If you didn’t get the topic, I would be elaborating in my article, from the header then this introduction is crafted for you. Blockchain has many use cases, but the very first of it was of cryptocurrency, the Blockchain 1.0, with the introduction of Bitcoin by Satoshi Nakamoto in 2009.
Bitcoin is a decentralized money transfer platform, currency here is in the form of Bitcoins. With its focus on peer to peer transfer than using centralized intermediary, it has to devise a way in which transaction could be validated without the presence of any third party like bank, payment wallet etc.
Comes the concept of “Proof of Work”, where every transaction that takes place would be validated by the nodes in the Bitcoin network. The node(miner) that is able to validate the transaction and have the longest chain leading to genesis block would be rewarded with Bitcoin. To validate transaction, nodes have to back trace existing blockchain to validate the transfer, the node back tracing more has done more work than other nodes in validating transaction and thus has a chain that is more reliable.
The discovered chain by node is then transmitted to the whole network and if it is validated by 51% of the system then that block of transaction is validated and added to blockchain, and the node responsible for solving the puzzle is rewarded.
This approach has a limitation, as blockchain of Bitcoin increases in size, the nodes(miners) would have to back trace chain more to validate the transaction, which would require more computation power and electricity. According to Digiconomist, electricity consumed in Bitcoin is enough to light Austria. Due to high requirement of computational power required to mine Bitcoin, miners form a pool wherein they combine their computational power and divide the rewards accordingly.
Miners across the world have spent $3500 Million in terms of electricity and computational power to mine around $4800 Million worth of coins. This technique of consensus is very costly, to tackle this Peercoin applied the concept of “Proof of Stake”, where ownership would be the deciding factor on who solves the blockchain puzzle and thus getting a fees in return.
Proof of Stake could resolve the issue of high electricity needed in Proof of Work, as this algorithm depends on the stake of a node in a network. Meaning a node owning 20% of the stake in a network would be allowed to mine only 20% of the currency. Thus competition would no more would be of having high computational power but rather of owning majority stake in a network. Proof of Stake would require node to deposit certain currency to the network so that it could gain access to mine currency, this deposit would be used by network to compensate for any false transaction verified by the node.
You might wonder then that Proof of Stake would be abused rich and powerful to control the network, but no!! after selecting the majority stakeholders, the node selected to finally validate the transaction would be done in a random way to avoid power shifting in one hand. This ensures security of network, as someone desiring to control and manipulate the network would need to own 51% stakes in the currency, if we take the case of Bitcoin that has a market capitalization of around $160 Billion, it would take around $81 Billion stakes to control the system. With this much invested in a cryptocurrency, the investor would not be interested in tarnishing the image of the currency that would eventually lead to downfall in price.
- Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System”, 2009