Consensus protocols

Since the first idea of an encrypted blockchain was popularized beginning in the year 2008 through the Bitcoin application, we have witnessed 2 main/popular protocols being used to emit a form of digital currency that we all know as cryptocurrency:

1. PoW (Proof of Work)

2. PoS (Proof of Stake).

PoW was the first completely decentralized algorithm or protocol associated with cryptocurrency and it's simply a way to securely and accurately determine the amount of investment an individual or company made to support the network of the Bitcoin software, in order for that individual to be rewarded accordingly.

Bitcoin was intended to become a decentralized currency that anyone can use anonymously & without identity verification.

Although it probably seemed like a good idea in the beginning, its expansion made us realize that the PoW protocol doesn't contribute to the well-being of the planet or society due to the power consumption issue and the disruption of entire industries requiring products running on computer chips, industries like computer hardware, car manufacturing, research, etc.

People invested time and money into this type of work in exchange for some amount of Bitcoin which is determined and released by the Bitcoin algorithm as a reward for the computing power provided.

This computing power comes from buying expensive hardware, space rental, and energy consumption… all very expensive investments made in the hope that over time, the price of Bitcoin will appreciate and there will be a profit for the investment.

But as Satoshi Nakamoto himself believed, I also believe that profit should not be the goal of any individual or society.

The PoW Protocol was written in the core of the Bitcoin application with the intention to correctly reward those who invest time and money to assemble and maintain hardware and internet infrastructure 100% dedicated to validating and storing the operations or transactions of the Bitcoin application across all its decentralized network. A fair idea.

However, the creator of Bitcoin did not anticipate that people will try to exploit this PoW algorithm for profit. This entire greed-based activity or “mining” for cryptocurrency, in general, is wasting hardware and network infrastructure that could be used for good.

Miners are simply the human part of a crude method for emitting units of cryptocurrency into circulation. The amount of cryptocurrency units that miners receive in their wallet address is the newly emitted coins.

Miners can hold onto the currency long-term or sell it on exchanges, and so the coins sold on exchanges are new coins put into circulation.

For Bitcoin, the code was written to limit the amount of Bitcoins that will ever be emitted to 21 million units of Bitcoin (which can be further divided into 100 million parts or sub-units, just like $1 can be divided into 100 cents or pennies, but way more parts).

The 21 million total monetary supply limit means that Bitcoin, as a monetary system is a deflationary monetary system. With a monetary system like this, inflation is technically and practically impossible.

When the last Bitcoin will be mined/emitted (which is estimated to be somewhere around February 2140), the Bitcoin software will no longer emit Bitcoins and people will have to price fight over the total amount of Bitcoin in circulation.

The showstopper problem with PoW is that it created sort of a "crypto mining rush" which created an electrical energy and hardware consumption worldwide problem, not to mention the whales that have enough bitcoins to crash the market if they ever sell too much too fast.

If you sum up all the cryptocurrency projects that implemented PoW, their total amount of electrical power consumption would be that of the consumption of many countries combined. The Bitcoin network for example consumes more electrical power than Argentina.

The PoS (Proof-of-Stake) algorithm is a solution for a more scalable blockchain with higher transaction throughput. The biggest benefit is the elimination of the electrical energy consumption problem.

This type of protocol basically emits coins through people purchasing a PoS cryptocurrency to stake it.

This is like holding your money in a bank used to be (when we actually gained value) or like purchasing company stocks. Over time, a certain interest or dividends coming from transaction fees are divided among investors.

Basically, if you solve the security issue of a PoS monetary system, this would be a fairer system that doesn't harm life on the planet.

These 2 algorithms or protocols (PoW and PoS) are the main “Consensus Protocols” that were used for cryptocurrency so far.

We must be very careful with the main players here because, the main crypto projects like Bitcoin and Ethereum, and most other projects derived (forked) from their software are now manipulated by whales owning large percentages of the coins. These whales became some of the wealthiest people in the world by creating artificial price bubbles (Bull markets and Bear markets). They're ruining people's economies and increasing inequality.

We have yet to see any well adopted real world use case for a blockchain application other than a monetary system, but GRAT token and BiiP is changing that.