Once you start to explore the blockchain and crypto worlds more and more you inevitably start to come across completely new terminology and abbreviations.
If you have been reading all of my previous posts and have already started to conduct your own research, then you should already be navigating your way through the many different coins, exchanges and wallets.
However, I bet that one way or another you have already come across two very important concepts.
One is Proof-of-Work (POW) and another is Proof-of-Stake (POS). So I guess it’s time for us to explore both of them and help you to try to understand how it may contribute to your investment strategy.
In this first part we are going to touch base on Proof-of-Work as this was the initial concept that was introduced in the original Bitcoin whitepaper.
So let’s go back in time for a moment. Ages ago every economy in the world was dependent on the gold standard, as this very scarce resource was the only way to represent a single measure of wealth. And later on a key currency, not to name it, was actually provided with gold.
However as you are hopefully now well aware, this is not the case any longer. So if you think about it the value of every single dollar cannot be more than just a production cost of the resources spent on its printing. And as a matter of fact, due to the simple principle of economies of scale the more you print the lower its value is, tending to zero eventually. So it does sound somehow alarming, doesn’t it?
Now let’s go back to Proof of Work and how it actually helps Bitcoin and other POW currencies to solve the issue described above. How POW works is that in order to build a new block in the blockchain a certain mathematical problem must be solved by one of the nodes in the blockchain. A node is a program which fully validates transactions and blocks as well as relies them to other nodes in the network.
Nodes are competing to find proof-of-work in order to form a block and receive a reward in the form of new coins or transaction fees. This whole process is known as mining due to its ideological relation to old time gold mining. And as finding proof-of-work itself requires certain resources such as time and electricity to be involved, this is what proves its value.
On top of that due to defined supply of Bitcoins, which is 21 million coins, its value is guaranteed and can only go up in time as it cannot be manipulated by additional emissions as soon as the limit is reached.
And although with time mining inevitably becomes more costly and I personally do not find it attractive from a small investor point of view, it is a fundamental principal of value preservation for Bitcoin. For this reason in this post I won’t give you any essential links accept for one. And it’s a core one. This is the Bitcoin White Paper written and shared by Satoshi Nakamoto almost 10 years ago. Find time and read it, as now that you are in the space you must understand what makes cryptocurrencies so unique and valuable, especially in the long term.
In part two we will cover Proof-of-Stake and how it solved certain drawbacks of Proof-off-Work approach. Stay tuned and continue learning.
PASSGRAM 