Welcome to another article from these series called “Crypto Jargon”. This article is about the following types of digital proofs in relation to blockchain technology and cryptocurrencies.
I will begin with the most commonly used ones, so I will not follow alphabetical order.
So, the first one here should be POW which stands for Proof-of-Work and it’s related to mining. If you need more clarity about what the Mining process is and how it works, check out the previous episode where I explain it in more detail.
Proof-of-Work is a consensus algorithm, pioneered by Satoshi Nakamoto (the creator of Bitcoin), that ties mining capability to computational power. Blocks must be hashed, which in itself is not a difficult computational process, but an additional variable is added to the hashing process to make it harder. When a block is successfully hashed, the hashing must have taken some time and computational effort. Thus, a hashed block is considered to be the Proof of work.
The rewards for this type of mining are straightforward: miners receive coins and transaction fee rewards in direct correlation to the actual mining work they complete. This type of mining is very high energy-consuming too and it’s often criticized as one of the main downsides to Bitcoin’s production. On the other hand, the PoW consensus algorithm is the most reliable and secure in existence today. However, it is not really scalable. Bitcoin, as well as other PoW-based blockchains, have limited performance in terms of transactions per second (TPS). Such limitation is related to the fact that Bitcoin relies on a distributed network of nodes, which need to reach consensus and agree on the current states of the blockchain. That is time-consuming and new alternatives are being invented to address this issue.
One of them is called Proof of Stake (POS). This is a consensus distribution algorithm that rewards earnings based on the number of coins that a user owns. Holding any number of units of that cryptocurrency for a (fixed) period of time is called “staking” and is used to calculate the amount of that currency that you mine. Proof-Of-Stake is incentivizing users to hold on to their coins which in return reduces the available volume on the market and ultimately aims at preventing deflationary effect on that currency. The dividends paid out to the stakeholders are proportionate to the amounts they stake, meaning that the more they stake, the larger their earnings will be over time.
POS was first implemented by Peercoin as an “environmentally-friendly” approach to mining and in 2019 the second-largest cryptocurrency by Mcap – Ethereum – switched from POW to a POS algorithm. In regards to the amount of transactions per second, Proof of Stake blockchains usually present a better performance than Bitcoin. However, the difference is not that significant and PoS networks did not really manage to solve the scalability problem.
Another alternative is Proof-of-Stake-and-Trust (PoST). A consensus mechanism used by Waltonchain – a project which focuses on cross-chain technologies. Their hybrid consensus mechanism rewards token holders and nodes with dividends, but it also adds a node reputation mechanism to further reward higher quality performance and more honest nodes.
There’s also dPOS, which stands for Delegated Proof-of-Stake. It’s also a type of mechanism used to achieve consensus and was developed by Daniel Larimer – American software developer and founder of BitShares, Steemit, and EOS. Delegated Proof Of Stake is designed as an implementation of technology-based democracy, using voting and election. The users vote for “delegates” who produce blocks on the relevant blockchain. The first implementation of dPoS was executed on BitShares. DPoS is also considered to be more secure than the regular Proof-of-Stake consensus, which is not very well protected from the malicious intentions of stakeholders.
Another hybrid approach is the Delayed Proof of Work (dPoW). A consensus mechanism used by the cryptocurrency Komodo. Delayed Proof of Work (dPoW) allows one blockchain to take advantage of the security and hashing power of another blockchain (which is Bitcoin, in Komodo’s case).
Next on my list is Proof-of-Authority (PoA). A method used to achieve consensus on the blockchain similar to Proof-Of-Stake. When the blockchain achieves consensus through Proof-of-Authority, it uses identity as a stake. The PoA consensus algorithm leverages the value of identities, which means that block validators are not staking coins but their own reputation instead. Therefore, PoA blockchains are secured by the validating nodes that are considered trustworthy entities.
Moving onto Proof-of-Capacity (POC), also known as Proof-of-Space (PoSpace). A means of showing that one has a legitimate interest in service by allocating a non-trivial amount of memory or disk space to solve a challenge presented by the service provider. Proofs of space are very similar to proofs of work, except that instead of computation, disk space (storage) is being used.
Proof-of-Burn (PoB). There is more than one version of PoB. Firstly, it is a method used to achieve consensus on the blockchain. Proof of Burn looks like a Proof of Work algorithm but with reduced rates of energy consumption. The block validation process of PoB-based networks does not require the use of powerful computational resources and does not depend on powerful mining hardware. In Proof-of-burn users must show proof that they burnt a certain amount of coins in order to demonstrate their commitment to the network, gaining the right to “mine” and validate transactions. Since the process of burning coins represents virtual mining power the more coins a user burns in favor of the system, the more mining power he/she has and thus, the higher the chances to be chosen as the next block validator. Because proof of burn transactions is recorded on the blockchain, there’s enough necessary proof that the coins can no longer be used and the user can be rewarded as a result.
Another use of the term Proof-Of-Burn is in relation to Token burns which is a method used by some developers in order to create scarcity – to reduce the total supply of their tokens, which in return should increase the value of these tokens. I talk more about this in the next Crypto Jargon Episode, so make sure you check it out.
Moving on to Proof-of-Developer (PoD). This is literally as it sounds: proof that a specific developer exists. Why is this needed you might ask? Well, it makes it less likely that an anonymous developer will go underground after having fraudulently raised capital (which has happened in the past on a number of occasions). Developers are the brains behind any cryptocurrency and their involvement and consistency are of utmost importance for the stability and long-term existence of that cryptocurrency. This type of proof takes inspiration from the pre-digital era when people had to pose with the most recent newspaper issue in order to provide “Proof Of Life” but now this is done with the help of blockchain technology. The most famous use case to date is that of Vitalik Buterin, founder of Ethereum posting this tweet in 2017 after a fake article claimed he had passed away. So yeah, Proof-Of-Developer is a thing. Really.
Next is Proof-of-Existence (POE), which sounds similar, but it refers to pretty much anything, including intellectual property, documents, pictures, and other digitally stored data. It’s a service provided through the blockchain that allows people to prove that something existed at a certain point in time and demonstrate their ownership of it.
Proof-of-Importance (POI). A consensus algorithm, similar to PoS that was introduced by NEM, another very popular cryptocurrency. A proof of importance algorithm prioritizes miners based on the number of transactions in the corresponding cryptocurrency that they perform. The more transactions are made to and from an entity’s cryptocurrency wallet, the higher that entity’s chances of being given mining projects are.
Proof-of-Provenance (POP). A consensus mechanism used by DigixDAO (DGX) cryptocurrency project, to track the movements of physical assets, identify their ownership, and ensure their security through the change of hands, from the bullion supplier to the custodial vault in a transparent and cryptographically secure manner.
These are all the proofs and consensus mechanisms that I managed to squeeze into this episode. You’ll probably find some more and with time, surely there will be new ones popping up but currently, these are the ones worth mentioning.
These and many more terms are explained in my eBook “Crypto Jargon A-Z: definitions of crypto terminology” which is the most up-to-date publication of its kind. With over 700 terms, acronyms and trading slang, it contains everything related to cryptocurrencies and blockchain tech: a must-have guide for every crypto investor. It’s an Amazon bestseller and it’s available for Kindle here.
Go to http://www.ojjordan.com/cryptocorner and grab your digital copy today.
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