. Back in 2012-2013, coins with a hybrid PoS / PoW protocol began to appear on the market. Among them are Peercoin, Emerecoin, Novacoin and others.

Overview of Proof of Work and Proof of Stake Alternatives

With the emergence of cryptocurrencies and the ever deeper developments in the field of blockchain, other algorithms have been proposed besides proof-of-work and stake mechanisms. Some of them have already been implemented in new cryptocurrencies, others are only at the project stage.

Protocol name	essence
Proof-of-Activity	Hybrid protocol between proof of work and share algorithm. The following scheme is usually used: at the initial stage, all coins are mined without recording transactions in the blockchain (PoW), and then PoS is used with masternodes. A classic example is the DASH cryptocurrency.
Proof of Delegated Stake	A modified version of the POS, in which the delegation of the confirmation of the share takes place. Network participants can choose who from the nodes will confirm transactions and vote for various decisions in the network. Used in Bitshares.
Proof of Leased Stake	Can be translated as proof of a leased share. This protocol is implemented in the Waves platform. The bottom line is that in classic PoS, only nodes with a large stack can confirm transactions and receive rewards. In PoLS, participants with small shares can rent them out to nodes and receive rewards too. The scheme resembles pools with conventional mining.
Proof-of-Burn	This protocol uses coin burning. Participants send them to a special address where they become inactive. In return, they get the right to mine new coins. The protocol is applied in Slimcoin.
Proof-of-Signature	PoSign is a completely new mechanism that is not even fully developed yet. It is used in the XTRABYTES cryptocurrency blockchain. The idea is that each of the statistical nodes in the network signs new blocks. If a node tries to carry out an attack, then it is blacklisted.
proof-of-capacity	Here, the data storage space is used for the proof. The more it is, the more you mine. The pioneer of PoC is the Burst cryptocurrency.
proof of brain	Sometimes this term is used to describe how Steemit and Golos work. Here, participants for “mining” need to create content, that is, turn on their brains.
Proof of Importance	Proof of Importance is the consensus algorithm in the NEM cryptocurrency network. Importance is "calculated" as a combination of the current balance and the participant's transactional activity.

Let's summarize the material briefly:

• Proof-of-Work and Proof-of-Stake are two of the most popular consensus protocols among cryptocurrency blockchains;
• PoW - proof of work, protection is provided by computational operations and hash lookup;
• PoS - proof of stake ownership, validation is performed by nodes with active balances;
• PoW is generally more reliable, but requires much more resources, and in PoS systems there is centralization and resourceless proofs are possible;
• Increasingly, cryptocurrencies with hybrid protocols or completely new concepts of the consensus mechanism are emerging.

Not every investor who wants to make money on digital assets knows what pos and pow cryptocurrencies are. But this knowledge can be very useful when choosing a particular cryptocurrency. Well, let's figure out what both algorithms are.

What is POS mining

You have also repeatedly asked yourself, what is pos mining, and what does it “eat” with? But it is a consensus mechanism, created relatively recently - in 2012. Well, recently, if we compare it with POW, which became known back in 1993, when no one even knew about Bitcoin itself, even Satoshi Nakamoto himself.

Moreover, the first cryptocurrency in which this mechanism was embodied was not BTC at all, but PeerCoin. The main meaning of the algorithm is that a “share” is used as a resource, and it is used to judge which node will receive the privilege to mine the next block. Speaking in very simple words, so that even a beginner understands what pos mining is: it all depends on the number of coins on the user's account.

To organize a successful attack, one node must gain access to 51% of all coins, and for this purpose an incredible amount of resources will be required.

On the one hand, there is no reason for the attacker to organize an attack, because for this he will need to own a significant amount of tokens, and the attack itself can drastically disrupt the stability of the cryptocurrency that the attacker holds. It turns out that by making an attack, he begins to harm not only other participants, but also himself. But at the same time, no one has canceled the possible collusion of a group of nodes, and such a development of events may well serve as a start to adjusting the established rules of the blockchain. However, the likelihood of such a scenario is low.

What is POW mining

Now consider what POW mining is. We have already mentioned that this algorithm, although not in the name in which we use it now, was created in 1993. Then the authors of this idea, M. Naor and S. Dvork, came to the conclusion that in order to gain access to the main resource, one must first perform a very complex function, but quite realistic. In this case, it will be possible to talk about sufficient protection of the resource from possible abuse.

A difficult task is added, for the successful solution of which it will definitely take a lot of time, as well as a certain amount of resources, and thus the server receives additional protection against potential DDos attacks. The latter is the main purpose of this mechanism. And to check this task, the server does not have to spend a lot of time. This mechanism was created for computing, while the alternative POS mechanism is purely for cryptocurrencies.

In 1997, A. Beck organized and successfully launched Hashcash. This project was intended to protect against spam attacks. The very definition of Proof of Work was first given by Markus Jacobsen in one of the scientific articles.

Thus, we can describe this mechanism through 2 main processes:

1. The process of performing a rather complex and resource-intensive task. The human brain is not capable of performing it, only powerful computer technology. But at the same time, in order to solve such a problem, it will need to spend a lot of resources, which makes possible attacks impractical.
2. The process of checking the result. It checks how the problem was solved. And here the mission is completely different - to make sure that the minimum time and resources are spent on checking the task.

The main differences between POS and POW mining

So, we have examined, pow pos, what it is, and also understood the purposes for which each mechanism was created. Now let's briefly list how they fundamentally differ from each other:

1. Proof-of-Work has a high degree of vulnerability to a 51% attack, while Proof-of-Stake does not have such a problem.
2. There is a problem of centralization in POS mining. If some person manages to get more than 51% of the tokens at his disposal, he will be able to control the entire network. In P.O.W. we are talking about 51% not tokens, but computing power
3. Proof-of-Stake does not require as much electricity and is not as demanding on computing power as Proof-of-Work. For this reason, many major cryptocurrencies such as Bitcoin or Ethereum may switch to a POS mechanism.
4. POS is less labor intensive, energy intensive and costly than POW. In addition, POS commissions are much lower, and the validation speed is significantly higher.

In general, the advantage is clearly on the POS side.

POS and POW mining strategies

The most accessible and understandable POS mining strategy is the purchase of 1 cryptocurrency, transactions for which are carried out on 1 exchange. The main thing is that this exchange should be large and well-known. We mine new blocks, receiving not only a reward for mining, but also a profit from changes in the value of this asset.

Another strategy that is somewhat more complicated is the acquisition of a digital asset that is not listed on any of the exchanges. The implementation of this strategy will require a lot of time and endurance, because the investor will buy this asset to the eyeballs and at the lowest price, after which he will wait until it starts to be quoted on the stock exchanges. Then the price of this asset will rise sharply, but… many coins eventually remain unclaimed, so the risks of such a strategy are very high.

What can you earn through POS mining

Knowing what POS mining is is great, but it’s much more pleasant to get information of a more practical nature, namely, to find out what kind of profit you can count on through POS mining.

To understand this, you will not need to perform complex calculations - just go to the official resource of the selected cryptocurrency, and you can easily find it there. So, ReddCoin will provide a yield of 5% per year, and LEOcoin - 20% per annum, if investments in cryptocurrency are maximum (over 50 thousand coins). The same 20%/year is promised in ClubCoin, but the creators of NovaCoin went the furthest, promising an incredible 100% per annum.

How to start POS and POW mining: step by step instructions

We start mining by choosing the cryptocurrency that we plan to mine. Here it is important to decide which coins are best suited for POS and POW mining. Next, we perform the following actions:

1. Create a wallet
2. We purchase coins in the quantity that we consider optimal and necessary
3. We are waiting for the appearance of new blocks (the process may take up to 24 hours)
4. Installing the client program on the computer
5. We make wallet activation

The advantage of the PoS mechanism is the absence of the need for large initial investments, in particular, for the purchase of equipment, as well as savings on electricity.

Where does PoW mining start? That's right - from the fact that we purchase components and assemble our own mining farm. Ideally, we need a powerful PC with video cards in the amount of 2 to 8. Next, all equipment must be placed in a cool enough place so that it does not overheat ahead of time. Adjustment and other difficulties also fall on our shoulders.

More about cloud POS mining

Cloud mining allows you to mine cryptocurrency not alone, but jointly by joining a pool with other miners. Higher mining efficiency, no need for significant initial capital, as well as no need to independently assemble a mining farm and set up equipment, higher reliability and stability of work - this is just the beginning of all the benefits that PoS miners receive.

You can learn more about this mechanism, as well as how to increase the efficiency of such mining by 13 times, from the following video:

Conclusion: how profitable is it?

If we talk about the potential profitability of PoS mining, it is in the range from 0.5% to 20% per year. Much will depend on which cryptocurrency you choose. If your goal is to mine litecoin, ethereum and bitcoin, it’s better to forget about PoS right away. But this work algorithm is great for mining NovaCoin, LEOcoin, Stratis, ReddCoin, ClubCoin and other lesser-known coins.

The profitability of PoW will depend on how powerful the hardware you use for crypto mining. You will need the initial cost of purchasing equipment and knowledge huge amount nuances, but at the same time you will get the opportunity to mine the most popular digital assets that cannot be obtained in the process of PoS mining. For example, if you plan to mine ZCash, the best choice GTX 1080 and GTX 1070 graphics cards will become. Their cost ranges from $600 to $900, while per month you can count on profits from $90 to $130 (for 1080) and from $70 to $100 (for 1070).

articles are coming to an end, but there are still many topics that can be discussed. How about we take a look at the acronym Pos/Pow? Let's start!

Chances are you've come across this terminology before, but let's take a closer look at what it means. We already use a lot of abbreviations when it comes to digital currency. The concept of PoS (Proof-of-Stake) provides great opportunities for generating digital currency. PoW (Proof of Work) is a concept in which the security of a network is guaranteed by the total computing power of its participants. To somehow simplify the consideration of these issues, let's start with PoW.

PoW is a protocol that is used in the economy (or feature, if you prefer that term). It takes computer time to process it. It's easy to digest, isn't it? No? Well, I'm not saying it's hard, let's try to simplify. The concept of PoW was developed in order to be able to resist DDoS attacks that caused the system to hang and refuse to process user requests. PoW also counters spam. The concept of PoW does not require much computing power from your processor and effectively secures the entire network. This is not an ideal solution to the issue, but it is necessary - where to start?

How are the concepts related to digital currency generation? In the crypto world, PoW is used to secure your coins as it supports decentralized networks. A simple example: you have a digital wallet and this moment it is out of sync. As soon as you connect to the network, it changes its status to synchronized as it starts accessing the blockchain. What do you think can be loaded in this case? The wallets of other people with small capacities are combined into a network, with the help of which it becomes possible to work together.

The concept of PoW is a security measure and gives us the ability to dispense with official regulators of our business operations. And that's what a lot of us like. This is a non-exclusive feature that is only available to select users. Each new coin has been working with the PoW protocol since the moment when the first bitcoin was put into circulation. The issue is that most developers don't even know what it does, let alone the fact that their coin also runs on a specific protocol.

On the other hand, there is the concept of PoS. Most people know more about it than about PoW, as it allows you to earn money by doing almost nothing. So what does it mean PoS technology in the eyes of the average reader?

Initially, the PoS protocol was intended to be used as a security protocol that supports the operation of PoW. This protocol looks for vulnerabilities in the system and optimizes them. One of the most well-known such problems is the 51% attack. It can occur when one miner has computing power that is more than half of the total network resource of the entire system. In this case, the percentage of profit will be distributed unevenly and not every person wants more than half of his coins to go to another.

The concept of PoS is not perfect, it is one of many defensive strategies. It also allows you to earn interest on the cryptocurrencies you hold in your wallet. Let's say you become the holder of 0.5% of all generated coins mined by the community. Let your coins use the PoS function in their work. This means that you will receive 0.5% of all generated blocks just for holding digital money in your wallet. This can be compared to a bank account, where once a year you receive a certain percentage of the profit, which is transferred to a savings account. PoS works in a similar way, it is your reward for holding coins in your wallet.

Of course, there are certain disadvantages or side effects in the work of PoS. The PoS function ultimately leads to a gradual inflation of all coins. In the future, their number will tend to infinity. Does this mean a price reduction? Not certainly in that way. Most coins do not reach their face value as the network is constantly evolving. Due to the complication of algorithms for generating digital blocks, there will be a gradual decrease in their production. But up to this point, the concept of PoS can be used. And its protective functions will be preserved after a complete shutdown of the network.

PoS also affects the transaction costs of your coins. Cryptocoins that do not support the PoS function will work with modified commissions when conducting transactions. Operating fees will depend on the number of tokens you send or receive. With PoS support, transaction charges will be made at a fixed rate, regardless of the number of coins involved in the transaction. This the best option, is not it?

If you're looking for arguments that justify the use of the PoS concept, then you won't have to look far. Bitcoin has used this protocol from the very beginning, but there are other coins that also use PoS in their work. These are NovaCoin, PPCoin, and many others.

Alexey Russkikh

There is a lot of information on the net about what PoW and PoS are, how protection is built and who is more likely to receive a block reward. But how these types of algorithms are related to PoS mining is almost non-existent. Sit back, we'll tell you everything.

general characteristics

PoW and PoS are types of algorithms by which the blockchain determines how the distributed consensus problem will be solved. This ultimately determines how the block reward will be distributed.

In PoW (from the English proof of work - proof of work) - the probability of successfully solving a cryptographic puzzle, on which the creation of a new block depends, is greater for owners of more powerful computing equipment.

In PoS (from the English proof of stake, literally: “share confirmation”), the creator of the next block is determined pseudo-randomly, and the probability that he will be chosen by the creator of the block depends on his wealth, or, in other words, the size of the wallet.

PoW is used in cryptocurrencies:

• on the SHA256 algorithm: Bitcoin, Mazacoin, Namecoin;
• on the Scrypt algorithm: Auroracoin, Coinye, Dogecoin, Litecoin;
• on the CryptoNote algorithm: Bytecoin, Monero, DarkNote.

PoS is used in cryptocurrencies:

• on the SHA256 algorithm: Nxt (NXT);
• based on the Scrypt algorithm: Gridcoin; blackcoin.

Currencies with mixed types of algorithms (PoW and PoS):

• peercoin;
• emercoin;
• bitconnect.

In 2016, Ethereum Vitalik Buterin announced the transition from PoW to PoS. The final transition of Ethereum to PoS should take place in 2018.

PoW Features

PoW consensus (also called Nakomoto consensus) was the most innovative solution proposed in Satoshi's article "Electronic Cash". PoW solves many problems of electronic money, such as, for example, Sybil attacks. In addition, PoW ensures the integrity of the network: the success of a miner is proportional to the power of the computational capabilities of his equipment (hashrate). If the miner hashrate is 1% of the entire network, then it is most likely that he will create 1% of the blocks and receive 1% of the reward. That is why bitcoin appeared on the basis of PoW.

However, for all its coolness, PoW has its drawbacks. Someone considers them essential:

1. Lack of utility: Proof-of-work calculations serve no useful purpose (other than security). Solving cryptographic problems occurs for the sake of solving them. At the same time, in order to make calculations, you need to spend resources, primarily electricity. It turns out that the resources that are spent on mining in PoW are wasted;
2. The problem of maintaining decentralization. About 80% of bitcoin hashrate is now located in China. Centralization, theoretically, can facilitate the association of miners and their conduct of malicious activities. If such miners become the majority (the so-called 51% attack), they will be able to ignore the blocks of other miners, distributing the reward only among themselves, or double spend the same crypto coins.

PoS mining differences

In 2011, an alternative proof technology was proposed - proof of stake or proof of stake. It differs from proof of work in that instead of performing computational operations, the creator of the block shows that he has a share in the system (in the form of a crypt on his wallet). Thus, the more digital currency a miner has, the higher his chance of a reward for a new block.

PoS is primarily a method, an algorithm, a proof that provides system protection. At the same time, users saw in this method of solving a distributed consensus something that was not originally a basic characteristic of the algorithm - an investment opportunity. Thus, POS mining is also another way to make money on cryptocurrency. main feature this way is that you don't have to invest anything (or almost nothing).

Unlike conventional mining or cloud mining, you do not need computing power. Here you buy a cryptocurrency that mines a new cryptocurrency for you just because you already have that cryptocurrency in your wallet. It seems like some kind of fantasy or even some kind of simple divorce. But no. This condition is hardwired into the PoS algorithm itself and is an integral part of it.

For the functioning of the blockchain in PoS, only constantly running wallets on the computers of the miners are needed. The longer you keep coins, the more you earn.

Why is PoS considered 51% attack-proof?

• First, in order to gain control of the network, the miner must own a larger share of the network's cryptocurrency. Such an attack can be extremely expensive, as it requires an investment of more than half of the total money supply of the entire cryptocurrency network.
• Secondly, by carrying out such an attack on the network, the attacker will become the biggest victim, as he will steal the reward from himself.

Stages and Strategies of PIC Production

How to start mining PoS currency:

1. Select the PoS currency (below is a description of some currencies) that you will be mining.
2. Get a crypto wallet.
3. Buy currency.
4. Wait for the blocks to appear in the feed (the process will take about 24 hours).
5. Install the software client on the computer.
6. Activate wallet.

There are several POS mining strategies.

The simplest is the purchase of some PoS currency (hybrid PoW-PoS currencies are also suitable, for example, PutinCoin), which is listed on at least one of the major exchanges. You start to mine it, mine new blocks and receive a reward for them, your earnings will consist of two components:

• change in the price of a currency based on the results of trading on the stock exchange.
• block reward in the form of cryptocurrency, which you can also sell on the exchange.

A slightly more complex strategy in terms of time investment is the purchase of a new cryptocurrency that is not yet listed on the exchange. The goal is to purchase the maximum amount of currency at the minimum price in order to sell it when it appears on the exchange. This method has a significant drawback - the currency may never start trading anywhere. However, you risk almost nothing, so you can try your luck. Cryptos of new generations appear on the network every now and then, promising with their manufacturability.

Some craftsmen mine PoS currency collected from faucets. This method also has the right to exist, however, the profitability of such mining is relatively low.

Cloud PoS mining

Separately, it is worth talking about the cloud mining method using POS technology.

The brightest service for cloud POS mining is offered by PosWallet. You can start mining immediately after registration and replenishment of the balance. Moreover, the service allows you to get a crypt for free and use it for mining using the PoS protocol (section called Faucet). The PosWallet pool gives you the opportunity to earn money around the clock. You don't even have to be online. Money is withdrawn automatically. The pool takes a commission of 1%.

Unfortunately, as of September 25, 2017, the pool does not register new users. Let's hope this is temporary.

Cryptocurrencies and profitability of PoS mining

The profitability of mining PoS currencies in 2017 depends on the declared reward of the cryptocurrency itself. This information can usually be found on the coin’s website. Below we will talk about what are the most popular coins for POS mining are relevant today and what is the profitability.

For the first time, a cryptocurrency with a new mining concept was announced in September 2013. A new type of digital money is called NXT. Today, other cryptocurrencies are already being heard, with their own chips and% return. About each in more detail.

(http://www.leocoin.org):

• Claims an annual rate of 20% with a maximum investment in crypto (more than 50,000 coins).
• Traded on at least 5 exchanges.
• Capitalization $24,373,792 (as of September 25, 2017).
• Russian language on the site.

(https://www.reddcoin.com):

• Claimed yield of 5% per annum.
• Traded on 8 exchanges, incl. on such a large one as Bittrex.com.
• Capitalization $40,698,653 (as of September 25, 2017).

(http://clubcoin.co):

• Claimed yield of 20% per annum.
• Traded on 2 exchanges, incl. at Bittrex.com.
• Capitalization $43,108,009 (as of September 25, 2017).

(http://novacoin.org):

• Fantastic declared yield of 100% per annum.
• Traded on 8 exchanges.
• Capitalization $8,664,226 (as of September 25, 2017).

Which currencies cannot be mined using the PoS algorithm:

• Bitcoin (uses the PoW algorithm);
• Ethereum (uses the PoW algorithm).
• Litecoin (uses the PoW algorithm);
• NEM (uses POI - proof-of-importance algorithm);
• Decred (uses both algorithms, however, mining is carried out exclusively by PoW).