Proof of Work, Proof of Stake and Delegated Proof of Stake

How does Bitcoin pay for the decentralized group of people who update and secure the network?

Answer: The bitcoin system uses inflation to pay those who update and secure the network, the "miners".

In fact, as of 2014, the bitcoin system imposes a 10% inflation rate per year, and all the newly created bitcoins and as well as all the transaction fees, go to the miners who update and secure the network, which brings the costs to about 500 million per year for the bitcoin system.

This hidden cost of having to pay 1 out of every 10 bitcoins we own to the people who secure the network has been obscured by the fact that the bitcoin market cap has been rising at an alarming rate.

If there was no alternative, we might settle for this. The bitcoin system would still be cheaper and more environmentally friendly than the mesh of people and brick and mortar buildings that normal businesses employ to get their work done. However, there is an alternative. It is called Proof of Stake (PoS).

To understand why PoS makes a difference we first must understand bitcoins Proof of Work.

In essence, Proof of Work is the method bitcoin uses to update and secure the network, and it relies or heavy duty work from computers that need to "mine" for difficult to compute mathematical numbers. This is why bitcoin needs to spend their 500 million dollars a year to pay the miners. The computational work costs a lot both in terms of electricity and hardware.

In contrast, Proof of Stake is the new method that many alternative cryptocurrencies have been using to update and secure their network. Instead of relying on heavy duty work from computers to do work, it relies on giving people with stocks in the company a means to secure the network.

In this way it gives power to the people who have a stake in the system and who want the system to keep operating without failure. The "miners" in bitcoin by contrast need have no stake in the system, and can sell the bitcoins they earn as soon as they computers have done the requisite computational work.

Another problem with mining is that mining is cheaper to do when you put lots of money into developing specialized hardware and large computer "farms." Since this way of mining is more profitable, the little guy will be pushed out, and this is just what we are witnessing - mining is profitable only for Big Corp.

However, even Proof of Stake (PoS) has its disadvantages. Unfortunately, it is also unprofitable for people with little stock in the company to help secure the network when the PoS system scales. This means that only the people with large stakes in the system can help secure the system without losing money doing so. Thus only a few will end up securing the system, making the rich richer and the system more and more centralized.

When both PoW and PoS tends towards centralization and bad actors having more control and more power, the situation begins to look grim. Luckily there is another alternative that might fare better than its predecessors. This alternative is a modification of PoS called Delegated Proof of Stake (DPoS). In contrast to Proof of Stake, it allows the little guy to Vote for the people who update and secure the network.

In DPoS we get the following advantages,

- More people have a voice

- Bad Actors can be Excluded regardless of stake.

- Large shareholders need approval of smaller shareholders

- Increases Flexibility

- Maintains Decentralization at Scale

- Optional Source of Trust

Because DPoS is a new system, and we know the current ones will fail at scale, it is worth considering this new technology to see if it can finally offer what we are looking for, a decentralized system that is both transparent, secure, anonymous and that does not succumb to centralization with scale.