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The QTUM Network

2018-12-04 | QTUM

QTUM is the first smart contract platform that uses a Proof of Stake (PoS) algorithm instead of the more traditional Proof of Work (PoW) algorithm that for example bitcoin uses. In the traditional PoW algorithm miners make incredibly difficult calculations (automated by software) upon solving these calculations they have a chance to fine a “block”. The one finding the block first gets a reward known as a mining reward. These calculations become increasingly more difficult as the hashrate (the amount of computational power trying to solve the algorithm) increases. Finding the reward is randomized but if you run a mining rig for a sufficient amount of time you’ll earn X % of mining rewards that is equal to the X % of hashing power of the total network you have. This however has lead to an arms race of miners competing for more computational power. In turn mining for the oldest PoW protocol (Bitcoin) has becoming very centralized into huge mining operations mainly located in China (due to their electricity costs being very low). This requires massive amounts of hardware (nowadays specifically made for mining the Bitcoin protocal) which in turn requires massive amounts of energy to operate.

All of this is needed to guarantee that no false transactions are written on the blockchain. Seeing as in order to write a false transaction you’d need 51% of the networks computational power requiring a malicious actor to buy insane amounts of hardware to get this much hashing power. However crypto developers have long been thinking about alternative ways to secure the blockchain that are more environmental friendly. The most interesting solution they came up with was Proof of Stake, an alternative algorithm that doesn’t rely on large amounts of computational power to secure the blockchain but instead relies on stakers to put up their “stake” in order to secure the blockchain.

They idea here is that people who own the native currency of their PoS coin can put up their coins for staking, thereby locking them for a certain amount of times and at the same time validating transactions. Now if you validate a block and only allow valid transactions as a staker you will earn a reward similar to a mining reward but now called a staking reward. This is like a sort of interest on your coins. In a PoS protocol you will lose your staking reward if you allow malicious transactions (which are checked by all other stakers to) and lose your reward. Hence you are strongly discouraged from validating the integrity of the blockchain. Stakers however do valuable work as they check new transactions to see if they are valid and if they are the stakers write them into the blockchain. This is why they earn staking rewards. This means if you stake your QTUM you will be able to earn interest over your coins!