What is Peercoin? The Hybrid Cryptocurrency

Introduced in August 2012, Peercoin (PPC) is one of the oldest altcoins in the cryptocurrency community and a major competitor to Bitcoin. It was created by Scott Nadal and Sunny King, an anonymous developer who also created Primecoin. Peercoin was the first cryptocurrency to combine proof-of-work and proof-of-stake into a hybrid system that addresses Bitcoin’s weaknesses while also using less energy.

A Green Alternative

Bitcoin has been criticized for its heavy consumption of resources, as faster and faster machines are needed to earn the same amount of coins through block rewards. Currently the Bitcoin network consumes about $150,000 worth of energy in a single day, and therefore is a measurable strain on environmental resources.

Peercoin takes a different approach, using a hybrid algorithm that initially uses proof-of-work but gradually transitions to proof-of-stake as the network grows. Instead of keeping coin generation solely in the hands of miners, the Peercoin network transfers the burden to people who simply possess Peercoin and run the client on their computer. Thus the term “proof-of-stake” literally means that it rewards the users who maintain a stake on the network, and therefore maintain the network itself.

Because Peercoin uses significantly less energy than Bitcoin, it is touted as a sustainable and environmentally friendly altcoin. In fact, as of January 2014, the Peercoin network uses just 30% of the energy that Bitcoin uses. This fraction is predicted to decrease further over time as Peercoin transitions more to proof-of-stake.

Minting: Peercoin’s Internal Clock

The process of creating new coins and securing the network in a proof-of-stake system is called “minting.” This can be done by anyone running a full node, and the probability of solving the block is determined by how many Peercoins have been sitting in the wallet for at least 30 days. These coins that have been sitting for at least month are the only coins that count as “stake” in the network. Once coins are transferred to a new owner, their internal clock is reset and another 30 days must pass before the coins can be used as stake again.

After that 30th day is reached, however, the minting power actually increases every day thereafter for another two months. Once the 90th day passes, the coins essentially stop aging and continue to be minted at the same rate. Essentially the Peercoin network incentivizes people to hold coins for at least 3 months and strongly discourages spending. The minting process rewards those who retain the tools for minting: coins themselves. The greatest benefactors of Peercoin are those who hold a lot of it, and for long periods of time.

Guarding Against Inflation

As another built-in benefit of proof-of-stake, Peercoin users are rewarded 1% interest annually for maintaining their stake on the network. This mechanism is like interest on a savings account, built right into the money itself. This incentivizes people to stay on the network without using excessive energy, but also slowly inflates the money supply.

This 1% inflation rate is actually counteracted somewhat by a clever use of the 0.01 PPC per transaction fee. Instead of sending the fees to miners like in the Bitcoin network, Peercoin actually destroys the fees and removes them from the money supply completely. Thus, a little bit of Peercoin vanishes with each transaction that occurs — thereby creating a deflationary feature.

The parallel mechanisms of 1% annual interest and a 0.01 PPC transaction fee work together to create an interesting dynamic not seen in other altcoins. Peercoin is essentially is built to discourage frequent transactions and encourage hoarding. Therefore Peercoin would be impractical as a payments platform, making its purpose significantly different than other coins that are more transaction-friendly.

Security Against 51%

Another benefit of Peercoin’s innovative proof-of-stake hybrid system is that it’s much more costly to perform a 51% attack — a vulnerability that Bitcoin has been criticized for. An attacker would theoretically need to gain 51% of the total hashing power of Bitcoin’s miners in order to gain the power of double-spending, and this risk has seemed very real in the past when certain BTC mining pools did approach 50% of hashing power.

Peercoin abolishes that risk though it’s hybrid proof-of-work and proof-of-stake system. Not only would an attacker need 51% of the mining power, but also 51% of the coins that have an active stake in the network. At Peercoin’s current market cap, this endeavor would cost nearly $25 million — making a 51% attack incredibly expensive and much less likely to happen than on the Bitcoin network.

As mentioned earlier, only coins that have been sitting for at least 30 days can be used for  minting and securing the network. For someone to carry out a 51% attack on Peercoin, they would not only need to buy up 51% of the coins, but then wait for a whole month before being able to compromise the network. In the extremely unlikely event that this happens, Peercoin users would see it coming and have 30 days to react.

Peershares: Decentralized Stocks

Peercoin’s active development community has resulted in Peershares, a new application built on top of the network’s existing code. The project was first proposed in September 2013 by developer Jordan Lee and started gaining traction in January 2014 as more developers jumped on board.

Peershares is intended as a decentralized solution for businesses that want to issue stocks and dividends without having to rely on a third-party stock trader. Each business would convert a certain amount of Peercoins into a brand new blockchain which represents all of that company’s shares. The new blockchain can now be divided up among stockholders, enabling a company to raise money and eventually issue dividends.

Peershares is still in its initial stages, with core development continuing for the foreseeable future. But there is palpable excitement behind the Peershares project, and some developers have actually shifted their focus away from Peercoin in favor of its stock-based cousin. It’s very possible that Peershares will be the first successful implementation of stocks into a cryptocurrency.

Room For Growth?

Currently Peercoin has a nearly $50 million market cap, making it the fourth most popular cryptocurrency in terms of stored wealth. However, it’s still less than 1% of Bitcoin’s market cap of $6.7 billion. This begs the question: is Bitcoin one hundred times more valuable than Peercoin?

Obviously, market dynamics are complex and there are countless factors at play in the value of a cryptocurrency. But it’s clearly true that the Peercoin network is energy-efficient and incredibly secure against a 51% attack, making it one of the most sustainable and reliable cryptocurrencies on the market right now.

But the economics built into Peercoin make it attractive only for long term hoarding, and it remains to be seen whether this is a feature or a bug in the eyes of the community at large. For now, the space will likely continue to be dominated by transaction-centric coins like Darkcoin, Litecoin and Bitcoin.