POS and DPOS: As we sing a lullaby to Proof of Work (POW)....

By Cryptonsula | Nextgen Cryptos | 18 Jun 2020

After hearing about "Bitcoin" from a nerdy friend, a crypto-space newbie in late 2013 stumbles upon the strange-sounding terms "mining" and "proof of work" during his infant days, while searching about "what is bitcoin" on google and wikipedia. Soon, he discovers that apart from bitcoin being all that peer to peer, decentralized, borderless and potentially tax free payment protocol on the internet, there is also an opportunity to "make money" with Bitcoin by allocating one's own computing power to participate along with others in maintaining the network's life and functionality, a thing called mining. This was at the peak of the earliest major crypto bullrun with BTC price rising from around $130 to $1,129 in less than 90 days.

Proof of Work: From CPU, to GPU, to ASIC mining

The bitcoin genesis block was mined by Satoshi Nakamoto back in Jan 03, 2009 using CPU mining and received the very first 50 BTC block reward, and later CPU mining continued to be the only way of mining bitcoin for early adopters. Of course its worth mentioning that at this time bitcoin was technically worthless and still considered experimental. The average hashrate required to mine a block was only a few KH/s.

By October 2010, the bitcoin price had risen to $ 0.10 and already gaining more and more users after the news about Laszlo Hanyecz buying a pizza for BTC 10,000 (worth about $ 25 at the time) went viral raising curiosity and public attention towards this technology. It was around this time that the first GPUs (previously with a use limited to gaming and graphic apps) started being used for mining, and GPU mining yielded six times more hashrate compared to CPU mining.


Above Image: A Radeon HD 5800 Series, the same model of GPU was used to mine block 210,000, the last block before the first ever Bitcoin Halvening of 2012 which brought mining rewards from 50 to 25 BTC per block found. Image courtesy of Bitcoin wiki.


By 2013, the crypto-space saw the emergence of Application Specific Integrated Circuits (ASICs), devices designed specifically for Bitcoin mining. These were pioneered by chip manufactures such as Bitmain, with its production line of the Antminer S series. The first Bitmain antminer S1 had a hashrate of only 180Gh/s, a few months later Antminer S2 at 1Th/s and on. By the time of writing this article Bitmain's latest ASIC device is the Antminer S19 is boasting 110Th/s. Due to their superior yield, ASIC miners eventually made obsolete GPU mining and even more so, CPU. This in turn also shifted the pattern of mining power distribution to a more centralized nature with few who could afford running the ASIC devices eventually dominated the mining world (The rise of Crypto mining farms). 


Above Image: The Bitmain Antminer S1 unit, one of the ASIC pioneers that became available in 2013. Later models were heavily adopted by Bitcoin mining farms.


Proof of Work: The Energy Vampire, Cloud mining and Scammers:

Noise, heat, maintance costs and a "never before seen" bill from the power company started to become a norm amidst "Bitcoin farmers" by 2015. Companies such as genesis mining and the short lived Zeus mining formed to start mining bitcoin and litecoin for profit, employing the use of ASIC devices and GPUs as well. Afterwards these bitcoin farms started opening their doors to prospective individual investors wishing to invest in mining. Customers visiting their sites would first create accounts and afterwards purchase hashrate (payments were accepted mostly in BTC, but later BTC farms also supported fiat through VISA/MC, etc), in return the investors would receive earnings in the desired crypto. This was the beginning of cloud mining. The overall effect was that the total bitcoin hashrate increased tremandously across the network, causing increased mining difficulty and more time to mine a block and receive rewards.  

With the advent of increasing mining difficulty, the mining space became even more competative, resulting in increasing power demand for mining operations. Cloud miners also felt this as they expirienced increasing maintanace costs deductions from their daily earnings, significantly reducing thier potential ROI. To give an example, in late 2015, a $ 500 cloud mining contract with one of these farms would yield a daily earning of about BTC 0.001 (worth around $ 0.3 at the time), so it would take about 1666 days for ROI.

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As cloud mining became more known to perspective investors who wanted to make money mining bitcoin, ponzi schemes and scammer sites started to mushroom, posing as legitimate cloud mining sites giving out daily rewards in bitcoin. Most of these scams gave out more lucrative earnings compared to legitimate sites and as such became even more popular with thousands of people joining daily. Some may remember the infamous scam of June 2016. Hashocean est. 2014, was supposedly a cloud mining platform selling hashrate in Kh/s and giving out daily rewards. Typically they promised ROI in 90 days, and many users re-invested their earnings after 90 days as the gains were attractive. One morning on June 2016 while logging in to their accounts, users were shocked to see that the domain was on sale. Hashocean had scammed more than $ 40m.


The birth of Proof of Stake


We can thank developers Sunny King and Scott Nadal who first introduced the idea of POS in a paper back in 2012. The pair would go on to found Peercoin (PPC) in 2013, a crypto network that for the first time offered POS mining while still keeping POW. Peercoin is considered to be the pioneer of POS.


Peercoin came with the Peercoin wallet, where PPC held there was automatically staked and the owner received staking rewards. For this the wallet had to run as a node, therefore be on and online in order to stake. PPC is however, was still a first generation coin therefore lacking the ability to execute smart contracts, i.e. delegation was none existent by this time.

Following Peercoin's footsteps, new coins in the space implementing POS as network securing mechanism followed. Blackcoin was the first POS fully coin launched in 2014, then NEO, NXT and others followed.

Delegated Proof of Stake: A POS and smart contracts amalgamation 

On July 30, 2015 Ethereum (ETH) launched. ETH brought with it an additional feature called "smart contract ability" in addition to its cryptocurrency backbone, this would be the beginning of second generation coins. However ETH was and still is, at the time of writing a POW network. Smart contracts brought live the ability of applications built on the network to communicate with each other and with the blockchain, and this proved to be a useful application on permission and permissionless events on the blockchain.

Soon, POS protocols were designed to function with smart contract ability embeded within. Thus far, the traditional POS required the full running of a node to earn mining rewards. This would no longer be necessary with dPOS, as the technology was designed to have two parties participating  in maintenance of the network. The node operators would remain just as with the traditional POS protocol, but through smart contract ability, other holders of a coin would be able to delegate their stake (i.e. vote) for any desired node and in return have a share of the staking rewards given out by the network. This means that one doesn't have to be fully on and online to earn rewards, simply delegate to a node and earn from the network.

Lisk (LSK) is probably the first project to implement dPOS, back in early 2016 but it wouldn't be the last. Others followed including Bitshares (BTS), Steem (STEEM), Cardano (ADA), Tron (TRX), Icon (ICX) to mention a few. 

Delegated Proof of Stake: Fortifying Security, Transparency and Blockchain Democracy

Thanks to the evolution of smart contract functionality, the crypto-space has become much more secure for blockchain users and investors. In the past years, one needed to actually transfer assets to another address in order to participate in crypto ventures. This was a loophole that made ponzi schemes and other scammers laugh all the way to the bank, at the expense of their victims. There was also no sure way of knowing if the amounts shown to be available as capital were actually there and earnings were distributed manually with the entities you invested with deciding when and how much to give you. Investors were at the mercy of the parties they invested on. Not to mention that the websites could disappear anytime without notice and you'd have nowhere to claim or complain.

Now, it is possible to see and verify exactly how much coins are available on a particular contract address and earnings are distributed automatically as per smart contract terms. This reality has given scammers a difficult time.

From 2017 onward, most of native blockchain projects that launch are built to function as DPOS coins, and they have seen significant adoption so far.

So, what is the fate of POW?

No doubt, BTC is still Gold in the crypto-space, and other first gen cryptos such as Litecoin, Monero, ZCash etc still use POW, so POW is still out there. However with POW operations becoming more and more energy-hungy and costly to maintain with time, it is likely that crypto communities will opt out of POW in favor of the greener and cheaper option, POS and DPOS. 

A very vivid example is ongoing migration of the Crypto giant Ethereum, from POW to POS expected to be completed sometimes this year, a movement which will bring Ethereum 2.0 to life, where DPOS mining will finally become available on the Ethereum network. This tells that POS and especially dPOS is a thing of the future.

POW operations will remain with big crypto investors, the mining farms, while your "average Crypto Joe" would mostly likely invest in DPOS projects.

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Next Generation Crypto!

Nextgen Cryptos
Nextgen Cryptos

My publishes focus mostly on the evolution and development of second and third generation cryptocurrencies, believing that POS and dPOS protocols are the future of cryptocurrencies.

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