×
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 56.71% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money
×

Cryptocurrency mining is fast gaining ground with people from all corners of the world and spheres of life showing interest in generating their own cryptos and becoming a part of this digital revolution. While bitcoin and many other cryptos use the Proof of Work method for the generation of new coins or validation of transactions, many others, like peercoin, blackcoin, shadowcoin and now ethereum, are using the Proof of Stake algorithm, which is considered to be safer.

So, what do we mean by Proof of Stake? The basic principle behind this concept is that a person can mine or validate block transactions on the basis of coins owned by them. So, the higher the number of bitcoins or altcoins owned by a miner, the more mining power they have.

Proof of Stake vs Proof of Work

Proof of Work refers to the initial method used to verify a miner’s work and validate block transactions. Mining computers turn transaction data into blocks with nodes used to verify the legitimacy of each block. Verification is done by solving a complex puzzle or problem.

The miner who decrypts each block’s transactional puzzle is rewarded and the verified block of transactions is added to the blockchain’s public ledger. Mining of this kind uses an excessive amount of computer power and electricity, so to resolve this problem, a new concept known as Proof of Stake has recently emerged.

This new concept attributes mining power to a person in proportion to coins held. This means that the miner does not need to utilise all his energy to answer Proof of Work puzzles and instead only needs to mine a percentage of transactions that are reflective of his ownership stake.

The 51% Attack

While the Proof of Work system has long been considered secure, it does have a potential flaw in that it’s theoretically susceptible to a 51% attack. This means that a group of miners may be able to control more than 50% of the network’s mining system or computing power allowing them to halt payments, reverse transactions, double spend and generally interfere with the process of creating new blocks. This could prevent other miners from completing blocks and receiving rewards. While such malicious activity hasn’t happened yet, it’s a concern floating around the crypto space.

Some people argue that this kind of attack may happen in the Proof of Stake method too but this is extremely unlikely. Why? Well because to carry out such an attack on a blockchain network, a person would need to obtain 51% of the cryptocurrency. The cost of buying a 51% stake in a reputable cryptocurrency is much more than buying enough mining equipment to get 51% of the total network’s mining power, so the Proof of Stake system seems to be safer. What’s more, if an individual owns 51% of a reputable digital currency, any decline in valuation is sure to impact the sizable investment in question and therefore meddling with the system does not make sense.

Safety Features in Proof of Stake

Proof of Stake also incorporates other safety features for its users, such as:

  • Penalties for attackers: Some protocols using Proof of Stake include penalties for blockchain attackers. According to this protocol, a malicious validator can lose all his stake if the network is attacked. Another penalty is in the form of loss in the value of the cryptocurrency involved, which in turn means loss in the net worth of the attacker.
  • Barriers to 51% stake: Another safety feature is that it is very difficult for a single entity to purchase a 51% stake in one go. Demand for the coin is bound to push up the price, making it a very costly option.

That said; Proof of Stake also has its flaws and may be misused, so new methods are always being considered including a hybrid solution which combines both Proof of Work and Proof of Steak. There are also other options circulating the crypto/blockchain sphere, so time will tell what miners and crypto networks prefer in the future.

Disclaimer

If you liked this educational article please consult our Risk Disclosure Notice before starting to trade. Trading leveraged products involves a high level of risk. You may lose more than your invested capital.

Test Popup:

Chat with an expert 

15585