Why Can’t All Crypto Switch to Staking?

The concept of staking in bitcoin has become one of the most discussed aspects of owning and earning from digital assets, thanks in part to the capacity to generate yields higher than bank savings interest rates.

The term “staking” refers to a Proof-of-Stake mechanism for verifying transactions and securing blockchain networks (PoS). PoS seeks to improve on the original Proof-of-Work technique utilized by Bitcoin (PoW). Only PoS-based crypto can be staked.

Despite the lauded advancements, not all cryptocurrencies use staking or have switched to a staking mechanism. Bitcoin, in particular, does not appear likely to make the changeover in the near future.

The cause behind this is discussed in this article. You will discover:

• Issues surrounding Bitcoins Proof-of-Work consensus mechanism

• The advantages and disadvantages of staking over Bitcoins Proof-of-Work consensus mechanism

• Why Bitcoin may never switch to staking

Proof-of-Stake as an alternative to Proof-of-Work

Bitcoin and Proof-of-Work

Because of a simple yet smart idea known as Proof-of-Work, Bitcoin was the first blockchain-based commodity to attain public awareness and widespread adoption as a safe digital money (PoW).

PoW gave a solution to a long-thought-unsolvable coordination problem known as the Byzantine Generals problem.

Several generals are besieging Byzantium's old city. They triumph when they attack collectively. They will fail if they attack at various times. How would they communicate to reach an agreement when isolated from one another and aware that some of them are untrustworthy？

The corresponding difficulty for a distributed network like Bitcoin was this: how can you assure that despite the presence of dishonest members, many people on a distributed network reach the same valid decision？

PoW was a two-pronged economic solution to this problem, bringing a true cost to dishonest behavior and a reward system to incentivize good behavior and attract additional users, so expanding its network and increasing its security. The broader the network expands in this system, the higher the cost of dishonest behavior and the higher the security.

PoW network participants, as the name implies, must give proof of work. The goal of this effort was to solve exceedingly complicated mathematical problems by utilizing large computational resources to determine the solution to the network-provided puzzle. Each problem completed results in the creation of a new “block” in which validated transactions are recorded. Each transaction block is subsequently added to an existing chain of blocks, resulting in a chronological record of transactions.

Anyone with computational resources capable of solving these riddles might become block makers or crypto miners in this manner.

Issues with Bitcoins Proof-of-Work

These puzzles are solved faster as additional computing resources join a PoW network. However, as one riddle is completed, the next one grows more difficult to solve.

The rapid rise of Bitcoin meant that the level of difficulty quickly became beyond the processing capabilities of standard computers. At first, anyone with a basic home computer could mine Bitcoin. After a few years, though, solving a block on your own required sophisticated computers. By 2013, crypto mining players need ASICs, which are highly specialized processors designed exclusively to solve these immensely complicated equations (Application-Specific Integrated Circuits).

This predicament resulted in two big concerns.

For starters, because only more expensive and powerful equipment could solve the equations required to manufacture new blocks, only wealthy individuals and corporations could participate. This became clearer in the case of Bitcoin, where massive and powerful crypto “mining” businesses would set up factories of mining rigs, displacing hobbyists and home PCs.

This resulted in a kind of centralisation in which only a few corporations were responsible for the majority of computer power protecting Bitcoin, which some saw as detrimental to cryptocurrency's decentralisation efforts.

Second, and arguably more obvious to spectators, this specialized equipment used vast amounts of energy, raising concerns that PoW-based coins would have an ever-increasing carbon footprint.

Bitcoin is expected to require 91 terawatt-hours of electricity per year in 2021, which is greater than Finland's (population 5.5 million) consumption in the same year.

Proof-of-Stake as an environmentally-friendly alternative to Proof-of-Work

Only a few years after Bitcoin's inception was a new consensus mechanism known as Proof-of-Stake (PoS) implemented. At the time, Bitcoin was estimated to require $150,000 in electricity every day.

Sunny King and Scott Nadal proposed in their joint article utilizing a deterministic technique called “staking” to add new blocks, selecting successful miners (or nodes or participants) depending on the number of crypto tokens they held. People would need significantly less technical knowledge because they would simply need to stake crypto rather than solve difficult mathematical issues in a proof of work chain.

A simple example would be as follows. Node A had a 10% chance of finding the next block if it owned and staked 10 coins in a network with a total supply of 100 coins.

Instead of using ever-increasing energy to solve ever-increasingly difficult riddles, miners in a crypto staking network merely needed to increase the number of crypto assets possessed to better their chances of discovering new blocks.

Honest participants were still incentivized in this system by receiving fresh currencies via block rewards and transaction fees. Dishonest participants would face fines from the network or perhaps the loss of some or all of their holdings.

The downsides of the Proof-of-Stake algorithm

So it's clear, right？ If PoS is cleaner than PoW and no electricity is needed to secure a currency, wouldn't it make sense for every crypto to utilize PoS？

Both sides' arguments have been debated, and Proof-of-Stake has become more mature and viable since 2012. Some PoW coins, notably Ethereum, have switched to PoS. (ETH).

Ethereum's early consensus method matched Bitcoin's Proof-of-Work approach. Since 2014, Bitcoin's developers have overseen a progressive shift to Proof-of-Stake, a less energy-intensive technique of protecting the network and confirming transactions.

High transaction verification costs since 2016 led to this approach. Ethereum's transactional capacity has been maxed out multiple times since its popularity as a dApp platform, causing consumers to pay hundreds of dollars or wait hours or days.

Ethereum has often delayed its changeover to Proof-of-Stake or Ethereum 2.0, but December 2020 was a significant point when they began testing the system.

PoS hasn't been proven on a large, robust network like Ethereum. A small error might cost billions.

PoS's security isn't as well-known or battle-tested as Bitcoin's. Bitcoin has shown PoW as a feasible approach to safeguard a cryptocurrency worth over $550 billion. It also secures $210 billion Ethereum.

Binance Coin (BNB), the largest PoS coin by market cap, has $50 billion.

This essay won't address PoS security directly. Instead, we examine various PoS dangers.

Why Bitcoin will likely stick to PoW and not move to PoS

It's hard to forecast how Bitcoin will evolve in the coming decades, but its developers and technical community are cautious when it comes to change.

While other blockchains have quickly migrated, merged, and re-emerged as new algorithms – Ethereum may switch to PoS by 2022 (but we wouldn't hold our breath) – Bitcoin has been slower to adopt new foundational technologies, opting instead to improve its current technology with “soft” upgrades that don't change the core mechanism.

As we described above, there are several reasons to stick to a system that has kept Bitcoin secure.

As a reminder, WikiBit is ready to help you search the qualifications and reputation of projects in a bid to protect you from hidden dangers in this risky industry!