🟡Crypto Investing Basics: BTC & ETH, PoW vs PoS
⚡Part 2
✨ Introduction
In Part 1, we talked about cryptography, decentralization, and blockchain. We touched briefly on how blocks are created via solving a complex puzzle with very powerful computers.
As Bitcoin reaches new all time highs and Bitcoin ETFs are being approved, it’s important to understand the difference between Proof of Work and Proof of Stake. It’s also integral to know the difference between Bitcoin and Ethereum as there are also talks about approving Ethereum ETFs across the world.
On this edition of The Dividend Journal, we are going to:
→ Discuss the differences between Proof of Work & Proof of Stake
→ Talk about Bitcoin vs Ethereum
✨ Proof of Work vs Proof of Stake
From a big picture viewpoint, Proof of Work (PoW) and Proof of Stake (PoS) are both methods to confirm transactions and to add blocks to the blockchain. There are a few distinctions between the two methods though.
What is Proof of Work?
Proof of Work (PoW) is where miners of blocks use very powerful computers to compete with other miners to complete complex mathematical equations. The first one to complete the math problem gets the right to add the next block on the blockchain, and they are rewarded with the cryptocurrency they are mining.
Aren’t super powerful computers very energy intensive?
A common dissenting argument against cryptocurrency is energy usage. With PoW, it is indeed energy intensive because you would need a lot of continuous computational power in your arsenal to mine. You also have to consume a lot of electricity. However, these power requirements create a high barrier to entry to manipulating the blockchain. It would not only be expensive but you would also need massive amounts of computational power.
Cool, now what is Proof of Stake then?
Proof of Stake (PoS) allows holders of the cryptocurrency to become validators to create new blocks on the chain. The more coins you hold (staking aka holding coins as collateral) means you have a higher chance of being selected to validate transactions and add a new block.
Is PoS energy intensive like PoW?
Unlike PoW, PoS solves the energy intensive issue because you don’t need the large amounts of computational power to mine for the next block. Ethereum 2.0 utilizes Proof of Stake. With a lower barrier to entry, some argue that this method creates more opportunities for projects to scale better as well as more adoption of the cryptocurrency. These lower costs also lead to lower transaction fees and faster transaction verifications.
The potential security risk with Proof of Stake is wealth accumulation. There could be a few entities holding an imbalanced amount of coins, which would lead to a situation where the ecosystem is not as decentralized and where the “rich get richer.”
✨ Bitcoin vs Ethereum
Bitcoin (BTC) was first introduced in 2009, and is the first ever cryptocurrency. Its purpose is intended to be a digital currency that is a decentralized alternative to our current forms of currency. The most common comparison from investors is Bitcoin is like digital gold.
Ethereum (ETH) was launched in 2013, by Vitalik Buterin and goes beyond just a digital decentralized currency. The blockchain network allows smart contracts and decentralized applications, think of NFTs.
Consensus Difference?
BTC utilizes PoW and we just saw the network complete its fourth halving. ETH originally was also using PoW to create new blocks on its blockchain. In 2022, the network pushed out the ETH 2.0 update. This changed the consensus method to PoS and really cemented its difference from BTC.
I like to view Bitcoin as the more safe and less risky of the two, and you can think of BTC as a value stock or an ETF. BTC’s PoW system ensures security, and has only one goal of being like a digital gold alternative. Ethereum on the other hand is moreso like a growth stock, offering multiple use cases on its blockchain. You’re able to innovate decentralized finance with smart contracts or create art via NFTs.
In the next Crypto edition, we will look at alt coins and their use cases. Amongst the “meme coins” and scams out there, there are Crypto networks trying to create revolutionary tech and change the world.