Welcome back to another look at blockchain and cryptocurrency.
Since we laid the foundation in the last two posts, it can only seem that blockchain and cyptos are gaining more mainstream awareness and acceptance. Paypal, a popular application for sending money to another person, now has the option of buying cryptos. There are debit cards where you can literally pay for groceries, bills, and the like using bitcoin and others like it. It doesn't seem to far off where you can have bank accounts that are able to house cryptos for future plans or for emergencies.
But how do cryptos attain the value they have when put in circulation? There are different methods or "proofs" to bring it about. The Merriam-Webster dictionary defines proof in this way:
"a: the cogency of evidence that compels acceptance by the mind of a truth or a fact
b: the process or an instance of establishing the validity of a statement especially by derivation from other statements in accordance with principles of reasoning"
Applying these definitions to cryptos and blockchain, proofs show that cryptos, developed through blockchain technology, are both a legitimate form of currency and with a real value. In this post, we will look at the two most well known and most used proofs to mint cryptos and put them in circulation: Proof of Work and Proof of Stake.
Proof of Work
This proof is how bitcoin is minted, and is the original proof used for cryptos. According to Investopedia's guide to bitcoin, it "is a decentralized consensus mechanism that requires members of a network to expend effort solving an arbitrary mathematical puzzle to prevent anybody from gaming the system."
The way that gaming the system can be prevented by using long strings of numbers known as "hashes." When the bitcoin network, for example, needs to turn the process into a Proof of Work, a certain difficulty setting is defined for the miners, or the ones using the computers to solve the math puzzles, in order for the work to be added to the blockchain by generating a valid hash every ten minutes. When miners solves these puzzles, they are paid in new bitcoin being circulated.
There are pros and cons to this process. Because there is a valid trail of work in this proof, it gives bitcoin or other cryptos its value. On the other hand, not only is it energy intensive (solving the puzzles requires a lot of computer processing power), but also time consuming, which can make transactions being validated take much longer to process.
While this is the OG of proofs in blockchain, it isn't the only one. Another proof that has been gaining more traction and adoption is Proof of Stake.
Proof of Stake
Investopedia defines this method as "[a] person can mine or validate block transactions according to how many coins they hold. This means that the more coins owned by a miner, the more mining power they have."
The best way I can break this down is this method could be seen as a similar approach with stocks in a company, the more stocks or shares you own in that company, the more power or influence you in which direction that company goes.
The pros and cons? While less energy consuming and time intensive, it also makes it more difficult to be attacked from antagonistic miners, The downside? Just as it is people friendly, one has to keep in mind that you have to work towards owning a greater number of coins in a given network if they seek a greater role in that coin's growth.
Final thoughts
These are only two examples of how cryptos are brought into circulation on a blockchain network. But this shows how blockchain is changing the way that currency is brought into existence and used. If a currency uses either of these two proofs, among others, then it has the potential to be something great!