Proof of Stake – How does it work and what are the advantages?

Recently more and more alt coins have decided to integrate a proof of stake system over the traditional proof of work system used by Bitcoin and Litecoin. But why, one may ask? Frankly, the proof of work system is not perfect. A cryptocurrency without proof of stake doesn’t just lack an incentive for users to continue holding on to their coins, but is also susceptible to a 51 percent attack if one party controls a majority of the total mining output. To solve help these problems, some cryptocurrencies, such as NXT, have implemented a 100 percent proof of stake system. Other currencies, such as Dogecoin, have implemented elements of proof of stake to take advantage of its benefits.

What is Proof of Stake?

Like a proof of work system, proof of stake allows miners to verify block chain transactions and solve puzzles in order to receive rewards – which ultimately are the coins you receive.  In a proof of work system, miners complete difficult puzzles using the hashing power of their computer equipment and are rewarded based on how quickly they can solve the mathematical puzzles. The faster the hashrate, the more coins they will receive. Mining in a proof of stake system however is not completely determined by one’s hashrate (or computing power,) but instead by how much of the currency they currently own. If someone owns five percent of the currency, then they can mine five percent of the blocks.

In proof of stake the “mining” that goes on doesn’t necessarily refer to the mining done on currencies such as Bitcoin with powerful computing equipment. Instead, “mining” occurs when transactions take place within the currency, generating fees. These fees are more likely to go to the users with greater stakes in the currency. This creates an incentive for miners to hold onto their coins instead of trading them away as soon as they’re earned.

How proof of take can solve the flaws of proof of work

Although more merchants are accepting Bitcoin, the price has yet to recover from its peak late last year. Though there are many reasons for this, one in particular is because most of these merchants convert their Bitcoins into dollars or other fiat currencies as soon as they earn them. This creates a downward pressure on the price of Bitcoin due to the constant selling of currency that exist the Bitcoin economy. In the proof of work system there is no incentive for merchants to keep Bitcoins and due to its volatile nature many merchants are scared to hold them for longer periods of time. The proof of stake system however gives people an incentive to keep their coins rather than selling right away.

Proof of stake can also solve the very critical risk of 51 percent attacks that haunt both the Bitcoin and other cryptocurrency community. Earlier this summer the Ghash.io pool, controlled by CEX.io, came dangerously close to reaching the 51 percent attack potential. While the company did eventually reduce its network hashing rate and issued a press release noting its intentions to prevent a 51 percent attack, proof of stake would permanently prevent this issue from ever occurring. This is because it is not only very difficult to attain, but would do more harm to the causer of the 51 percent attack than to the rest of the network.

The advantages of a mix of both systems

The proof of stake system is by no means perfect. By giving people an incentive to save their coins it also gives them an incentive to hoard and never spend any coins. This in turn lowers the overall transaction volume, which can hurt the price of the currency as well. Ultimately there must be a healthy median between these two systems that minimizes the flaws of both and maximizes their advantages. But will a currency like Bitcoin ever adopt a proof of stake system? Probably not. This is because changing anything in the Bitcoin protocol as dramatic as a new proof of stake system would make the currency seem weak and unguided. But it is very likely in the future that other currencies will adopt a mixed system between the two methods, much like Dogecoin.

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An Introduction to PGP

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Hash: SHA1

The Internet is not an inherently secure medium for sensitive communication. When Alice sends a message to Bob through the Internet, that message passes through the hands of various Internet service providers before arriving at its final destination. Depending on the messaging platform used, it may also pass through the hands of Facebook, Google, or Microsoft, or other operators. We can always assume that someone is watching.

Each individual with access to the message on its path between Alice and Bob has the opportunity to read or even modify it. This could be very problematic if the message contained private information such as passwords that could be read or financial information such as a Bitcoin address that could be modified.

Cryptography solves this problem. By encrypting a message before sending it to Bob, Alice can ensure that nobody except Bob will be able to read it. Similarly, Bob can verify that the message was not altered if Alice includes a cryptographic signature. This introduction will not explain the mathematics behind cryptography, but Nick Sullivan wrote a great primer on the topic for anyone interested.

Developed in 1991 by Phil Zimmerman, Pretty Good Privacy (PGP) is now one of the most popular tools for signing and encrypting files. PGP leverages a web of trust to verify the identities of users when encrypting files for them or verifying their signatures.

Many PGP software implementations are available. HushMail uses PGP standards to provide an encrypted personal email service. Symantec offers various products powered by PGP such as drive encryption and email encryption. The GNU Privacy Guard (GnuPG, or GPG) is a free and popular command line tool, with Gpg4win for Windows and GPGTools for Mac OS X. Kleopatra is a graphical user interface for the Windows version of GPG. This introduction will explain how to use Gpg4win with Kleopatra. Directions for Mac and Linux users will vary, but the general process should be similar.

Navigate to the Gpg4win downloads page. Download and install the most recent full version including Kleopatra. Make sure to install the GnuPG, Kleopatra, and Gpg4win Compendium components.

Once installed, open Kleopatra. You now need to create your first PGP key pair. If you are not automatically prompted to do so, navigate to File and then New Certificate. Enter your name and email, but note that this information will be linked and made public. Continue by clicking Next and creating your key. When prompted for a passphrase, choose a new secure password. This passphrase will be needed to decrypt and use your private key.

Next, you should import the public key of somebody you trust. To add mine, copy the public key block at https://gist.github.com/thofmann/fc645404e45feb1f1944. Once it is copied to your clipboard, right click the Kleopatra icon in your system tray and navigate to Clipboard and Certificate Import.

To practice encrypting a message for someone, select some text to encrypt and copy it to your clipboard. Now right click the Kleopatra icon, but this time choose Encrypt. Now click Add Recipient and choose the person to encrypt a message for. After adding all intended recipients, click Next and Ok. Your encrypted message has now been copied to your clipboard and you can paste it anywhere such as an email body or forum post.

Next, try signing a message. Just as you would for encryption, copy the message to your clipboard. Right click the Kleopatra icon, and choose OpenPGP-sign. Select your certificate to sign with and click Next. You will be prompted for your passphrase. After entering it, your message will be signed. Click Ok and your signed message will be copied to your clipboard.

As a last test, verify this entire article’s signature. Copy the entire article and signature from the beginning of the message to the end of the signature. Right click the Kleopatra icon again and select Decrypt/Verify.

Congratulations! You are now capable of the essential features of PGP.

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