What is Proof of Stake?
Proof of work is how we mine bitcoin. By linking your machine up to the world wide web you are made responsible for supporting the network and keeping it running. If you lose interest, leave the internet or move house the network won’t last. If you don’t get the most rewards your machine will get slower and slower. The first thing you need to do is identify some users on your machine (you could look them up here) and link your network with theirs. With the growing number of users, it means there is ever more computing power on the network. It is called hashing.
A Stake is a small stake, in other words, the ownership of a given amount of Bitcoin or Ethereum or some other cryptocurrency, such that the total market capitalization of the asset of that stake is greater than zero. It is essential that this stake be made up of transaction outputs, as it is usually an act of gambling which may produce less or more than zero net worth, at least in the short term, depending on whether the markets for that stake become liquid enough to realize its value.
Staking is a “volatile” asset (and in many cases, the most volatile). There are several types of staking mechanisms and variations of each type are possible. When a node on a blockchain receives a stake, it updates its balance using some type of algorithm to set the market value of the stake for any given period of time. It uses that market value as the means to provide the new blockchain chain, which links the previous blockchain to all of the blocks before and after the one which created the stake. This blockchain could then be used to quickly restore the network or for a decentralized minting process, etc.
There are two main types of stake methods, Proof-of-Work and Proof-of-Stake. An individual can create a stake through these methods:
- Proof-of-Work: The person who created the stake holds all of the coins generated for that stake. However, some of the coins can be “stolen” by a malicious attacker if he captures all of the blockchain hashing power on his computer. An attacker could possibly produce 50% of all coins with this method, giving him the entire block chain. In this case, the attacker would have 100% of the coins and it would be pointless for the attacker to create a new blockchain.
- Proof-of-Stake: There are two forms of stake that I know of: Proof-of-Stake and “Proof-of-Exist.” The “Proof-of-Exist” method can only be applied to newly minted coins, whereas the “Proof-of-Stake” method can be used on any old coin. The question that I am not sure I know the answer to is, “Which method is better for new coins, a coin that can be controlled by anyone user, or a coin that can be controlled by everyone?” Obviously, the “Proof-of-Exist” method is better for controlling the creation of new coins, but the “Proof-of-Work” method is better for ensuring that all coins have been fully distributed on a node, at least on the current blockchain, but the “Proof-of-Stake” method is often used because it can be used to reward non-miners. I believe that the latter is most likely to be used for new coins in the future.
For more information, please see the following Wikipedia article, and, as always, we welcome questions and comments: https://en.wikipedia.org/wiki/Proof-of-Stake
UPDATE: I am only posting this explanation because of the influx of questions and comments from my last post on this subject. To be concise: