In " What is Bitcoin Mining? ", we explained that Bitcoin mining is the process of solving complex mathematical problems with a computer (mining machine) to recognize new Bitcoin transactions as "valid transactions", and if you are the first computer to solve the problem, you will receive Bitcoin as a reward. The computer that solves the complex mathematical problem will be able to obtain the "right" to record new transactions.
- What is PoW?
The mechanism by which correct transactions are authenticated as a result of the "work" of solving complex mathematical problems is called "Proof of Work" (PoW) in technical terms.
In this way, the use of the "proof of work" rules creates a competition to receive Bitcoin as a reward, i.e., a "competition" to record correct transactions, resulting in safe cryptocurrency transactions.
- What is PoS?
Proof of Work (PoW) is not the only mechanism for verifying that a cryptocurrency transaction is "correct." In particular, in recent years, Bitcoin mining has come under criticism for its heavy environmental impact due to the large amount of electricity it uses, and many currencies other than Bitcoin now use mechanisms other than PoW to verify "correct" transactions. The technical term for this mechanism is "Proof of Stake (PoS)."
PoS stands for "Proof of Stake." The "stake" here refers to the amount of cryptocurrency that a person holds. PoS is based on the premise that "people who hold a lot of cryptocurrency will not engage in fake transactions or aggressive behavior to prevent the value of that cryptocurrency from declining." In other words, by holding a lot of cryptocurrency, you will have a great influence on the cryptocurrency's network, but if you abuse that influence, the value of the cryptocurrency you hold will decline, and you will face the risk of losing the value of your assets. Therefore, people who hold a lot of cryptocurrency have an incentive to protect the network.
In PoW, rewards are earned through mining, whereas in PoS, rewards are earned through "staking." "Staking" is similar to "depositing." In essence, staking is the act of depositing cryptocurrency with a specific computer in order to gain the right to generate blocks. Staking represents the trust and contribution of a person who holds a lot of cryptocurrency to the network of that cryptocurrency.
People with a large "stake" have a large investment in the network, and as such they can do the work necessary to keep the network secure and reliable, and receive new cryptocurrency as a reward.
Specifically, when staking, you deposit a portion of your cryptocurrency into a specific wallet to support the security of that currency's blockchain. If you participate in staking, you can receive rewards according to the amount of currency you deposit. Let's look at some examples of major cryptocurrencies that use PoS.
(i) Ethereum: Ethereum, the second largest cryptocurrency by market capitalization (total value of cryptocurrencies), initially adopted the same PoW as Bitcoin. Amid growing criticism that PoW uses a large amount of electricity and puts a heavy burden on the environment, Ethereum switched from PoW to PoS during its September 2022 upgrade. Users can become validators of the network by staking 32 ETH. Validators generate new blocks and verify transactions, and receive ETH as a reward. Even if you do not become a validator, you can deposit ETH to a validator that provides staking as a service and receive rewards after the validator's fees are deducted.
(ii) Cardano (ADA): The Cardano network allows participants to contribute to the security of the network and the generation of new blocks by staking ADA in one of many staking pools. By participating in staking, participants receive ADA as a reward.
(iii) Tezos (XTZ): In Tezos, users can support the security of the network by staking XTZ (called “baking” in Tezos). By participating in baking, users can generate new blocks and validate transactions, and receive XTZ as a reward.
There is ongoing debate in the cryptocurrency industry about whether PoW or PoS is better, but we believe that PoW is the most important for cryptocurrencies and support it. This is because the "Proof of Work" mechanism gives everyone, including those who do not own the cryptocurrency, equal rights to record new transactions, making cryptocurrency transactions fairer and safer.
In the "PoS (Proof of Stake)" system, people who have a lot of virtual currency may get even more virtual currency, and as a result, I am worried that in the long term, only a few wealthy people will increase their wealth. Also, since people who have a lot of virtual currency record transactions, there is a non-zero risk that they will record fake transactions.
PoW is also criticized for its heavy environmental impact due to the large amount of electricity it uses. This criticism is not only made by those involved in virtual currencies that use PoS, but is also often made by vested interests (those involved in legal tender currencies such as the US dollar, the euro, and the Japanese yen) who are critical of all virtual currencies, including Bitcoin. However, we believe that this criticism of the "burden on the environment" is a one-sided view, and in order to understand the overall picture, we also need to consider the impact that traditional monetary (fiat money) systems such as the US dollar, the euro, and the Japanese yen have on the environment.
For example, the value of the US dollar is backed by the US military power. Maintaining military power and maintaining the value of the US dollar requires huge amounts of materials, personnel, and energy. In fact, the US military is the world's largest consumer of fuel, and its impact on the environment is immeasurable.
In contrast, Bitcoin's Proof of Work (PoW) consumes only a small fraction of the electricity used in the world, meaning that Bitcoin's environmental impact is small compared to the environmental burden of fiat currencies.
Furthermore, an increasing number of miners are using sustainable electricity (environmentally friendly electricity) to mine Bitcoin, and it is expected that the impact on the environment will decrease over time.
These are the reasons we support "Proof of Work" (PoW), which not only offers fair and secure transactions, but also has a lower environmental impact than existing financial systems.
In addition to "proof of work" in the sense of "solving complex computational problems," we carefully manage and operate not only the Bitcoin mining machines that we ourselves invested in, but also each and every mining machine that our customers invested in. Sometimes we go to cold places like Siberia and Kazakhstan to check the operation status of mining machines and develop new mining farms (data centers that manage and operate mining machines). These are very difficult tasks in themselves, and in that sense, we strongly believe that "our work supports the value of Bitcoin."