Since cryptocurrencies are decentralized and not under the control of financial institutions, proof-of-stake (PoS) and proof-of-work (PoW) are the two most common types of consensus mechanisms cryptocurrencies use to verify new transactions, add them to the blockchain, and create new tokens, a process called "mining."
Cryptocurrency mining involves decentralized networks of computers around the world. The miners maintain and secure the blockchain, the blockchain awards the coins, the coins provide an incentive for the miners to maintain the blockchain.
In October 2019, it required 12 trillion times more computing power to mine one Bitcoin than it did when the first first blocks were mined in January 2009.
Every computer on the network races to be the first to guess a 64-digit hexadecimal number known as a “hash.” The faster a computer can complete this, the more likely the miner is to earn the reward.
The winner updates the blockchain ledger with all the newly verified transactions, thereby adding a newly verified “block” containing all transactions to the chain, and is granted a predetermined amount of newly minted Bitcoin. This happens every 10 minutes, on average.
As of late 2020, the reward was 6.25 Bitcoins but it will be reduced by half in 2024, and every four years after. The final block should theoretically be mined in 2140.
The proof-of-stake model allows owners of a cryptocurrency to stake coins to be used for verifying transactions. Investors can stake their crypto to earn rewards, providing a form of passive income.
Bitcoin miners earned more than $600 million in revenue in 2021.
Proof-of-work was the method of choice for early cryptocurrencies, including Bitcoin, while proof of stake originated in 2012 with Peercoin.
According toPC Magazine, a single Bitcoin transaction is estimated to burn 2,292.5 kilowatt hours of electricity, enough to power a typical US household for over 78 days.
Proof-of-stake mining uses 99% less electricity than proof of work mining and has gotten more popular as attention has turned to how crypto mining affects the planet.
Cryptocurrencies that use proof-of-stake are able to process transactions quickly and at a low cost, which is key for scalability.