Cryptocurrencies can be explored/mined via PoW and PoS or with both as hybrid, such as DeepOnion Coins.
I would like to give you an explanation of both protocols and compare them with each other.
What is Proof of Work?
Within the framework of Proof of Work (PoW), the algorithm allows participants who solve a complicated cryptographic task and thus validate transactions and thus generate new blocks on the blockchain to receive a reward. This process is also called mining.
Imagine it like this: If someone solves a math problem correctly, he has usually understood the calculation path and thus proved how a principle works (proof of work).
Cryptocurrencies based on the Proof of Work (PoW) protocol are for example the Bitcoin (algorithm: SHA-256), Ethereum (algorithm: Ethash), the Litecoin (algorithm: Script), the Monero (algorithm: CryptoNight) and DeepOnion (algorithm: X13).
However, the Proof of Work (PoW) algorithm has some disadvantages. Solving the complicated calculation tasks requires a lot of time and electricity and is therefore relatively costly. For this reason, other crypto currencies rely on the Proof of Stake (PoS) concept.
What is Proof of Stake (PoS)?
With the Proof of Stake (PoS) algorithm, the digital currency is not dug by solving complicated computational problems, but rather by holding and unblocking portions of a digital currency in a wallet.
With its share of the digital currency, the owner of the cryptocurrency validates transactions on the blockchain and thus contributes to the security of the network. In return, the investor receives a kind of interest rate that differs depending on the cryptocurrency and usually ranges between 2 and 10 % per year. For DeepOnion, it is 10% in the first year and 5% the second year and thereafter 1%.
For example, if an investor holds 2% of a given digital currency, he can validate 2% of all transactions. Cryptocurrencies that rely on the Proof of Stake (PoS) protocol are for example Dash, Neo, PivX, Stratis, Reddcoin and our DeepOnion.
Difference between Proof of Stake and Proof of Work
The difference between Proof of Stake and Proof of Work is how a transaction is validated on the Blockchain. Since the blockchain is a decentralized technique without central authority, confirming the transactions, consensus algorithms, which are very difficult to manipulate, should take over this task and provide the necessary trust in the network.
Pros and cons of Proof of Stake and Proof of Work
Both protocols have advantages and disadvantages. The Proof of Work protocol offers the possibility of a 51% attack. This means that mining pools, which account for 51% or more of the mining performance, can compromise the stability and security of the network.
The Proof of Stake (PoS) protocol is much simpler and cheaper. For this reason, Ethereum (cryptocurrency ether) is considering a partial conversion to the Proof of Stake algorithm.
However, the Proof of Stake (PoS) protocol prefers those subscribers who have a particularly high number of the respective cryptocurrency. For example, investors holding $10,000 in a cryptocurrency can validate ten times more blocks than investors holding only $1,000 in a cryptocurrency.
In short: The bottom line is that the Proof of Work (PoW) protocol is very energy- and cost-intensive, which makes the "mine" hardly worthwhile in countries with high electricity prices (e. g. in Germany).
Conclusion
With the Proof of Stake (PoS) protocol, investors should note that a certain minimum number of coins is required for different cryptographic currencies to earn interest. Ultimately, the Proof of Stake (PoS) protocol is considered to be significantly more energy-efficient and, in expert circles, safer than the Proof of Work (PoW) concept.
In my opinion, DeepOnion is unbeatable in this respect. With 10% interest in the first year, 5% in the second and 1% thereafter plus the future-proof price increase of the coin, the PoS is totally worthwhile for everyone with little effort. Given the current price of an onion, it is also worthwhile for smaller investors.
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- to be continued
Awesome article, upvoted! :)