Recently Proof of Stake (PoS) and subsequently Proof of Stake Velocity (PoSV) have been developed as an alternative to Proof of Work (PoW) mining. But despite offering some serious improvements, economically these alternatives cannot (yet) compete with PoW mining.
Proof of Work mining
In traditional PoW mining, transactions are validated by so-called miners, who have to solve computational puzzles to this purpose. All the miners working on a block are in fact racing to solve the same puzzle. Once a solution has been found, the block will be confirmed and added to the blockchain. The miner that finds the solution will be rewarded with new coins and/or transaction fees paid by the users, before all the miners continue to work on the next block. This mining process is often critisized for not being energy efficient, as mining costs include an initial hardware investment plus on-going electricity costs. Furthermore, in order to remain profitable, it is required to mine at an increasing scale. This results in a centralizing effect on a network that is meant to be decentralized. Lastly, the availability of many alernatives also led to large coin-switching multipools that try to exploit the lagging difficulty adjustment of PoW.
Proof of Stake minting
To tackle the previous, PoS was developed, first implemented by Peercoin. PoS blocks are similar to PoW blocks, except it doesn’t require a very power hungry mining process. Rather than mining blocks, blocks are minted. This only requires leaving your computer on and wallet opened, running a PoS enabled client that takes little resources. To become eligible for PoS rewards, you need to hold a certain amount of the currency. After these coins have sufficient coin age, your coins will start earning rewards. Coin age refers to the amount of time coins have been inactive. A minimum of 30 days of coin age is required. Minting will then yield a cetain percentage of the coins that were eligible for PoS rewards. Someone holding 1% of the cryptocurrency can receive up to 1% of PoS blocks. In short, it effecively pays interest on coins that have been held for a certain period. Apart from potential security issues with open wallets with a lot of coins in them, it also significantly reduces monetary velocity. This causes a deflationary effect, which isn’t economically desirable as discussed in the article “why deflation threatens Bitcoin.”
Proof of Stake Velocity
The previous was also acknowledged by the development of PoSV, developed for Reddcoin, which is meant to address the economic concerns with PoS. PoSV adds an additional variable for economic activity, as PoSV is designed to reward both ownership (stake) and activity (velocity). This immediately runs into a problem, as it is not possible to create an accurate measure for economic activity. This has already been attempted once with the statistic called days destroyed. But since wallet addresses are anonymous, it is not possible to determine which coins were spend on goods or simply transfered to oneself. A measure for economic activity can never indicate more than an upper bound. It can therefore be concluded that neither PoS or PoSV can provide a viable economic altenative for PoSV.