Peercoin and “Proof-of-Stake”

As much as we support Bitcoin – as not only a high tech financial instrument, but also an ideology – it remains important, especially if there’s skin in the game – to keep the open minded approach that made Bitcoin possible in the first place.

And while it does seem likely that Bitcoin will retain it’s position of dominance in the digital currency realm for the foreseeable future..

Anything can happen, and it’s seems rather prudent at this stage of the game to maintain an unbiased, and open perspective – making sure to logically consider all developments and possibilities.

One of the more promising of these is Peercoin, a hybrid proof of work / proof of stake coin that attempts to evolve the Bitcoin protocol and in doing so; solve many of the potential problems that could lay on the horizon for Bitcoin.Below, we’ll attempt to layout the fundamentals of Peercoin, how it differs from Bitcoin, and do what any good crypto enthusiast does: speculate.

When researching the topic of Bitcoin – the term “network effect” is bound to pop up. The network effect is simply the advantage gained from being the first mover in a specific market. More specifically, it’s the collective habits of a large group of users that constitute the network effect, and provide it’s distinct advantages.In this case Bitcoin was the first to market, and as such holds what could very well turn out to be insurmountable. And while the network effect is nothing more than people’s psychological aversion to change.. don’t underestimate the difficulty in overcoming a competitor with such an advantage.

If the market demands change and Bitcoin fails to evolve and adapt… the network effect will do little more than slow the shift in market share. With that said.. to “evolve” to meet specific market demands, Bitcoin might have to abandon attributes that make it Bitcoin in the the first place. Also, it seems the community may be realizing that making fundamental changes to the Bitcoin protocol is a complex and unrefined process.Therefore, if there were multiple and various needs and uses to arise for cryptocurrencies (which seems rather likely) and Bitcoin is incapable to fill all of these needs (which also seems likely) then there would be space in the market for other alt coins. Meaning the network effect would mean very little to the alt coins the targeted such market gaps properly.

Regardless of your opinion of Peercoin, if you have one at all, it definitely sets it’s self apart from Bitcoin by incorporating key changes into the protocol.

In reality, most crypto-coins are an imitation of Bitcoin in a fundamental fashion, but once you take the time to understand precisely how Peercoin has differentiated itself to be positioned within the crypto market – You’ll realize just how dramatically different it is, and that it very much stands on it’s own in terms of innovation contributed to this digital currency evolution.

Much like how you’ll likely run into the term “network effect” with Bitcoin, the term “backbone” seems impossible to avoid. Sunny King, the anonymous developer behind peercoin, designed it to exist in conjunction with other digital currencies. As such, the term backbone makes a good bit of sense.This differs from Bitcoin, which attempts to exist as the sole proprietor of the cryptocurrency technology. In fact, that seems to be the opinion of many Bitcoin advocates – that really only one coin is needed in the economy, and anything else is nothing more than technological redundancy.

It seems obvious by now that there will be far more than one single crytpocurrency around for quite some time. As the market matures, they’ll all mold to coexist with each other – This, of course, remains to be seen, but either way, Peercoin is designed to play a specific role in a developed future ecosystem of cryptocurrency, and if it succeeds in that role it could become better than Bitcoin at one important function – a long term store of value.And this is where many confuse Peercoin’s future and potential, as it’s often cited that Peercoin doesn’t function well for day-to-day transactions – and therefore isn’t of much use a cryptocurrency. Or that’s how the narrative goes, assuming a “one crypto take all” scenario. While it’s true that purchasing a new laptop computer on Overstock.com isn’t what Peercoin is best suited for, and that’s intentional in the design, it’s because it is intended to be used in tandem with other coins that’s fee structure and transaction times are far better suited to smaller, more frequent transactions.

In designing Peercoin, SunnyKing assumes that the crypto landscape will indeed resemble current financial markets. In that multiple financial instrument will differentiate themselves enough through various mechanisms such as interest rates and fees, among other things, in order to provide enough value on their own merit to justify a place in the markets for themselves.If this indeed turns out to be the case, then Sunny King’s foresight could prove ingenious and Peercoin could very well adapt to become the “backbone” of cryptocurrency. In effect, Peercoin or “PPC” looks to be the bonds and treasuries market of the crypto world.

The transaction fee is a fundamental function in a coin and significantly affects the position it takes in the market. Peercoin’s transaction fee is cited by many as the sole reason that the coin could fail. The assertion being that the fact that the .01 PPC fee acts as a deterrent from making transactions, and therefore, what’s the point?One thing to point out is that the fee is actually fixed per kilobyte of transaction data, not per transaction. Which means that Peercoin’s transaction fees are actually steeper than most think. In other words, most PPC transactions will result in a transaction fee of .01 PPC, but a transaction that exceeds the 1 kb threshold would result in a fee double, triple, or even ten times as high that. Essentially .01 fee is a minimum, and this has absolutely profound implications for PPC as a useful financial instrument.

Especially as PPC presumably grows in value. Currently, as PPC currently sits at a value of around $5.00 – That would mean that a .01 PPC fee (5 cents) would be reasonable if you wanted make a smaller purchase with it. But what if PPC reaches a value of $1000 USD? A minimum fee of $10 would certainly make buying your groceries via your Android PPC app very inefficient, to say the least.

At this point, we’ll remind you that Peercoin’s poor suitability for frequent transactions was intentional, and could potentially provide some much needed stability to the cryptocurrency markets. It is truly intended for use as a long term store of value. Admittedly, it does seem somewhat puzzling at first that transaction fees are set to operate in the manner that they do.. but after seeing the bigger picture, and how the fee works in cooperation with interest that incurs simply for holding your Peercoins, it all starts to make a bit more sense.For one, the fee mechanism could potentially calm much of the volatility seen in Bitcoin. This is huge, and one of the main reasons Bitcoin hasn’t been as widely accepted as should be at this point. Market volatility has been an ongoing trait of the crypto markets and Peercoin looks to be the solution that’s needed. The transaction fee combined with the slightly inflationary nature of PPC could simultaneously provide deterrent of transactions, and incentive for holding, providing the stable, less volatile currency that could actually serve as the “backbone” of the market.

In short, the transaction fees only seem out of place before you realize exactly what Peercoin is attempting to become. A mechanism that increases the currencies stability is rather desirable once you understand that PPC is meant to serve as a type of “buffer” for the entire crypto ecosystem – and that’s exactly what the “high” fee does.It also means that if PPC ever soars to $10,000 (only exploring hypotheticals, here..) then buying $100 worth of PPC would do nothing more than cover your transaction fee. This creates an interesting dynamic and fairly high barrier to entry that even further demonstrates Peercoin’s intent to serve as a long-term store of value, rather than a transfer of value.

One of the benefits of proof of stake, in regards to Peercoin, is that simply by holding your coins and verifying your stake in the network, your stake will grow by 1% annually. This is made possible because, as a stake holder, you become the “miner” and will rightfully be compensated for doing your part in securing the network.

So if you’re holding and minting (minting is basically mining in proof of stake) 100 peercoins for an entire year, you will automatically receive an additional one Peercoin in the form of interest. If you hold 1000 PPC, you will, of course, gain 10 additional PPC as interest for the year. At a current value of $6 per coin, we admit that hardly seems like incentive. But lets say PPC reached $1000 USD – that would mean that you would incur an extra thousand dollars a year simply for holding on to your 100 PPC, and allowing your “stake” to do it’s part in securing the network.

This puts Peercoin in an interesting new class of cryptocurrecies and shoudn’t be underestimated in significance. Much of the debate in Bitcoin value is that it currently has very little use other than speculation (although that’s changing fast), and such will remain the case until Bitcoin has proliferated the online economy to where the amount of transactions justify the price. Peercoin on other hand has already attained as much exposure as it will ever need to be valuable on it’s own accord, as it already does something inherently valuable: it grows.

Another effect of the 1% interest is seen in Peercoin being slightly inflationary by nature. We’ would be quick to point out that this can be somewhat misleading if you don’t take the entire mechanism into account. Most associate inflation of money supply with hyper inflation that has been seen in fiat currencies, and assume any inflation is bad inflation. Not necessarily. There are far more factors to take into account, when judging the viability, and valuations of an asset, digital or not. Not to mention that there are actually more than one inflationary mechanism that would need to be considered.

For example, compared to Bitcoin – Just because the Peercoin is inflationary by nature, and Bitcoin isn’t – says nothing about the current growth rate of the money supply, which has far more immediate effects on market valuations. So while Bitcoin may have a hard cap at 21 million coins, and while Peercoin will technically never reach a hard cap at all.. that says little of the current growth rate of the coin supply.

Here’s a chart comparing the growth rate of the coins supply for both BTC and PPC – as you can see, that while PPC is indeed the inherently inflationary coin, the supply of new coins coming into the market is dwindling far faster than Bitcoin’s. We can only assume this will eventually be reflected in the price. Assuming the crypto market was rational, which it certainly isn’t at this stage, so it’s difficult to extrapolate.

We’re not arguing that Peercoin’s slightly inflationary nature is either a positive or negative feature for a cryptocurrency. Only that inflation isn’t inherently a bad thing as many may assume. It’s centralization that enables the abuse and manipulation of inflation that is inherently a problem. The bottom line is PPC’s inflation rate is purely a function of the holder of the coins receiving that 1% interest for securing the network. This is good inflation, and one of Peercoin’s many strong suits. So while the money supply grows.. just like dollars, the main difference is the fact that your stake in said money supply grows, as well. So there is inflation in the money supply, but no purchasing power whatsoever is lost by the coin holders.

The difference between proof of stake and proof of work is not only significant, but also the main differentiator between the leading contenders for the crytpto currency title belt. Albeit, a fairly nuanced and difficult topic, it’s a concept that should be fundamental knowledge that’s considering investing in the crypto coins.

To start, something that many don’t realize is that Peercoin is very literally an evolution of Bitcoin. Proof of stake was born out of concerns that a full proof of work system, such as the one Bitcoin utilizes, could be fundamentally flawed in that miners won’t have sufficient incentive to keep the network secure when block rewards inevitably diminish. This unknown hypothetical has become known in Bitcoin circles as “The Tragedy of the Commons”, and is one of the major long-term problems with Bitcoin.

That said, a fully proof of stake system has it’s potential detriments, as well. Mainly, the initial distribution of the coin supply is rather difficult if you take mining out of the equation. There are full proof of stake coins such as Nxtcoin that have attempted to accomplish the difficulty of initial distribution of a full proof of stake coin by simply selling the initial coins in an ad hock ipo of sorts. We’ll talk more about this, and Nxt, in general, in an upcoming article, but for now..

Peercoin takes the approach of combining the “best of both worlds”, and holds the distinction of being the first hybrid PoS/PoW crypto coin. Peercoin started off being mined just like Bitcoin, then will gradually transition to a mostly proof of stake platform. This allows PPC the considerable benefits of PoS while still maintaining an initial distribution that’s widely considered fair and acceptable for a decentralized digital currency.

We certainly can’t definitively answer that, as it seems to be a matter of perspective more than anything else. But it does seem rather inevitable that it will eventually become a heated issue. Whether it should be or not is up for debate and entirely irrelevant to those will most likely use it as a talking point to grab ratings, or page views. It would only seem to align with the current political climate, that Peercoin’s ability to claim itself to be the “green” and “sustainable” coin will indeed turn out to be a considerable asset.

Recently, Forbes reported that the Bitcoin network currently costs north of 15 million dollars a day, and stories like this are likely to become more and more prevalent as the mining network gets larger, and thus consumes vastly more electricity and resources. The movement against Bitcoin energy consumption is only just getting started, and since Peercoin effectively alleviates the energy problem all together – things could get interesting.

While, due to it’s hybrid proof of work and proof of stake design, Peercoin currently does require mining and electricity, but it’s designed to transition away from PoW (requires mining) completely, as soon as there are enough stake holders to secure the network with a fully PoS system. That means that the electricty bill for PPC will gradually decrease, while BTC’s bill will only continue to climb to potentially absurd levels.

Some think that proof of stake is problematic in that your reward for securing the network, is based solely on the amount of stake (number of coins) that you hold. Obviously, if someone is earning 1% interest on 100 PPC, and another person is earning that same 1% interest on 10,000 PPC – then the individual holding the 10,000 coin stake will indeed be receiving more Peercoin’s annually.

source: http://cointrader.org/peercoin-proof-of-stake-and-bitcoin/

Peercoin and “Proof-of-Stake”