What is Peercoin?
Peercoin intends to be a peer-to-peer cryptocurrency inspired by Bitcoin. Peercoin was the first coin to introduce a proof-of-stake system to replace proof-of-work as the system that ensures network security. Peercoin provides a hybrid design where proof-of-work is used for the initial minting of coins, but becomes mostly non-essential as its functions are taken over by the efforts of stakers.
Proof of Stake versus Proof of Work
In Bitcoin’s protocol, proof-of-work is used to ensure the security of the network. To do this, miners expend computing power which depends on energy consumption. This process is costly and this cost can eventually be expressed through its transaction fees. While mining is largely done to secure the block reward that is offered on the Bitcoin network, this reward is halved at set times. Since the start of the Bitcoin network, this has been done twice. The next halving is expected in May of 2020. With the halvings, the inflation of Bitcoin decreases and as a result the costs of mining may end up putting pressure on raising transaction fees to sustain the network’s security.
Another element to consider with regards to proof-of-work is the effect of energy consumption on the environment. In July of 2018, the total energy expended by the Bitcoin network was estimated at around 22 TWh per year, which is almost the same as the entirity of Ireland. It is questionable whether the security of a digital payment network is worth such great quantities of energy, especially when this kind of energy consumption turns out to be unnecessary in coins that use a a different algorithm for its security.
Proof-of-stake algorithms can also benefit the decentralisation of the network. With Bitcoin and other coins using a purely proof-of-work algorithm, the mining rewards offered resulted in an arms race between miners to secure the most computing power on the network so as to increase their prospective reward. The result of this is that mining operations have become largely centralised in areas with low electricity costs and with wealthy actors who have the means to invest in warehouses filled with mining hardware. Because of the specialised hardware required, securing the network has become financially uninteresting for anyone other than the largest players. As such, the security of the Bitcoin network, quite contrary to its philosophical background, arguably rests with a small group of people. Since staking only requires ownership of coins and limited hardware, securing the network in a currency that employs a proof-of-stake algorithm can be a responsibility that is shared by many different actors. This means that proof-of-stake currencies can remain more true to the philosophy of decentralisation that is so important in the cryptocurrency space.
The concept of a proof-of-stake currency is not quite new, but was discussed by Bitcoin users and developers as early as 2011. With proof-of-stake, rather than using expended computing power, proof of coin ownership is used to ensure the security of the network. In proof-of-work, expended computing power cannot be forged, and therefore it becomes incredibly costly to introduce false transactions to the network. This is so costly, in fact, that it becomes cost-prohibitive to any gain that can be achieved from trying to do so. In a proof-of-stake algorithm, it is similarly difficult to forge coin ownership. As such, introducing false transactions to a proof-of-stake network is also cost-prohibitive, as it would require a single actor to gain ownership over a majority of the coins. Acquiring such a great number of coins is infeasible, as the mere attempt would rapidly increase its price. The money that would have to be spent, in this regard, is a form of proof-of-work, as it proves the efforts that one had to go through to acquire those funds.
With the proof-of-stake algorithm, Peercoin also introduced the concept of coin age.. Coin age is simply the currency amount times the holding period. For example, 10 coins held for 50 days would mean 500 days of acquired coin age. When a bad actor would try to gather enough coins to attack the network, their funds would initially havea coin age of one day. Coins need a minimum of 30 days of coin age before they can be used for minting, which is the process that replaces mining in proof-of-stake algorithms. Due to the coin age concept, any attacker would need to hold the coins used in their attack for at least 30 days. Furthermore, as others on the network may have older coins, this may also increase the number of coins needed for a succesful attack. These systems thus make any attack infeasible while simultaneously creating a window for the network to respond to any attempt.