Explore how Proof of Work and Proof of Stake differ, their impact on security, energy use, and blockchain’s future. Learn which consensus mechanism suits your crypto needs.
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There has been an influx of conversation about Proof of Work (PoW) and Proof of Stake (PoS) consensus mechanisms recently. But what do these really mean? In this article, we're fleshing out what they are, how they work, and how they differ from each other.
The shift from traditional PoW systems to more modern PoS alternatives represents one of the most significant developments in crypto history. Understanding these mechanisms isn't just academic curiosity - it directly impacts energy consumption, transaction speeds, security models, and the future sustainability of blockchain networks.
Whether you're considering which cryptocurrencies to invest in or simply want to understand the technology behind your digital assets, grasping these fundamental concepts is fairly important.
What is a consensus mechanism in crypto?
Before we get started, let's first address what a consensus mechanism is.
Whether PoW or PoS, the consensus mechanism is the agreed-upon protocol that the entire network will use to maintain and operate the blockchain. It looks at how transactions are verified, the amount of energy they require and how new coins enter circulation. The consensus mechanism is effectively the protocol that keeps all the computers on the network in check.
Think of a consensus mechanism as the rulebook that all participants in a blockchain network must follow. Without it, there would be no way to prevent double-spending (the digital equivalent of spending the same dollar twice). These mechanisms ensure that all participants agree on the current state of the ledger, maintaining the integrity and security that make cryptocurrencies valuable.
While PoW and PoS are the most prominent consensus mechanisms, others exist, including Proof of Authority (PoA) and Delegated Proof of Stake (DPoS). Each serves specific use cases and comes with unique trade-offs between security, speed, and decentralisation.
What is Proof of Work (PoW)?
Proof of Work might be the most well-known of the two as Bitcoin, the first cryptocurrency to come into existence, uses it. Despite what many think, this was not when the consensus mechanism was created. It dates back before crypto's integration into the financial sector, right back to the early 1990s when it was initially used as a means to mitigate email spam.
The system worked in such a way that sending an email required a small amount of work to send one email, and a large amount to send out mass spam emails. Alongside blockchain technology, Satoshi Nakamoto reworked these concepts to create the first digital currency. While the electricity and money implications remained the same, he eradicated the need for human intervention.
The blockchain is made up of blocks containing data pertaining to the network, stored in chronological order. The first block on the blockchain is known as the Genesis block and is hardcoded into its software. Each block after that references the previous block and contains an updated version of the blockchain. Still with me? Let’s dive deeper.
New blocks are added to the network by miners who compete with each other to solve a complex cryptographic puzzle. The first to complete the puzzle gets to execute the transactions and receive the miner's fee (a reward for their time and energy).
The process of miners racing to finish the puzzle is known as hashing, as miners are guessing a string of pseudorandom numbers, known as hashes. Once a miner establishes the winning hash, it is broadcast to the network for all the nodes (network of computers) to verify whether it is correct or not. If it is correct, the block is added to the blockchain, and the miner receives the reward.
The reward is new coins that are then minted and added to circulation. In the case of Bitcoin, freshly minted BTC will be distributed to the miners, with this number reducing each time the blockchain reaches a certain number of blocks. This is called a halving and takes place every 210,000 blocks (which takes place roughly every 4 years). Halvings keep the cryptocurrency deflationary and finite.
Examples of Proof of Work cryptocurrencies
Major PoW cryptocurrencies include Bitcoin, Litecoin, Dogecoin, and Ethereum Classic. These networks have demonstrated remarkable security over the years of operation, with Bitcoin alone processing over $19 trillion in transaction volume in 2024 without a successful attack on its consensus mechanism.
However, this security comes at the cost of significant energy consumption, with Bitcoin's network alone consuming more electricity than some countries.
What is Proof of Stake (PoS)?
Proof of Stake was first introduced to the world through Peercoin in 2012, gaining more traction when Ethereum began implementing PoS in 2020 with the launch of Beacon Chain, and fully transitioned via The Merge in 2022.
Considered a more "energy-efficient" means of operating crypto networks, instead of using energy to race to find the winning hash, PoS focuses on participation in the network by looking at ownership in terms of the coin's total supply. PoS was designed to solve the energy problems that PoW platforms created.
Unlike PoW, which requires specialised mining equipment (ASICs), PoS validation can be done on standard hardware, provided there is stable internet and enough ETH staked.
Instead of a number of miners racing at the same time to solve the same puzzle, the PoS algorithm pseudo-randomly selects a node that will be responsible for verifying the transactions.
This election is based on the number of coins that a particular node holds. Once selected, the node verifies and signs off on the validity of the transactions and proposes the block to the network. Once the network accepts, the block is added to the blockchain in the same chronological order as the PoW consensus.
Nodes are selected by engaging in a process called staking. They are required to stake (lock) their funds on the platform as collateral in order to be selected. In order not to favour the richest of the nodes, the algorithm will typically also favour how long the funds have been staked for and add an element of randomisation.
As there is no competition between the miners to race to solve the puzzle, this process is referred to as minting or forging on the PoS networks. The cost implications are specific to that of the platform.
PoS networks often implement additional mechanisms to ensure fairness and security. Slashing is a penalty system where validators can lose a portion of their staked tokens if they act maliciously or fail to properly validate transactions. This economic incentive structure replaces the computational cost of PoW with financial risk, creating a different but equally effective deterrent against bad actors.
Examples of Proof of Stake cryptocurrencies
Leading PoS cryptocurrencies include Ethereum, Solana, Cardano, Polkadot, and Avalanche. These networks can process thousands of transactions per second while consuming a fraction of the energy required by PoW systems, making them attractive for applications requiring high throughput and environmental sustainability.
Proof of Work vs. Proof of Stake: key differences
The differences extend beyond these technical aspects. PoW networks tend to have more predictable issuance schedules and have proven their resilience over longer periods.
PoS networks also offer more flexibility in governance and can implement upgrades more easily, but they're still relatively new compared to established PoW systems.
Industry experts have varying perspectives on these trade-offs. Fidelity Digital Assets noted that PoW's "proven track record" gives it advantages in terms of demonstrated security, while others argue that PoS represents the natural evolution of blockchain technology toward greater efficiency and sustainability.
Pros and cons of PoW and PoS
Proof of Work: advantages and disadvantages
Advantages:
- PoW systems offer unparalleled security through their requirement for massive computational investment, making 51% attacks on networks like Bitcoin practically impossible to execute due to the enormous costs involved.
- These systems have demonstrated remarkable stability over more than a decade of operation, processing trillions of dollars in value with zero successful attacks on their core consensus mechanisms.
- The decentralised nature of mining operations, while concentrated in pools, still maintains a high degree of censorship resistance and network independence.
- PoW has a proven track record that provides confidence to institutional investors and long-term holders seeking maximum security for their assets.
Disadvantages:
- The energy consumption of PoW networks has become their most criticised aspect, with Bitcoin alone consuming more electricity than countries like Argentina.
- Transaction throughput remains severely limited, creating bottlenecks during periods of high demand and resulting in dramatically increased fees for users.
- The environmental impact has led to regulatory scrutiny in various jurisdictions, with some countries banning or restricting PoW mining operations.
- The high barrier to entry for mining has created concerns about centralisation in regions with cheap electricity, potentially concentrating power in specific geographic areas.
Proof of Stake: advantages and disadvantages
Advantages:
- PoS systems consume dramatically less energy while maintaining strong security through economic incentives rather than computational waste, reducing environmental impact by over 99%.
- They can process transactions much faster and at lower costs, making them suitable for everyday use and complex applications like DeFi.
- The lower barrier to entry allows more participants to earn rewards through staking, potentially leading to better decentralisation and broader network participation.
- These systems offer more flexibility for implementing upgrades and governance changes, allowing networks to evolve more rapidly in response to user needs.
Disadvantages:
- PoS networks are relatively new and haven't been tested over the same timeframes as PoW systems, creating uncertainty about their long-term security properties under extreme conditions.
- The "rich get richer" dynamic, where larger stakes earn proportionally more rewards, could lead to centralisation over time as wealth concentrates among the largest validators.
- Some critics argue that PoS systems are less censorship-resistant because validators can be more easily identified and potentially coerced by authorities or malicious actors.
- The complexity of slashing mechanisms and validator requirements introduces new types of risks for participants, including the potential for technical errors to result in financial losses.
It’s worth noting that Ethereum's successful transition to PoS through "The Merge" in September 2022 provided significant validation for the PoS model, demonstrating that large, valuable networks can successfully implement this consensus mechanism while maintaining security and functionality.
Why did Ethereum move to Proof of Stake?
Ethereum's transition from PoW to PoS, known as "The Merge," arguably represented one of the most significant technical achievements in crypto history. The upgrade, completed in September 2022, was driven by several critical factors that had been limiting Ethereum's growth and adoption.
The primary motivation was scalability. Ethereum's PoW system could only process about 15 transactions per second, creating severe bottlenecks as the network grew. High gas fees during peak usage periods made the network unsuitable for many applications, particularly those requiring frequent, small-value transactions.
The PoS system laid the groundwork for future upgrades that would dramatically increase transaction throughput.
Environmental concerns were a key factor in the shift, with the move to PoS cutting energy use by over 99%, directly tackling one of crypto’s biggest criticisms.
The economic shift was significant. Under its proof‑of‑work system, Ethereum paid out roughly $5 billion annually to miners via block rewards. After the Merge, those rewards shrank by over 80%, now going to validators who stake ETH—an approach widely seen as more sustainable. At the same time, the protocol burns a major portion of transaction fees under EIP‑1559, making ETH potentially deflationary during high usage.
The successful completion of The Merge sent a powerful signal to the broader crypto industry about the viability of PoS systems. It demonstrated that even large, complex networks with billions of dollars in value could successfully transition to more efficient consensus mechanisms without compromising security or functionality.
Which is more secure: PoW or PoS?
The security debate between PoW and PoS systems involves fundamentally different approaches to protecting blockchain networks. Both have proven effective, but they operate on distinct principles that create unique strengths and vulnerabilities.
Security
PoW security relies on the economic cost of mounting an attack. To successfully attack a PoW network, an adversary would need to control more than 50% of the network's hash rate, requiring massive investments in specialised hardware and electricity.
For Bitcoin, this would cost billions of dollars and require more mining equipment than currently exists. The beauty of this system lies in its simplicity - the security assumptions are straightforward and have been tested over many years.
PoS security operates through economic penalties rather than computational costs. Validators must stake significant amounts of the network's native token as collateral. If they act maliciously or fail to properly validate transactions, they face slashing: the permanent loss of their staked tokens. This economic incentive structure ensures that honest behaviour is more profitable than attempting to attack the network.
Centralisation
Each system faces different types of centralisation risks. PoW networks can become centralised through mining pools and the concentration of mining operations in regions with cheap electricity. PoS networks face the risk of wealth concentration, where large stakeholders could potentially gain disproportionate control over the network.
The "nothing at stake" problem, often cited as a weakness of PoS, has been largely addressed through sophisticated slashing mechanisms and finality rules. Modern PoS implementations include penalties that make it economically irrational to validate conflicting blockchain histories.
Which is better?
Experts remain divided on which system offers superior long-term security. The reality is that both systems can be highly secure when properly implemented, with the choice often depending on other factors like energy efficiency, scalability, and governance requirements.
The future of blockchain consensus mechanisms
The evolution of consensus mechanisms continues beyond the PoW versus PoS debate. While these two models dominate current discussions, innovative alternatives are emerging that could reshape how blockchain networks operate in the future.
Hybrid consensus models are gaining attention, combining elements of different mechanisms to balance security, efficiency, and decentralisation. Some networks use PoW for initial block creation and PoS for finalisation, attempting to capture the benefits of both systems while mitigating their individual weaknesses.
Proof of Authority (PoA) systems have found success in enterprise and consortium blockchains where participants are known and trusted. These systems sacrifice some decentralisation for dramatically improved performance and energy efficiency.
Delegated Proof of Stake (DPoS) represents another variation, where token holders vote for delegates who validate transactions on their behalf.
Emerging mechanisms like Proof of Space, Proof of Burn, and various forms of Proof of Activity are being explored for specific use cases. These alternatives aim to address particular limitations of existing systems or serve specialised applications.
The trend toward environmental sustainability is likely to continue driving innovation in consensus mechanisms. As regulatory pressure increases and institutional adoption grows, networks that can demonstrate minimal environmental impact while maintaining security will have significant advantages.
However, it's unlikely that PoS will completely replace PoW in the near future. Bitcoin's position as digital gold seems secure, and its PoW consensus mechanism is integral to its value proposition. Instead, we're likely to see continued specialisation, with different consensus mechanisms serving different purposes within the broader crypto ecosystem.
Conclusion
The PoW versus PoS debate isn't about declaring a winner, it's about recognising that each serves different purposes in the evolving crypto landscape. Many in the industry consider Bitcoin’s PoW to be a benchmark for security and decentralisation, while PoS networks are becoming the preferred choice for apps requiring speed, efficiency, and environmental sustainability.
Ethereum's successful transition to PoS proved that established networks can evolve without sacrificing security, validating PoS as a mature alternative. As the space develops, expect to see continued specialisation rather than replacement, with different consensus mechanisms optimised for specific use cases.
For investors and enthusiasts, understanding these mechanisms is essential for evaluating projects and predicting where the technology is headed. The consensus mechanism innovation continues to be one of blockchain's most dynamic frontiers.
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Index funds are an increasingly popular form of investment that offers investors a low-cost, passive way to gain exposure to a broad range of assets. With minimal management fees and no need for active trading decisions, index funds can provide investors with higher returns at lower costs than more traditional forms of investing.
What is an index fund?
An index fund is a type of mutual fund or exchange-traded fund (ETF) composed of a basket of stocks or bonds that tracks a specific stock market index such as the S&P 500 or Dow Jones Industrial Average. These might also be referred to as index mutual funds.
Unlike actively managed funds, which attempt to beat their respective benchmarks through security selection, index funds strive to replicate their underlying market indexes by holding all (or substantially all) of their components in similar proportions.
This makes index mutual funds more cost-effective than actively managed funds since they incur fewer trading costs and require less research and fewer management fees. On top of that, since they track established indexes, investors can benefit from the diversification within the asset class without having to pick individual stocks themselves.
Index funds provide an easy way for investors with any level of experience or resources to access some of the market's best-performing assets at a minimal cost. Index mutual funds are also favored for long-term investment strategies such as retirement funds.
How do index funds work?
Index funds, also commonly referred to as "indexing", follows a passive form of investing (unlike traditional mutual funds that are typically actively managed funds). Instead of fund managers actively trading a variety of stocks, index funds are built by mirroring the securities of a particular index and holding them.
The key notion is that by mirroring the profile of the index or stock market, the fund will match its overall performance. For example, over the last thirty years, the S&P 500 has grown an average of 10.7% per annum, which its index mutual fund will mimic.
While the most popular index fund tracks the S&P 500, other prominent index mutual funds include:
The Bloomberg U.S. Aggregate Bond Index
Which tracks the bond market.
The MSCI EAFE Index
Which tracks foreign stocks in Europe, Australasia, and the Far East.
The Dow Jones Industrial Average (DJIA)
Which tracks 30 large-cap companies listed on the stock exchange.
The index fund portfolio holdings will remain as is unless there is a significant change in the market's benchmark index. Benchmarks are used to measure the performance of the market indexes and will influence whether any changes to the composition of the portfolio need to be made. If changes are necessary, managers will rebalance the percentage of securities as necessary.
Passive vs actively managed funds
Both mutual funds and index funds are great investments, however, they differ slightly in how they operate and the returns one can expect. As with any investment endeavor, investing involves risk.
Actively managed funds
An actively managed investment fund offers investors access to an experienced team of financial professionals or simply a fund manager who makes knowledgeable decisions about where and how to allocate the funds across asset classes. This generally enables larger returns than traditional passive investing.
Typically, many mutual funds are actively managed funds, however, it's best not to assume a fund is actively or passively managed simply based on the fund type. There are plenty of funds that break this rule, like actively managed exchange-traded funds.
The advantages of an actively managed fund are that it can earn higher returns and beat the market index. It's important to note that this is not a guarantee so it's best to check the history of the fund you wish to invest in beforehand and the performance of the team managing it.
It's also worth noting that when the mutual fund sells individual stocks it incurs fees and taxes which will affect the fund's performance. Investors are also required to pay a flat fee despite the performance of the actively managed mutual funds, which could result in the mutual fund underperforming the market index.
Passively managed funds
On the other hand, a passively invested fund mimics a market index and does not have a fund manager or team of fund managers making decisions on what and when to invest.
With passive funds, there are fewer decisions to be made and trades to execute, which allows for less effort and lower fees. Automating the bulk of a passively managed index mutual fund makes it much more cost-effective than paying professionals to determine when and what should be bought or sold.
Typically, an index fund will fall into this category as it does not require full-on management. Once the index on which it will mimic is established, the shares are purchased and the index fund continues with little to no input.
Index funds vs mutual funds
Investors looking to build a portfolio have two popular fund options: index funds and mutual funds. Both types of funds are created by offering diversification through a curated range of stocks and bonds and access to professionally managed investments, but there are some key differences between index funds and mutual funds that investors should be aware of before making their choice.
Index funds typically carry lower fees than mutual funds, but they also come with fewer features and tend to be more passive in nature.
Actively managed mutual funds on the other hand provide more flexibility when it comes to customization, as well as access to professionally-managed portfolios which may yield higher returns over time. Understanding how both index and mutual funds work will help investors make an informed decision about which type is right for them.
Is it worth investing in index funds?
Financial professionals will typically agree that index funds are a great way for investors to invest passively in the stock market. Not only do they require little input, but they also offer a low-cost option with a strongly diversified portfolio. Index funds also offer a good investment option for long-term investors.
However, it's important to remember that all investments come with risks, and individual financial situations can vary widely. Before making any investment decisions, it is highly recommended to consult a professional financial advisor who can assess your specific circumstances and provide tailored advice. Their expertise will help you make informed choices aligned with your financial goals and risk tolerance.
As we explore concepts within the investing world and the various available options, today we are looking into mutual funds to gain a proper understanding of what they are, how these are categorized, and what these actively managed funds could contribute to your investment journey.
What is a mutual fund?
A mutual fund is a type of investment vehicle that pools the money of many investors and invests it in stocks, bonds, or other securities. Mutual funds offer investors diversification, professional management, and economies of scale.
These actively managed funds also provide liquidity since they can be easily bought and sold through a broker or financial advisor. Mutual funds come with various levels of risk depending on their asset allocation strategy, with some being more conservative than others. Investing in mutual funds is a great way for individuals to access the stock market without having to purchase individual stocks themselves.
How can you access actively managed funds?
Investing in mutual funds is an easy and cost-effective way to diversify your portfolio, as they offer access to a wide range of asset classes. Mutual funds are professionally actively managed funds handled by fund managers who make decisions on behalf of the investors.
Accessing mutual funds is relatively straightforward, investors can buy mutual fund shares directly through a fund house or use the services of a financial advisor or online broker. The price will reflect the mutual fund shares' net asset value plus fees associated with the trade.
When one wants to redeem their shares, they will be worth the net asset value at the time plus any fees. The net asset value (NAV) of a mutual fund, more commonly referred to as its price, is determined by the total worth of all the securities held in the portfolio and divided by the number of outstanding shares.
Before investing in any mutual fund shares it’s important to understand the fees associated with them, such as management fees and sales charges, so that you can choose the best option for your needs. Mutual fund investing can be lucrative, but there are still risks associated.
The different types of mutual funds available
As with most investment options, there is never just one type. When it comes to mutual funds, there are roughly six different types that one can explore. Any interested mutual fund investor should become familiar with the following types:
1. Stock Funds
Also known as equity funds, stock funds are made up of stocks (publicly traded shares of a company). Stock funds allow mutual fund investors to invest in multiple publically traded companies, and effectively own a tiny piece of each. These stock funds are known to deliver the highest returns when compared to other mutual funds and have the greatest growth potential, however, they are also considered to be the most volatile.
Growth stock mutual funds, in particular, are known to grow at a faster rate than the rest of the markets. These are categorized by the companies' value, with small-cap funds incorporating companies valued below $2 billion, medium-cap funds $2-10 billion, and large-cap funds looking at companies valued at $10 million or higher.
These mutual funds can be further broken down into a number of categories, and offer a perfect means to diversify within the stock funds category:
Growth and Income Funds (Large Cap)
Aiming for slow and steady development, these calm-growth stock mutual funds invest in large-cap companies that have relatively modest rises and falls when compared to their smaller counterparts. As a result, mutual fund investors can be sure of long-term gains with minimal risk.
Growth Funds (Medium Cap)
A perfect medium between small-cap and large-cap funds, these mutual funds invest in mid-sized companies for moderate growth and volatility.
Emerging Market Funds (Small Cap)
These are the most volatile funds as they have the capability to offer massive profits or losses in a brief period. Investing heavily in up-and-coming startups with the potential for exponential growth is an integral part of these aggressive mutual funds.
International Funds
International growth stock mutual funds allow one to diversify their money even further and are composed of a variety of companies from across the world and differentiated by capital size. These mutual funds typically include the likes of international brands and market giants beyond the borders of a specific country.
2. Bond Funds
With bond funds, you have the option of investing in government or corporate bonds. Here, instead of buying a company's stock, your money is lent to governments and in return one earns interest. Unlike growth stock mutual funds which can be volatile and unstable in nature, bond funds offer steady returns and are known to provide consistent profits over time.
While bond funds err on the side of caution, it's important to remember that in order for an investment to be worthwhile it needs to grow at a faster rate than inflation. History shows that these types of mutual funds earn between 5-6% per annum, which should be evaluated against the inflation rates (typically 3-4%). While bond funds are a safe bet, one must consider whether they will generate wealth.
3. Index Funds
Index funds are a kind of mutual fund that seeks to match the performance of an index or certain segment of the market. Unlike most mutual funds which have their investments actively managed by professionals, index funds only buy the investments included in a specific index, a process known as passive management.
For example, the renowned S&P 500 index tracks the stock prices of some of America's leading businesses to measure their financial performance. Investing in an index fund of this nature allows you to invest in multiple companies at the same time.
While many investors believe index funds are more beneficial in the long run due to their lack of management fees, there is a plethora of professionally managed mutual funds that routinely surpass these. Not only this but investors who invest in mutual funds will always benefit from an experienced investment professional monitoring one's portfolio, making up for any additional costs with increased profits.
4. Income Funds
Those seeking regular income from their investments should consider mutual funds that focus on stocks paying dividends. Investors who opt for such a fund are not worried about the volatility of stock prices, instead, they're prioritizing receiving reliable small amounts of money from companies inside these mutual funds throughout the year.
5. Money Market Funds
Money market mutual funds provide investors with the opportunity to earn returns from loaning money out for short-term periods. Money market funds are typically loaned out to governments, banks, and companies that have contractual agreements in place to pay back investors within a year or less.
In comparison to bond funds, money market funds often fall short in terms of building wealth. For example, they typically pay an average return rate that is no higher than 3%, meaning your capital can actually decrease with time if inflation exceeds this level.
Money market mutual funds can act as a protective guard over one's cash. While it safeguards against any potential losses, its conservative nature also limits the chances of any significant growth.
6. Hybrid Mutual Funds
To ensure your investments are well-rounded and secure, hybrid mutual funds cleverly spread out the money across stocks (equity) and bonds (debt). Two common types of these intelligent funds include balanced funds and target-date funds. Investing with hybrid mutual funds offers returns in smaller time frames.
Balanced Hybrid Mutual Funds
Balanced hybrid mutual funds are investment funds that provide a combination of stocks and bonds, allowing investors to benefit from both the potentially higher returns of equities while also mitigating some of the risks with fixed-income investments.
These mutual funds typically have an asset allocation mix between 60% stocks and 40% bonds, but this can vary depending on the fund's objectives. Balanced hybrid mutual funds offer diversification within one single fund, making them ideal for those seeking to minimize their overall portfolio risk.
Similar to most mutual funds, these types of mutual funds are actively managed by experienced professionals who continually monitor market conditions in order to make adjustments when necessary.
Target-Date Hybrid Mutual Funds
Target-date hybrid mutual funds are a type of investment fund that combines both stocks and bonds to provide investors with the potential for higher returns while mitigating some of the risk associated with equities.
These mutual funds typically have an asset allocation mix that is based on when one plans to retire, allowing investors to benefit from diversification within one single fund. Target date funds can also be referred to as lifecycle funds.
Why invest in mutual funds?
Investing in mutual funds is a great way to diversify your portfolio and maximize your returns. Mutual funds are pools of money from several investors that can be used to purchase stocks, bonds, or other investments.
Most mutual funds allow investors to spread out the risk associated with investing across multiple assets instead of just one, reducing the volatility of your overall portfolio. Additionally, mutual fund managers have access to greater research capabilities than individual investors do which can help them identify profitable investments more quickly.
Overall, investing in mutual funds is an excellent way for individuals to benefit from professional management while also reducing their own risk exposure. Mutual funds are also recommended for long-term investment goals, particularly for retirement.
Crypto wallets are a critical tool for anyone looking to use, store, and manage crypto assets. Crypto wallets come in various forms, with different features and security options that cater to the needs of different users. Finding the right crypto wallet is essential if you want to get the most out of your cryptocurrency investments.
No matter what type of crypto wallet you choose, it’s important to do your research before making a decision since each one comes with its own set of advantages and disadvantages. It’s also important that you keep your private keys safe so no one else can access them, this will ensure that only you have control over your funds and crypto assets.
What is a crypto wallet?
A crypto wallet is a digital wallet that stores manages and facilitates the use of various cryptocurrencies. In order to store and use crypto assets, one needs a digital wallet. Unlike traditional wallets that simply hold your cash or cards, crypto wallets facilitate transactions as well as store your funds.
Each crypto wallet has a public and private key which are unique alphanumeric codes that grant the user access to the funds. Public keys are wallet addresses to which other users can send you cryptocurrencies, similar to your bank account number, while private keys are akin to a pin number and should not be shared with anyone.
In essence, crypto wallets act as secure interfaces for users to access, store and transfer funds across different blockchain networks. In essence, it’s like a bank account for digital currencies.
The different types of crypto wallets
Crypto wallets can be divided into two main categories: hot wallets and cold wallets.
Internet connectivity is the defining factor between hot wallets and cold wallets. Hot wallets are connected to the internet, making them less secure but much more user-friendly. On the other hand, cold wallets are stored completely offline and do not require any internet connection. This provides a higher level of security, which makes them ideal for individuals who plan on storing their crypto assets long-term.
Each of these categories can be further broken down into varying wallets. Under the hot wallets umbrella, there are desktop wallets, mobile wallets, and web wallets, while under the cold wallets umbrella, there are hardware and paper wallets.
Hot wallets
As a hot wallet is easy to set up and constantly connected to the internet they are ideal for users looking to make daily or frequent transactions. Typically with hot wallets, funds are quickly accessible and they tend to be very straightforward to operate. Below we look at the three main types of hot wallets: desktop wallets, mobile wallets, and web wallets.
Desktop wallet
A desktop wallet is a cryptocurrency storage solution that allows users to store, send, and receive crypto assets from their personal computers with the crypto wallet stored on the device’s hard drive.
It is generally considered to be a secure way of managing crypto assets as it does not require the user to store their funds on an exchange, instead giving control over the private keys associated with the hot wallet to the user.
The downside however is that it may be vulnerable to computer viruses should someone gain access to your desktop.
Mobile wallet
Mobile wallets are digital crypto wallets that allow users to manage their cryptocurrencies directly on their mobile devices. These crypto wallets are very convenient and secure compared to carrying large amounts of money around or keeping it in a traditional bank account.
Mobile wallets provide users instant access with more control over their funds and are particularly useful for quick payments that require a scan of a QR code. When downloading this type of hot wallet ensure that you use a link from the website directly to ensure that you are not falling for a fake wallet. This goes for all hot wallets and cold wallets listed here.
Mobile wallets are typically the best crypto wallets for users actively spending their crypto assets.
Web wallet
Web wallets are hosted by third-party services, which act as custodians for users' private keys. Web wallets provide an easy way to manage digital currencies, allowing users to quickly send and receive payments without having to download or install any software.
Additionally, web wallets offer enhanced security features such as two-factor authentication and multi-signature transactions. With these features in place, web wallets can provide a secure environment for storing cryptocurrencies regardless of the user's level of technical expertise, an added bonus for hot wallets.
Cold wallets
Cold wallets are hack resistant and therefore are considered the best crypto wallets for hodlers. In order to facilitate trades, cold wallets need to connect to the internet in order to trade directly from their cold storage devices.
Hardware wallet
Hardware wallets store private keys on a physical device like a USB drive or an external hard drive. A common example of this is the Ledger Nano X, while secure it retails for roughly $150.
These crypto wallets provide maximum security but require more effort to set up and use compared to other types of crypto wallets. They typically are also more expensive as one needs to buy a physical device.
Paper wallet
Finally, paper wallets are simply printed copies of public/private key pairs which allow you to securely store funds offline without having any digital device at all. While these are considered to be the best crypto wallets in terms of security, if the paper gets damaged then the funds are lost.
Finding the right crypto wallet for you
In order to find the right crypto wallet you will need to establish what specifically you wish to do with your funds. If you are looking to hold them long-term, cold wallets are by far the more secure solution, however, if you are making payments and using cryptocurrencies in your day-to-day life, a hot wallet or even a mobile wallet might be better suited to your needs.
Many crypto users utilize a combination of two or three, using the more secure crypto wallet option to hold their funds long-term while also having a portion of funds in a preferred hot wallet allowing them quick and easy access to their funds when they need them.
Ethereum Naming Service is a branch from the original blockchain network which aims to make the crypto space, particularly within the DeFi and Web3 sectors, more user-friendly and accessible. Similar to how Domain Name Service made the internet more accessible, Ethereum Name Service aims to do the same and become a fundamental component of these sectors.
What is Ethereum Name Service (ENS)?
Ethereum Name Service (ENS) is a decentralized naming system that simplifies sending and receiving payments in the Ethereum network. It works like a domain name service (DNS) uses IP addresses, but instead for Ethereum crypto addresses, allowing users to register human-readable names that are mapped to their Ethereum addresses. This makes it easier to remember and share addresses, instead of having to remember long strings of characters.
For example, a user could register the domain name "myname.eth" and associate it with their Ethereum wallet address. Once registered, anyone can send payments to "myname.eth" instead of the complicated Ethereum address.
Users can register a name through various ENS domain registrars or directly through the ENS manager. Once registered, the name is added to the Ethereum Name Service Registry, and the user becomes the owner of that name. ENS uses a hierarchical system of domains similar to the DNS system used for the internet.
Once registered, the user can then set the resolver, which is a smart contract that provides information about the Ethereum wallet address associated with the ENS name.
The resolver can be thought of as a mapping function between the name and the Ethereum wallet address. When someone sends a payment to an ENS name, the resolver is queried to retrieve the associated Ethereum address. Once the Ethereum wallet address is retrieved, the payment can be sent directly to the address.
ENS also allows users to add additional data to their domain names, such as an IPFS hash or a swarm hash, making it possible to associate decentralized content with a domain name. For example, a user could associate an IPFS hash with their domain name, making it possible to access decentralized content using a human-readable name.
Who created Ethereum Name Service?
Ethereum Name Service (ENS) was initially part of the Ethereum Foundation and proposed by Nick Johnson in 2016 as a way to simplify the process of sending and receiving payments in the Ethereum network. Nick Johnson is a software engineer that previously worked at Google and the Ethereum Foundation.
The ENS system was launched as a separate entity in May 2017 as a decentralized naming service on the Ethereum blockchain. Since its launch, ENS has been widely adopted by the Ethereum community and has become an essential part of the Ethereum ecosystem.
How does Ethereum Name Service work?
The Ethereum Name Service (ENS) system is similar to the DNS (Domain Name System) used on the internet. Users can register an ENS domain name under the .eth top-level domain and associate them with their Ethereum addresses by using the platform's smart contracts.
This means that instead of sending payments to complicated and hard-to-remember Ethereum crypto addresses, users can simply send payments to easy-to-remember domain names. For example, instead of sending funds to 0x71C7656EC7ab88b098defB751B7401B5f6d89, users can instead send funds to tap.eth.
The system uses two smart contracts to make this possible: the registry and the resolver.
ENS Registry
To use ENS, users must first register a name through a registrar. Registrars are entities that facilitate the registration of domain names under the .eth top-level domain and store all the domains. Once a user has registered a name, it is added to the ENS Registry, and the user becomes the owner of that name.
ENS Resolver
The next step is to set the resolver, which is a smart contract that provides information about the Ethereum address associated with the ENS domain. Resolvers can be set by the user or they can use one of the default resolvers provided by ENS. Once the resolver is set, users can associate their Ethereum crypto address with their ENS name. This is done by adding a record to the resolver that maps the ENS name to the wallet address.
ENS allows users to add additional data to their ENS domains, such as an IPFS hash or a swarm hash. ENS also supports subdomains, which are domains that are associated with a parent domain name. This makes it possible to create a hierarchical naming system that is similar to the DNS system used on the internet.
What is the ENS token?
The Ethereum Name Service (ENS) did not have its own token until recently. In 2021, the ENS team announced the launch of a new governance token called ENS, which is separate from the old ERC-20 token with the same name.
The new ENS token is used for governance and voting purposes and is not used to pay for the registration or renewal of ENS domain names. Instead, users need to pay in ETH to register their “.eth” domains, with an idea of the costs reflected below (subject to change due to market fluctuations, please review the ENS website for accurate costs):
$5 in ETH per year, for a five+ character .eth ENS domain;
$160 in ETH per year, for a four-character .eth ENS domain;
$640 in ETH per year, for a three-character .eth ENS domain.
The higher prices are due to the supply of three- and four-character .eth names being smaller.
The total supply of the new ENS token is 100 million, and they were distributed through a community airdrop in 2021.
What is the ENS DAO?
The ENS DAO (Decentralized Autonomous Organization) is a community-governed organization that oversees the development and management of the Ethereum Name Service (ENS) ecosystem. It is responsible for making decisions about the future direction of the ENS system, including upgrades, changes to policies, and new feature development. The organisation is governed by the ENS token holders, who have the right to vote on proposals and decisions related to the ENS ecosystem.
The organization is an important part of the ENS ecosystem, as it ensures that the system is developed and managed in a decentralized and community-driven manner. It allows stakeholders to have a voice in the decision-making process and ensures that the system remains responsive to the needs of the community.
What is the ENS Foundation?
The Ethereum Name Service (ENS) Foundation is a non-profit organization that supports the development and growth of the ENS ecosystem. It oversees the development of the ENS system, promotes its adoption, and provides support to users and developers.
The ENS Foundation is involved in a wide range of activities related to the ENS ecosystem, including organizing community events, providing guidance, and funding the ongoing development of the ENS system. It plays a critical role in supporting the growth and development of the ecosystem alongside the ENS DAO, which is responsible for making decisions about the future direction of the ENS system.
How can I buy ENS tokens?
Tap's mobile app enables users to easily acquire, trade and securely store Ethereum Name Service (ENS) in an integrated wallet. Users can buy and sell the ENS token using a variety of supported crypto or fiat currencies. The app also provides a reliable space to store ENS tokens and other digital assets. By downloading the Tap mobile app, users can unlock the potential of a range of cryptocurrencies and fiat wallets.
Generational wealth is not just about building a large stash of money, it's also about how you pass it on. Once you've paid off your debts and established various forms of income, the next step is to start to build generational wealth that can surpass your lifetime.
In this article, we explore what generational wealth is and how to start building it. As with any investment account, the earlier you start the better the end result. While building generational wealth is a great place to be, we encourage you to get your current financial situation in order and build your financial education before you start exploring this concept.
What is generational wealth?
Generational wealth, also called family wealth, is the transfer of assets from one generation to the next within a family. This may include multiple streams of income from financial investments like stocks and bonds, as well as valuable assets, real estate, and family businesses. These assets continue to generate financial value as opposed to just being a lump sum of cash.
It's important to note that when an individual is born into wealth, that wealth was created by a generation before them, whether that be decades or centuries before. This financial success can help eliminate financial struggles for generations to come, or if not handled correctly, could be eradicated by just one generation.
The key factor when it comes to passing on generational wealth
Creating wealth is not the hardest part, the hardest part is educating the next generations on how to manage this wealth. According to the Williams Group wealth consultancy, 70% of wealthy families lose their wealth by the second generation while a whopping 90% lose it by the third.
Generational wealth is not about creating enough money to allow your children’s children to sit around all day, it’s about passing wealth down for generations to come to make the world a better place and empower the family tree. It's not about materialism or consumerism, it should be about financial education and philanthropy. Consider how important generational wealth is to you before embarking on building wealth for future generations.
The key steps to building generational wealth
There are two key components that need to come together in order to build generational wealth: firstly, building this wealth, and secondly, passing on this wealth. In this first section, we will cover the former.
Creating generational wealth isn't going to happen overnight. It's a journey that necessitates time, purposeful planning, and commitment. There are no shortcuts when it comes to creating generational wealth, it's a marathon, not a sprint, no matter which financial assets or stock market you might choose to invest in.
It involves not only taking care of your personal finances through proper planning but also educating the next generation about financial literacy and personal finance. This legacy wealth could go on to fund a child's education or college education, or be used to build an impressive real estate portfolio or invest in family businesses.
It's not about inheriting a trust fund at a young age so that one can simply enjoy life, it's about learning how to be financially fit, understanding how to create wealth, and hopefully building a secure financial future for the next generation.
1. Build a solid financial foundation
First and foremost, you will need to build a solid financial foundation before you start to build generational wealth which means you need to get out of debt and establish an emergency fund (three to six months' worth of expenses).
Do not progress to step two until this step has been completed. In order to build wealth one needs a firm foundation, so set yourself up to weather any storms that might come your way before you embark on the journey to create generational wealth.
2. Start allocating 15% of your income to a retirement fund
Now that you are out of debt and have established an emergency fund, allocate at least 15% to your retirement fund. In this step, consistency is key. Determine what kind of investment account (whether using new-age financial assets or the stock market) you wish to use, consult a financial advisor if necessary, and start allocating 15% of your gross income to this tax-advantaged retirement account.
If you consistently do this for two to three decades you will have built enough wealth to live comfortably after retirement and pass some on.
3. Build slowly and consistently
As we mentioned earlier, building generational wealth is a marathon, not a sprint. This is a long-term commitment that requires no rush and no pressure. Commit to consistently building your wealth for the rest of your life.
4. Communicate with your family and educate them about money
Discuss your financial goals with your children and use the opportunity to share your knowledge about wealth. If your wealth creation involves investing in real estate, building a family business, or any avenue that requires active participation, ensure that you keep your descendants in the loop and provide them with the wisdom, knowledge, and skills to maintain and ideally continue to build generational wealth.
By discussing money frequently, being open about mistakes you have made with finances, and demonstrating smart financial decisions in your own life, you can teach your children about the importance of managing their money wisely.
5. Officiate things by making them legal
When it comes to building generational wealth, a financial advisor is optional but including a lawyer is essential. This step ensures that the generational wealth you spent your lifetime building is distributed accordingly.
Ensure that you go through the necessary legal proceedings to make sure you're not only on the right side of the law but also that the generational wealth is passed on as per your intentions.
How to pass on generational wealth
Now that you've put the processes in place to start to build generational wealth, the next step is to put in place the necessary steps to ensure a smooth handoff. Here are three key steps to ensure that your generational wealth remains a blessing and not a chaotic curse for those left behind.
1. Create a will
No matter what earthly possessions or family wealth one has, a will is essential for everyone 18 years and older. This legal document outlines how your assets are distributed after you die. While consulting legal counsel is advised, there are plenty of templates and methods online for writing and establishing your will. Regardless of whether you create generational wealth or not, this step is important.
2. Establish an estate plan
Estate planning entails organizing your possessions and determining how they should be handled after you have departed. A will is a very important component, but if your net worth exceeds $1 million, consulting a professional could be wise to guarantee that all the details of your estate plan are in order.
Expert estate planners can help with more complex situations, like a family business or intricate family wealth, as well as demonstrate tactics for diminishing federal taxes so you don't pay any more than necessary.
3. Put together a legacy drawer outlining your family wealth
Crafting your legacy drawer should be on everyone's to-do list, it is a place where you store important documentation and items that will become invaluable for your family (and family wealth) should anything happen. While there are many documents to consider keeping in this secure location, here are a few must-haves:
- Your will and estate plan
- Financial account information
- A copy of your monthly budget
- Life insurance policy
- Tax returns
- Account passwords
- Personal letters to loved ones
- Funeral instructions
Create lasting generational wealth
If you want to create lasting generational wealth and blessings for generations to come, it's time to put your head down and get started. Consider this a long-term journey that with the right investments and education will empower generations to come.
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PAX Gold is the hybrid investment option bridging the gap between digital currencies and the gold market. This cryptocurrency provides the benefits of blockchain technology without the price volatility. The Pax Gold token also offers a more accessible way for traders to invest in physical gold assets.
What is PAX Gold?
PAX Gold (PAXG) is the biggest digital asset backed by underlying gold and each PAXG token represents one fine troy ounce of a 400-ounce London Good Delivery gold bar. The price of PAX Gold mimics the current gold market prices of gold, making it a more stable crypto investment with less volatility.
The crypto asset is issued by the Paxos Trust Company and the market value of the circulating supply is held in physical gold bars in vaults similar to how stablecoins hold reserves of the fiat currency they are pegged to.
To guarantee its integrity, the Paxos Trust Company undergoes and releases monthly audits to verify that its PAXG tokens are equal to the amount of allocated gold it holds. This process is regulated by the New York State Department of Financial Services.
Additionally, users have the option to redeem their PAXG tokens for allocated gold bullion bars whenever they desire, or for smaller amounts of unallocated gold bullion bars through a network of physical gold retailers around the world.
PAXG tokens are based on the ERC-20 token standard and provide users with all of the benefits of owning physical gold bars without the drawbacks typically associated with the physical commodities. These include limited accessibility, challenges storing the physical gold, difficulties transporting it, etc.
Due to its tokenized nature, PAXG can be traded for other cryptocurrencies in the sector, or simply redeemed for physical gold.
Who created the PAX Gold platform?
The Paxos Trust Company was co-founded by Charles Cascarilla and Rich Teo in 2012 with the aim to provide a more accessible and trustworthy means of moving assets. Cascarilla holds a degree in finance with experience in the capital management sector. He has also participated in multiple traditional and blockchain-based venture capital projects.
In 2018, the company released Paxos Standard (PAX), a stablecoin pegged to the US dollar, with reserves held in US bank accounts. In 2021, PAX rebranded to the Pax Dollar (USDP). The stablecoin remains one of the top 10 biggest asset-backed cryptocurrencies.
In 2019, PAX Gold (PAXG) was launched. The allocated gold-backed digital asset holds its reserves in vaults secured by Brinks. The company undergoes monthly audits which verify that the correct amount of reserves is held for each coin.
The company has achieved strong institutional support and secured more than $500 million in funding from reputable investors such as OakHC/FT, PayPal Ventures and Mithril Partners.
How does the PAX Gold work?
First and foremost, PAXG represents physical gold. PAX Gold (PAXG) is an ERC-20 token built on the Ethereum blockchain making it compatible with many dapps and decentralized exchanges within the DeFi space. When creating or destroying PAXG tokens, the company charges a small fee (0.02%) while the trader is liable for gas fees for any on-chain transactions.
Increasing investment entry barriers, the token is divisible by 18 decimal places, allowing anyone access to fractional ownership of a physical gold bar without the associated burdens of owning physical gold (transport, storage, etc).
Each PAXG token is allocated a unique serial number that matches that of an individual gold bar held in reserve. Holders are entitled to find the physical gold bar, its value, and other characteristics by using the PAXG lookup tool. Tokens can also be redeemed for gold, fiat currency, or other digital currencies as per the current market price of gold at that time.
PAXG transactions are closely monitored and surveyed by Paxos using third-party analytical tools for the purpose of investigating any potential cases of fraud or money laundering. In addition, developers subject the code to regular smart contract audits in order to detect bugs and vulnerabilities.
What is the PAXG token
PAX Gold (PAXG) is an ERC-20 token built on the Ethereum blockchain. Each PAXG token represents one fine troy ounce of a 400-ounce London Good Delivery gold bar which can be traced using the unique serial number.
The cryptocurrency offers investors exposure to the price of gold as well as investment opportunities otherwise difficult to access. The advantage of investing in cryptocurrencies like Pax Gold PAXG is that one can bypass the physical challenges of investing in real gold reserves. Instead, one can manage their investments from the convenience of their home.
The Paxos Trust Company holds all PAXG token reserves in vaults and undergoes monthly audits which are published on the Paxos Trust Company’s website.
How can I buy the PAX Gold token?
If you're looking to invest in the long-term value of high-quality gold without concerning yourself with physical gold bars, with the added benefits of blockchain technology Gold PAXG tokens might be the answer you're looking for.
Tap provides a seamless entryway to buying, storing and selling Pax Gold PAXG tokens. Users will simply need to download the Tap app, create an account and complete the quick verification process. From there they will gain access to a number of secure integrated crypto wallets and vetted cryptocurrency markets, including PAX Gold tokens.
The app not only allows users to buy, sell, trade and store cryptocurrencies, but also provides a payment service that allows users to make fiat payments directly from the app. Whether through an electronic payment or the Tap card, users can spend their crypto and fiat currencies anywhere, anytime.