What is an asset-backed cryptocurrency?

What is an asset-backed cryptocurrency?

Would the world benefit from an asset-backed cryptocurrency? YES! So how does an asset-backed cryptocurrency works?

Since Bitcoin introduced the idea of digital forms of money to a massive audience, the characterizing topic of basically all crypto tokens has been their extraordinary instability. But soon all that can change for the asset-backed cryptocurrency and asset-backed tokens (ABT).

The world is loaded up with resources, including land, stocks, gold, oil, among numerous others. The vast majority of these benefits are not actually transferable or sub-dividable physically. A change to a computerized framework along the lines of blockchain presents a suitable answer for these issues, subsequently the developing enthusiasm for asset-backed cryptocurrency.

What is an asset-backed cryptocurrency?

An asset-backed cryptocurrency or token is a cryptocurrency that utilizes a physical asset, such as real estate, for investment and revenue purposes.

They are considered to be the most reliable because the revenue system is backed by a physical asset which can be seen and accessed and therefore, it is easier to trust. Some analysts consider asset-backed cryptocurrency to be the next steps in the growth of cryptocurrencies.

There exist numerous digital currencies on top of the blockchain. The currencies (or tokens) can be used to transfer ownership of assets or objects outside the blockchain. This, in essence, is the tokenization of real assets.

Is an asset-backed token possible?

Land, gold, fiat money or oil are all examples of resources that could support and be part of the development of crypto tokens and possibly asset-backed cryptocurrency.

Being connected to a physical resource gives something extra and can influence how that asset-backed cryptocurrency is being transacted. Since most resource sponsored coins are attached to outer markets on which those benefits are exchanged.

Let’s take, for example, precious stones or silver. If the awareness of the token grows, at that point financial specialists will exploit the disparity and money out the physical resource.

Exactly how the basic resource of the token is overseen and secured in this procedure it will keep on being of fundamental significance. Institutional and standard financial specialists will be attracted to those coins upheld by systematised activities for managing and stripping resources.

Read more on Mainstream cryptocurrency adoption

Challenges of tokenization and ABT

While the tokenization and asset-backed tokens of genuine resources come with a guarantee, there are some challenges to overcome. Financial motivation help solve some of these challenges, and organizations and governments take part in the goal of creating a strong foundation in this field. Here are some of the issues:

  • Regulatory vacuum — The fields of cryptocurrency, tokenization and asset-backed cryptocurrency
    are not well regulated. As such, they introduce certain risks to qualified investors and customers.
  • Legal enforce-ability of property rights — Does owning tokens and asset-backed cryptocurrency confer ownership over the corresponding asset? In the event that the asset is inexistent, who is liable? How does the owner recover damages?
  • Technical infrastructure — There is a need to improve security and safety standards to make sure that asset-backed cryptocurrency is connected to its assets in the real world.

Read more on Regulation of Cryptocurrency Around the World Report

Benefits and Perspectives of asset-backed tokens

By joining the upsides of blockchain and traditional venture instruments, tokenisation can affect exchanges and speculation. The advantages of tokenization and asset-backed cryptocurrency are various and can be outlined as pursues:

  • Improves liquidity of assets like real estate
  • Allows fractional ownership
  • Permits the diversification of risk by owning parts of several assets
  • Alleviates territorial and temporal barriers
  • Allows newer models for raising capital
  • Allows more control, and even the ability to choose the level of control over an investment with implemented digital democracy
  • Decreases the number of intermediaries, and therefore the amount of fees
  • Unlocks liquidity premium

Read more on How to earn free cryptocurrency (without investing or mining)

As the digital currency advertise keeps on advancing, develop, and expanding, asset-backed cryptocurrency and tokens will be the portal to more extensive applications.

What Can You Buy Using Cryptocurrency?

What Can You Buy Using Cryptocurrency?

Rumours of merchants accepting Bitcoin have been circulating for years. After all, everyone knows at least one-foot soldier who spreads the good word of Satoshi wherever they can find a listening ear.

So then, what can you actually buy with cryptocurrency? If you’re not counting on holding for that Lambo anytime soon, let’s see what you can get for a few satoshis.

Flights and hotels

Due to the explosive growth of the cryptocurrency ecosystem in the past nine years, it is now possible to travel the world by spending cryptocurrency.

Established travel agents such as CheapAir, Destinia  Expedia and Surf Air accept bitcoin as a payment method to book flights, car rentals, and hotels and for those who prefer to stay in an apartment when travelling can book accommodation using bitcoin (BTC) or ether (ETH) on CryptoCribs.

The growth of the bitcoin ATM market also means travellers are now able to convert their cryptocurrency into local currency in most major cities around the world.

Movies, games and app-based services

Microsoft dipped its toes in the waters back in 2014, when it started accepting Bitcoin for online game and app purchases on its Windows and Xbox online stores. After a lover’s quarrel over volatility last year, the tech powerhouse stalled payments but has since rekindled the flame and picked up where it left off. While the tech giant is yet to accept BTC across the board, their support carries some serious weight.

While you won’t be getting the latest Windows from Microsoft, there’s always a back door – Newegg will proudly sell PCs, hardware, software, and an arsenal of miscellaneous equipment for bitcoins. Whether you’re in the market for a mining motherboard or a fly-fishing rod, Newegg seems to have it.

Some musicians (Bjork, Imogen Heep) will let you download their music in exchange for cryptocurrency.

Did you know you can Play blockchain games for free and win cryptocurrency?

Online Services

Your classic offline businesses are usually the last to jump on the bandwagon, while traditionally web-based businesses are quicker to catch on to tech trends.

Web services seem to be leading the pack, and you can just about create an entire website using Bitcoin. First, grab yourself a domain name on Namecheap, and if you won’t settle for their hosting package, try HostWindsGlowHost or HawkHost.

Once you’ve laid out the bones for your new site you’ll want a fresh installation of WordPress, where you can lock down a sexy theme and plugins galore – all purchased using Bitcoin, naturally. If all of this sounds a bit too much, you can jump the queue over on Reddit and launch your project as a premium feature.

Bitcoins also jangle around the darker corners of the world wide web, where romance comes at a price. There’s SuicideGirls, an eerily named “adult” community, or if you’d rather do things the old-fashioned way jump on OKCupid for some online dating action – both accept Bitcoin as payment for membership.

Read more on How blockchain technology is used in non-cryptocurrency applications.


Need to furnish your house or buy a special present for someone? Overstock was one of the first big retailers to start accepting bitcoin, back in 2014, and its founder – Patrick Byrne – is still one of the technology’s most active proponents.


Fancy some gold? Sharps PixleyAPMEX and JM Bullion will take bitcoin off your hands in exchange for bullion.


The first Bitcoin transaction ever recorded was for pizza, and apparently, the novelty never wore off. Accepting bitcoin for pizza since 2013, Pizzaforcoins is a third-party intermediary that will happily take your BTC and convert that into doughy, cheesy goodness made by your vendor of choice. (If you live in the US.)

If you’ve got a hankering for something less greasy, there’s a chance your local Subway will convert your crypto-assets into a foot-long classic. One punter traded 0.04 BTC for a Chicken Bacon Ranch 4 years ago- that said, BTC payments don’t seem to be a franchise-wide policy (being left to the discretion of individual store owners).


If it’s knowledge you’re hungry for, several private and public universities, as well as a couple of New York preschools, accept bitcoin. I bet you would have never guessed what you can buy using cryptocurrency.

Legal and accounting

Some legal and accounting firms also accept payment for their services in the cryptocurrency.


If you want to use bitcoin to buy presents, the most obvious solution is gift cards, via Gyft or eGifter. The recipient will then be able to spend the gift card at one of a wide range of retailers.


Whether you’re looking to bolster transparency with WikiLeaks, build clean water solutions in Sub-Saharan Africa with The Water Project, or SaveThe Children, the number of charities and nonprofits accepting Bitcoin is growing every day. Take your pick from art, entertainment, NGOs, open-source projects, activism, and even religion- you can find a full, up-to-date list on Bitcoin Wiki

Of course, you could always buy yourself some happiness by donating to one of the bitcoin-accepting charities or crowdfunding sites, such as BitHopeBitGive or Fidelity Charitable.

Search for offline shops

For a list of offline stores near you that accept bitcoin, check this list of resources to help you spend BTC away from the keyboard:

Where to Spend Bitcoins UK – An all-encompassing directory of shops, pubs, websites and places that accept Bitcoin as payment, complete with a map function.
Use Bitcoins – A directory platform listing 5,000 registered businesses that accept BTC.
CoinMap – An interactive map of worldwide businesses accepting Bitcoin.
Spendabit – A search engine to help you find a retailer for a specific good (that accepts BTC).

What can you buy using cryptocurrency? – Conclusion

Slowly but surely, merchants are warming to the idea of our old friend Bitcoin and slapping up their “Bitcoin Accepted Here” stickers with glee. That said, the process will certainly take some time, with the full force of FUD, regulation, and tech challenges all holding back your average Joe from seeing Bitcoin as a credible payment method.

Before spending, sometimes you also need to think about how to acquire it. Earning Bitcoins might seem like a daunting task if you leave out the option of buying Bitcoin. Check out some platforms which will help you earn free cryptocurrency and Bitcoin.

As an early adopter, sometimes you have to count the wins. While we are a long way off from BTC being as good as cash, there are some heavy hitters on this list that are bound to put the scent of FOMO in the air, jump-starting a mad scramble for competitors to join the crypto revolution.

Until that glorious day, your best bet is a Bitcoin debit card, which you can use just about anywhere that accepts regular old Visa. Try SpectroCoin, Uquid or Cryptopay, and you’ll be swiping and spending your satoshis like nobody’s business.

What is a smart contract in the Ethereum blockchain?

What is a smart contract in the Ethereum blockchain?

smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Smart contracts allow the performance of credible transactions without third parties. These transactions are trackable and irreversible.

Proponents of smart contracts claim that many kinds of contractual clauses may be made partially or fully self-executing, self-enforcing, or both. The aim of smart contracts is to provide security that is superior to traditional contract law and to reduce other transaction costs associated with contracting. Various cryptocurrencies have implemented types of smart contracts.

Smart contracts were first proposed by Nick Szabo, who coined the term.

With the present implementations, based on blockchains, “smart contract” is mostly used more specifically in the sense of general purpose computation that takes place on a blockchain or distributed ledger.

In this interpretation, used for example by the Ethereum Foundation or IBM, a smart contract is not necessarily related to the classical concept of a contract, but can be any kind of computer program.

In 2018, a US Senate report said: “While smart contracts might sound new, the concept is rooted in basic contract law. Usually, the judicial system adjudicates contractual disputes and enforces terms, but it is also common to have another arbitration method, especially for international transactions. With smart contracts, a program enforces the contract built into the code.”


Byzantine fault tolerant algorithms allowed digital security through decentralization to form smart contracts. Additionally, the programming languages with various degrees of  Turing-completeness as a built-in feature of some blockchains make the creation of custom sophisticated logic possible.

Notable examples of implementation of smart contracts are:

  • Bitcoin also provides a Turing-incomplete Script language that allows the creation of custom smart contracts on top of Bitcoin like multisignature accounts, payment channels, escrows, time locks, atomic cross-chain trading, oracles, or multi-party lottery with no operator.
  • Ethereum implements a nearly Turing-complete language on its blockchain, a prominent smart contract framework.
  • RootStock (RSK) is a smart contract platform that is connected to the Bitcoin blockchain through sidechain technology. RSK is compatible with smart contracts created for Ethereum.
  • Ripple (Codius), smart contract development halted in 2015

Replicated titles and contract execution

Szabo proposes that smart contract infrastructure can be implemented by replicated asset registries and contract execution using cryptographic hash chains and Byzantine fault tolerant replication.  Askemos implemented this approach in 2002 using Scheme (later adding SQLite) as contract script language.

One proposal for using bitcoin for replicated asset registration and contract execution is called “colored coins”. Replicated titles for potentially arbitrary forms of property, along with replicated contract execution, are implemented in different projects.

As of 2015, UBS was experimenting with “smart bonds” that use the bitcoin blockchain in which payment streams could hypothetically be fully automated, creating a self-paying instrument.

smart contract

Security issues

A smart contract is “a computerized transaction protocol that executes the terms of a contract”. A blockchain-based smart contract is visible to all users of said blockchain. However, this leads to a situation where bugs, including security holes, are visible to all yet may not be quickly fixed.

Such an attack, difficult to fix quickly, was successfully executed on The DAO in June 2016, draining US$50 million in Ether while developers attempted to come to a solution that would gain consensus. The DAO program had a time delay in place before the hacker could remove the funds; a hard fork of the Ethereum software was done to claw back the funds from the attacker before the time limit expired.

Issues in Ethereum smart contracts, in particular, include ambiguities and easy-but-insecure constructs in its contract language Solidity, compiler bugs, Ethereum Virtual Machine bugs, attacks on the blockchain network, the immutability of bugs and that there is no central source documenting known vulnerabilities, attacks and problematic constructs.

What’s the Difference Between Bitcoin and Ethereum?

What’s the Difference Between Bitcoin and Ethereum?

The blockchain technology has been in involved in the most important news worldwide for the last 2 years. Even if some people haven’t heard of digital currencies or cryptocurrency yet, they sure have heard of Bitcoin. Not so many of them have heard about Etherium. “What is Ethereum?” you ask? Ethereum is another cryptocurrency and a platform, similar to Bitcoin, but still very different. In this article will explore the difference between Bitcoin and Ethereum.

With massive trading volumes and market capitalizations for some of the larger crypto-currencies rivalling that of some of the worlds largest corporations, the Ethereum vs Bitcoin is like the competition between Messi and Ronaldo or Federer vs Nadal. They are each special., but different. We will try to make some light in these very disputed topics, trying to showcase what makes Ethereum different and what are the differences between cryptocurrencies.

What is the difference between Bitcoin and Ethereum?

To discover the difference between bitcoin and Ethereum, we first need to explain and understand how and why each was created. How does Bitcoin work? How does Ethereum work? What is the value of Bitcoin and what is the value of Ethereum? The fight for cryptocurrency supremacy is disputed and we will once it for all try to put everything into a simple and understandable language so that even cryptocurrency newbies can fully understand what is the difference between Bitcoin and Ethereum.

Let’s start by explaining what is Bitcoin.

Bitcoin. What is Bitcoin?

The easiest way to define Bitcoin is to call it a “digital dollar.”

That’s really all it is — minus all the formal regulations that come with a bank (which is what makes it such a disruptive concept). It’s not a technology. It’s not a company. It’s your money, held in a digital form.

Read more on What is Bitcoin and how does Bitcoin work?

bitcoin vs ethereum


How can you use Bitcoin? Why do people buy Bitcoin?

Some people buy Bitcoin because they want to store their money somewhere other than a bank. That’s all good, but take care of where you store your Bitcoin and other cryptocurrencies and digital assets. This can be a sensitive topic and the security of the crypto world needs to be talked about. Here are some newbie cryptocurrency mistakes to avoid. Spoiler: Don’t store your cryptocurrency, Bitcoin, Ethereum, digital assets, digital tokens, crypto collectables on a cryptocurrency exchange, except for when you are trading, selling or exchanging it. Store crypto in a wallet! Also, a good idea is to research some cryptocurrency exchanges and get started from there.

Some buy Bitcoin as an investment, hoping that the price will jump (once more) within a short period of time or in some years time. Here is where you can see people for what they are. They all call themselves crypto investors, but they really divide into two categories: long-term cryptocurrency investors and day-traders (just like the ones on the stock market). Of course, both ways are and have methods to increase your funds, but it requires a lot of research. Unless this isn’t your job, making money out of cryptocurrency is either a stroke of complete luck or not happening.

Others purchase Bitcoin as a means of investing in companies that raise money through an ICO since equity in those companies cannot be purchased with traditional currency. You can only purchase tokens with Bitcoin or Ether, which is Ethereum’s cryptocurrency.

The ones participating in ICOs are the true crypto enthusiasts or some who want a fast penny. But the year of fast-growing cryptocurrencies was 2017, and it is not coming back. AS time passes, the only true cryptocurrency projects remain and advance in their development. The others are thrown away into the pit of oblivion.


Ethereum is another cryptocurrency, and many people see it as a potential threat to Bitcoin as the dominant coin in the market.

What makes Ethereum different from Bitcoin is its technology, not the fact that it’s yet another cryptocurrency. Ethereum’s coin value is referred to as “Ether,”. Ether, just like Bitcoin, it can be is bought and sold on cryptocurrency exchanges, and used by investors to buy into ICO opportunities. So this is how Ethereum is similar to Bitcoin.

bitcoin vs ethereum


Read more on What is Ethereum?

But what is the difference between Ethereum and Bitcoin?

The difference between Ethereum and Bitcoin is the fact that Bitcoin is nothing more than a currency, whereas Ethereum is a ledger technology (a platform) that companies are using to build new programs.

Both Bitcoin and Ethereum operate on what is called blockchain technology, however, the Ethereum blockchain is far more robust. If Bitcoin was version 1.0, Ethereum is 2.0, allowing for the building of decentralized applications to be built on top of it.

In a nutshell: The Ethereum blockchain is great for innovation.

Furthermore, there is heavy support behind Ethereum’s technology in what is called The Enterprise Ethereum Alliance.

bitcoin vs ethereum

This is a super-group of Fortune 500 companies that have all agreed to work together to learn and build upon Ethereum’s blockchain technology — otherwise referred to as “smart contract” technology. In this case, “smart contracts” mean that demanding business applications can automate extremely complex applications.

What has so many people excited about Ethereum’s technology is its potential to impact projects and processes across all industries. It’s by no means a perfect technology yet, but it has opened the door for a wide variety of unique innovations.

Here is where the value of Ethereum is visible. Having all the functionalities of an improved blockchain compared to the Bitcoin blockchain, Ethereum has and it’s setting the pace for future blockchain opportunities, and it does so by offering this technology innovation to anyone willing to work with it. Ethereum is an open-source blockchain and gives its users to create their own open-source applications, also known as Dapps.

What is a Cryptocurrency Exchange?

What is a Cryptocurrency Exchange?

What does Cryptocurrency Exchange mean?

A cryptocurrency exchange is any system that operates on the basis of trading cryptocurrencies with other assets. Like a traditional financial exchange, the cryptocurrency exchange’s core operation is to allow for the buying and selling of these digital assets, as well as others.

A cryptocurrency exchange is also known as a digital currency exchange (DCE).

Think about the ways that these new types of exchanges are different from traditional financial exchanges. Cryptocurrencies are inherently unstable in terms of value and sourcing. Cryptocurrencies like bitcoin have been associated with major disruptive events where bitcoin value changed dramatically over a short period of time, or where major exchanges went under due to theft, fraud or other problems.

Cryptocurrency exchanges have to build in protections from some of these events. However, these exchanges do serve as a key vehicle for liquid use of cryptocurrency assets.

Read more on What is cryptocurrency and why do we need it?

In other ways, cryptocurrency exchanges work just like traditional exchanges. On many of these platforms, cryptocurrency buyers and sellers can make limit orders or market orders, and the brokering process works like it would for any other kind of asset. The cryptocurrency exchange helps with the transaction and collects the fees. The difference is the underlying asset – Bitcoin or Ethereum or some other cryptocurrency that does not have the same valuation properties as a national currency.

There are several types of cryptocurrency exchanges:

“Traditional” Cryptocurrency Exchanges

These are the exchanges that are like the traditional stock exchanges where buyers and sellers trade based on the current market price of cryptocurrencies (with the exchange playing the middle-man). These type of trading platforms generally charge a fee for each transaction.

Some of these types of exchanges deal only in cryptocurrency, others allow users to trade fiat currencies like the U.S. dollar for cryptocurrencies like Bitcoin.

Coinbase’s GDAX (AKA Coinbase Pro) is an example of this type of exchange, as is Kraken. There are those run by third parties (they have a middle man who supports and correct some problems) and Decentralized Exchanges or DEXs that mimic traditional exchanges like IDEX (trading is based on smart contracts and not facilitated via a centralized third party’s software for the most part).

Generally, centralized exchanges will require a lot of info, but often allow fiat trading, and DEX exchanges won’t allow fiat trading, but require less information.

cryptocurrency exchange

Cryptocurrency Brokers

These are website-based exchanges that are like the currency exchange at an airport. They allow customers to buy and sell cryptocurrencies at a price set by the broker (generally at the market price plus a small premium).

Here the exchange is between the buyer or seller and the broker, not between a buyer and seller. Coinbase is an example of this type of exchange. Shapeshift provides a similar service as well (it lets you swap on a type of token for another).

This is the simplest solution for new users. You’ll generally pay slightly higher prices than you do on the exchanges due to the ease of use and the work the broker puts in.

Direct Trading Platforms

These platforms offer direct peer-to-peer trading between buyers and sellers. Direct trading platforms of this type don’t use a fixed market price.

Sellers set their own exchange rate and buyers either find sellers via the platform and preform an Over the Counter (OTC) Exchange, or they denote the rates they are willing to buy for and the platform matches buyers and sellers.

Many Decentralized Exchanges are of this type (although some are closer to being like traditional exchanges, which is why they are listed in the first category).

This type of exchange can be the only solution in some regions. In regions where trading is limited to direct exchange, but where trading isn’t smart contract based (like it is with DEX exchanges), make sure to do some extra research and ensure you are using a trusted platform and dealing with highly rated users.

Also, make sure to check market prices on Coinmarketcap, as you aren’t buying/selling at a fixed market price!

For an example of a decentralized peer-to-peer direct trading platform, see AirSwap.io (here the DEX facilitates direct swaps between users via smart contracts, and thus may require no information). For an example of a centralized peer-to-peer exchange that facilitates the exchange of fiat and crypto, see LocalBitcoins.com.

Cryptocurrency Funds

Funds are pools of professionally managed cryptocurrency assets which allows public buy and hold cryptocurrency via the fund. One such fund is GBTC.

Using a fund you can invest in cryptocurrency without having to purchase or store it directly. As a trade-off, you can’t use crypto in a fund as money, these are strictly for investment.

In almost every case a person new to crypto trading will want to use an exchange or broker. Newcomers will generally only want to use a direct trading platform when their options are limited (either limited by regulation or limited by coin choice). Meanwhile, while funds might be ideal to some, they tend to have a range of restrictions. GBTC and ETCG are the only funds open to the public for example.

Source cryptocurrencyfacts.com

What is “Proof of Work” and “Proof of Stake”?

What is “Proof of Work” and “Proof of Stake”?

Bitcoin and Etherium are the two most renowned cryptocurrencies and the hottest examples of blockchain technology in use.

Both use the ‘proof of work’ (POW) consensus algorithm. Information currently available indicates that Bitcoin will still continue to utilize POW, but the Ethereum project group is working in their projected transition into the’evidence of bet’ (PoS) algorithm.

What is the Proof of Work?

The Proof of Work theory existed before bitcoin, however, Satoshi Nakamoto implemented this method to the digital money revolutionizing the way traditional transactions are set.

Actually, PoW idea was initially published by Cynthia Dwork and Moni Naor back in 1993, but the expression”proof of work” was commissioned by Markus Jakobsson and Ari Juels at a document published in 1999.

The Proof of work theory existed even before bitcoin, but Satoshi Nakamoto applied this technique to the digital money revolutionizing how traditional transactions are put.

Proof of work is maybe the largest idea behind the Nakamoto’s Bitcoin white newspaper — printed back in 2008 — since it allows trustless and distributed consensus.

Proof of work and mining

Going deeper, proof of work is a requirement to define an expensive computer calculation, also called mining, that needs to be performed in order to create a new group of trustless transactions (the so-called block) on a distributed ledger called blockchain.

Mining serves as two purposes:

  1. To verify the legitimacy of a transaction, or avoiding the so-called double-spending;

  2. To create new digital currencies by rewarding miners for performing the previous task.

When you want to set a transaction this is what happens behind the scenes:

  • Transactions are bundled together into what we call a block;

  • Miners verify that transactions within each block are legitimate;

  • To do so, miners should solve a mathematical puzzle known as proof-of-work problem;

  • A reward is given to the first miner who solves each blocks problem;

  • Verified transactions are stored in the public blockchain

This “mathematical puzzle” has a key feature: asymmetry. The work, in fact, must be moderately hard on the requester side but easy to check for the network. This idea is also known as a CPU cost function, client puzzle, computational puzzle or CPU pricing function.

All the network miners compete to be the first to find a solution for the mathematical problem that concerns the candidate block, a problem that cannot be solved in other ways than through brute force so that essentially requires a huge number of attempts.

When a miner finally finds the right solution, he announces it to the whole network at the same time, receiving a cryptocurrency prize (the reward) provided by the protocol.

From a technical point of view, mining process is an operation of inverse hashing: it determines a number (nonce), so the cryptographic hash algorithm of block data results in less than a given threshold.

This threshold, called difficulty, is what determines the competitive nature of mining: more computing power is added to the network, the higher this parameter increases, increasing also the average number of calculations needed to create a new block. This method also increases the cost of the block creation, pushing miners to improve the efficiency of their mining systems to maintain a positive economic balance. This parameter update should occur approximately every 14 days, and a new block is generated every 10 minutes.

Proof of work is not only used by the Bitcoin blockchain but also by Ethereum and many other blockchains.

Some functions of the proof of work system are different because created specifically for each blockchain, but now I don’t want to confuse your ideas with too technical data.

The important thing you need to understand is that now Ethereum developers want to turn the tables, using a new consensus system called proof of stake.

What is Proof of stake?

Proof of stake is a different way to validate transactions based and achieve the distributed consensus.

It is still an algorithm, and the purpose is the same as the proof of work, but the process to reach the goal is quite different.

proof of work vs proof of stake

Proof of stake first idea was suggested on the bitcointalk forum back in 2011, but the first digital currency to use this method was Peercoin in 2012, together with ShadowCash, Nxt, BlackCoin, NuShares/NuBits, Qora and Nav Coin.

Unlike the proof-of-Work, where the algorithm rewards miners who solve mathematical problems with the goal of validating transactions and creating new blocks, with the proof of stake, the creator of a new block is chosen in a deterministic way, depending on its wealth, also defined as stake.

No block reward.

Also, all the digital currencies are previously created in the beginning, and their number never changes.

This means that in the PoS system there is no block reward, so, the miners take the transaction fees.

This is why, in fact, in this PoS system miners are called forgers, instead.

Why Ethereum wants to use PoS?

The Ethereum community and its creator, Vitalik Buterin, are planning to do a hard fork to make a transition from proof of work to proof of stake.

In a distributed consensus-based on the proof of Work, miners need a lot of energy. One Bitcoin transaction required the same amount of electricity as powering 1.57 American households for one day (data from 2015).

And these energy costs are paid with fiat currencies, leading to a constant downward pressure on the digital currency value.

In a recent research, experts argued that bitcoin transactions may consume as much electricity as Denmark by 2020.

Developers are pretty worried about this problem, and the Ethereum community wants to exploit the proof of stake method for a more greener and cheaper distributed form of consensus.

Also, rewards for the creation of a new block are different: with Proof-of-Work, the miner may potentially own none of the digital currency he/she is mining.

In Proof-of-Stake, forgers are always those who own the coins minted.

How are forgers selected?

If Casper (the new proof of stake consensus protocol) will be implemented, there will exist a validator pool. Users can join this pool to be selected as the forger. This process will be available through a function of calling the Casper contract and sending Ether – or the coin who powers the Ethereum network – together with it.

What is Blockchain Technology? A step-by-step guide than anyone can understand

“You automatically get inducted after some time,” explained Vitalik Buterin himself on a post shared on Reddit.

“There is no priority scheme for getting inducted into the validator pool itself; anyone can join in any round they want, irrespective of the number of other joiners,” he continued.

The reward of each validator will be “somewhere around 2-15%, ” but he is not sure yet.

Also, Buterin argued that there will be no imposed limit on the number of active validators (or forgers), but it will be regulated economically by cutting the interest rate if there are too many validators and increasing the reward if there are too few.

Is Proof of Stake safer than Proof of Work?

Using a Proof-of-Work system, bad actors are cut out thanks to technological and economic disincentives.

In fact, programming an attack to a PoW network is very expensive, and you would need more money than you can be able to steal.

Instead, the underlying PoS algorithm must be as bulletproof as possible because, without especially penalties, a proof of stake-based network could be cheaper to attack.

To solve this issue, Buterin created the Casper protocol, designing an algorithm that can use the set some circumstances under which a bad validator might lose their deposit.

He explained: “Economic finality is accomplished in Casper by requiring validators to submit deposits to participate, and taking away their deposits if the protocol determines that they acted in some way that violates some set of rules (‘slashing conditions’).”

Slashing conditions refer to the circumstances above or laws that a user is not supposed to break.

Proof of Work vs Proof of Stake: Conclusion

Thanks to a PoS system validators do not have to use their computing power because the only factors that influence their chances are the total number of their own coins and current complexity of the network.

So this possible future switch from PoW to PoS may provide the following benefits:

  1. Energy savings.

  2. A safer network as attacks become more expensive: if a hacker would like to buy 51% of the total number of coins, the market reacts by fast price appreciation.

This way, CASPER will be a security deposit protocol that relies on an economic consensus system. Nodes (or the validators) must pay a security deposit in order to be part of the consensus thanks to the creation of the new block.

Casper protocol will determine the specific amount of rewards received by the validators thanks to its control over security deposits.

If one validator creates an “invalid” block, his security deposit will be deleted, as well as his privilege to be part of the network consensus.

In other words, the Casper security system is based on something like bets. In a PoS-based system, bets are the transactions that, according to the consensus rules, will reward their validator with a money prize together with each chain that the validator has bet on.

So, Casper is based on the idea that validators will bet according to the others’ bets and leave positive feedbacks that are able accelerates consensus.