What does Proof of Stake mean to You?

What does the proof of stake algorithm mean for your investment in a cryptocurrency? This new way of creating coins has the potential to attract different types of investors and offer great rewards for those who get involved. Are proof of stake coins worth more than proof of work coins? What potential investment opportunities does crypto mining have for the average person? Get the answers to these questions and more now.

Some key points about proof of stake:

-The proof of stake algorithm has the potential to change the way cryptocurrencies are created in the future.

-This new way of creating coins has the potential to attract different types of investors and offer great rewards for those who get involved.

If you’re looking to understand what proof of stake means for you, it’s important to first understand the difference between the two processes: proof of work and proof of stake. Miners are participants in a network that uses proof of work to add and verify blocks of data to the blockchain, while forgers or minters are participants in a network that uses proof of stake as the process of adding and verifying blocks of data to the blockchain. (So for you NFT enthusiasts, every time you ‘mint’ an NFT your using the proof of stake algorithm to add your unique item to the blockchain so it can be traded.)

There are two prevalent ways of verifying and adding blocks of data to a particular blockchain: proof of work and proof of stake.

With proof of work, validators use computing power to solve a complex mathematical riddle, and if they are successful, they receive a reward in the form of the currency that is being mined. With proof of stake, validators put up a stake in the currency that is being forged, and they have a chance of being selected by other stakeholders to validate a block of data. If they are successful in validating the block, they receive a fee in the form of the currency that is being forged. The proof of work protocol favors those with more computing power, while the proof of stake protocol favors those with more coins to stake.

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 or minter within the Ethereum platform is ETH 32 (US$62,996). Risking $62,996 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 important to appreciate the comparative expense of purchasing a $5,000 – $20,000 computing system and running it for $100 – $1,000 a month for a chance to win a comparable reward of cryptocurrency.

Advertisement

In the month of May in the year 2021, the Ethereum network generated roughly $89 million in transaction fees,

the highest in the cryptocurrency’s history. That is a substantial cash resource for forgers on the Ethereum blockchain to draw from. I wasn’t able to find the stats on how many forgers share in this pool or who was the highest earner at the time of this writing. But, if I had to bet, I believe each forger received more than they would if they had a comparable amount of value in a savings account at your local bank.

There are some things to consider with proof of work and proof of stake protocols. For proof of work, mining consumes a lot of electricity. In fact, the amount of electricity used to mine bitcoins in a year could power countries like Iceland over the same time period. Additionally, it requires a tremendous amount of computing power to solve the mathematical problem at the core of the algorithm. The cost of the hardware components needed to compete for a chance to solve the problem can range from $5,000 to $100,000. Obviously, since these units are being manufactured and sold, there are people willing to spend $100,000 and more to be involved in cryptocurrency mining and forging. Sure seems funny to me that these supercomputers are made in China, but the Chinese are officially banned from using cryptos to buy goods and services. One of those things that make you go hmmmmmm!!

Proof of stake is a more environmentally friendly way of validating blocks on the blockchain than its proof of work counterpart.

With proof of stake, less computational power and electrical energy is required. This makes it a more sustainable option in the long run. In addition, fees associated with validating blocks on the blockchain are typically ‘incentivized’ to encourage investors to stake large amounts of capital (e.g. $1,000,000 or more). This way, they stand to gain greater returns than if they had invested in something like US Treasury notes, which only yield around 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 ensures 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. This is to prevent people from trying to game the system and ensures that those participating in forging are doing so honestly. Another aspect to consider while investing in a proof of stake protocol is that all the coins available in a currency are created at the start of that currency’s life. The number of coins produced within the proof of stake system does not grow. It’s become apparent that when institutional investors realized they could make a lot of money from cryptocurrency investments, the average person missed out on a great opportunity to get rich quick through mining Ethereum and other cryptocurrencies. The rich people with access to large amounts of capital have pushed small investors out of the cryptocurrency mining business.

Proof of Stake has the potential to be a great investment for those who are willing to get involved now. Those who invest early in this technology have an opportunity to benefit greatly from its advances. Those who wait on the sidelines, however, forfeit their opportunities. Getting in early may be the key to reaping the rewards associated with Proof of Stake. The future is here, research your investment choices thoroughly then act. Doing nothing gains nothing.

New to finwars? Read more about crypto currency here

Advertisement