The POW consensus algorithm is often associated with Bitcoin mining. However, the Bitcoin blockchain is not the only one that utilizes POW mining. A number of cryptos such as Namecoin, Litecoin, and Dogecoin use the POW algorithm.
As mentioned in Class 2, the problem with POW mining is the high cost of electricity, the ever-increasing costs of the ASIC machines and maintenance. Hence, crypto enthusiasts started researching for alternative forms of mining.
In 2012, Sunny King and Scott Nadal came up with an alternative method to POW mining and in 2013 launched a cryptocurrency called Peercoin.
In simple terms, this new alternative method involves adding coins to the blockchain and keeping them there. The blockchain then uses the added coins to mint new coins. This method is called Proof of Stake (POS).
Module 1.0.0. What Is POS?
Imagine a man who has a vision to start a new bank but does not have enough capital. To actualise his vision, he goes about raising money from friends and family members and puts the money together as the capital with which he launches his bank. The borrowed money is used by the bank to run its services and generate more money.
As the bank makes profits, the borrowed money is paid back. The friends and family members, who lent the money, receive their money back with interest. How much each gets is dependent on how much money he has lent out to start the bank. This is similar to POS mining.
In POS, you lend out your coin to the blockchain. The blockchain uses the coins you lent out to mint new coins. Thus, the more coins you lend out and the longer you keep them in the system, the more newly minted coins you will receive from the blockchain as a reward for your lending. Whenever you withdraw all your coins from the system, you will then stop getting new minted coins as rewards.
It sounds simple and fair, doesn’t it?
This lending process is what is called staking or forging.