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Reaching a Consensus Part 3: Proof-of-What?

Reaching a Consensus Part 3: Proof-of-What?

This is a continuation of our previous posts on consensus algorithms, if you’ve not read part 1 and part 2, it is recommended that you do so before reading part 3.

 

Having already touched upon the strengths and weaknesses of the Proof-of-Stake and Proof-of-Work consensus mechanisms, it’s important to note that there are a wide range of other consensus algorithms which are in the works, or being worked on, and while Proof-of-Stake and Proof-of-Work remain the two main forms of consensus algorithms today, the blockchain industry is moving at such a fast pace, there’s no telling which consensus process will be used tomorrow.

 

It’s important to reiterate that all consensus algorithms are attempting to solve the same problem: namely, how to ensure all nodes are using the same blockchain, and how to prevent miners from adding false blocks, or changing the blockchain history. In order to do that, all consensus algorithms require miners to sacrifice something, Proof-of-Work the sacrifice is time and resources, Proof-of-Stake is currency, and the following consensus algorithms are no different. They will all follow the exact same model in order to solve the same problem, but in slightly different ways.

 

Here are a few of the more commonly used consensus algorithms along with a brief explanation of how they work.

 

Proof-of-Space or Proof-of-Capacity

Similar to Proof-of-Stake, this is a consensus algorithm which requires users to set aside a large amount of storage space on their system, in place of currency. Their stake in the mining process will be based on the relative space in comparison to the total space staked by all miners in the pool.

 

Proof-of-Stake Time

This consensus algorithm attempts improve upon the Proof-of Stake process in two major ways.

  • Proof-of-Stake time will not only reward users who have significant amounts of currency staked but will also reward the amount of time that user has been staking.
  • In order to prevent major currency holders from monopolizing the mining rewards and preventing those who cannot obtain as much by connecting currency staked to activity performed.

 

Proof-of-Importance

Similar to Proof-of-Stake Time, this algorithm attempts to reward those users who are important to the network. As such, it weights rewards towards users who have shown to be active and supportive for the blockchain network. This includes statistics such as, currency held, total number of transactions over a set period of time, and total number of transaction partners over a set period of time.

 

Proof-of-Stake Velocity

This consensus algorithm attempts to improve upon the Proof-of-Stake Time consensus, where not only are you rewarded for being active as well as holding currency, but your currency is weighted by how recently it was minted (created via mining).

 

The consensus gives more value to recently minted currency, and less for older currency. This not only gives incentive to be active, but to be consistently active.

 

Proof-of-Activity

A really interesting evolution of Bitcoin’s Proof-of-Work consensus, where instead of the work being a race to solve an equation is replaces by a virtual race. The algorithm will select a random Satoshi (the smallest measure of bitcoin. It is 0.00000001 Bitcoin) in circulation, and all miners will race to track it from the block it was minted (created) through, to the current wallet where it resides. The first miner to report the correct wallet address will be able to mine the next block.

 

While much of this consensus algorithm follows the idea of Bitcoin’s Proof-of-Work, it also takes some functionality from Proof-of-Stake, where the more Bitcoin a user owns, the greater the chances that their Satoshi would be selected.

 

Proof-of-Burn

This form of consensus algorithm is similar to Proof-of-Stake, with the major difference being that each miner’s stake is actually burned. In order to mine on the blockchain, tokens or coins need to be sent to a wallet address that is verifiably inaccessible. Meaning that once the tokens are sent to that address, they are lost forever. This consensus method effectively forces miners to actually spend currency, in order to mine on the blockchain and have chance to get some of the rewards.

 

Proof-of-What’s Next

All of these consensus mechanisms are examples of new technologies attempting to make blockchains more efficient, reliable, and effective. The developers of each of these algorithms are aiming to address the shortcomings of the current consensus mechanisms, and create a pathway to mass adoption. As the technology continues to evolve, grow and shift, this will be a truly exciting area to watch evolve as the blockchain of the future is built.

 

Go Crypto!

Reaching a Consensus Part 2: Proof-of-Stake, and beyond!

Reaching a Consensus Part 2: Proof-of-Stake, and beyond!

This is a continuation of our previous blog post on consensus mechanisms, if you’ve not yet read the part 1, it’s recommended that you do so now.

 

As mentioned in our previous posts, one of the fundamental beliefs within crypto is the idea of consensus. Decentralization hinges on the ability for an incredibly large number of individuals to all agree on the same history for each blockchain. Practically speaking, it’s like asking a hundred thousand people to all agree on a history of visa transactions. There would be no way to actively verify that the information is correct.

 

How this consensus is achieved is through what is called a consensus algorithm, which simply put is a way for multiple computer processes to agree on a single value for data. In this case, the consensus algorithm is ensuring that all blockchain nodes are operating off of the exact same version of blockchain. Additionally, there needs to be some incentive for the people processing blocks onto the blockchain (also called miners) not to maliciously corrupt the blockchain by using a different version or adding blocks with false transactions.

 

There are two major types of consensus algorithms: Proof-of-Work, and Proof-of-Stake. This is an overview for the latter.

 

Proof-of-Stake

Proof-of-Stake consensus is a much computationally simpler process than that of Proof-of-Work. It requires the individuals who want to compete to add blocks to the blockchain based on their stake within that blockchain.

 

Their stake is defined as the amount of the blockchain’s default currency that they put aside, and stake in order to obtain the ability to process blocks within the blockchain. Unlike the Proof-of-Work model, within Proof-of-Stake, there is a single individual selected at random to process each block and add it onto the chain (also called mining). Miners are no longer competing to mine each block, and mining should (in theory) be fairly distributed among all eligible miners.

 

It’s important to note that in most Proof-of-Stake mechanisms, the algorithm used to choose who gets to mine a block is weighted based on how much they have staked, the higher the stake, the better the chances for rewards.

 

These blocks, within the Proof-of-Stake mechanism, are computationally less challenging to mine. The theory behind Proof-of-Stake is that since all miners are forced to stake their funds in order to be able to mine blocks, if they were to act illicitly, they could lose all of their staked currency. Since those with considerable resources will have the ability to amass much greater stakes, they will be much more likely to be selected to mine blocks on the chain. This created a de-facto centralization within the block mining where the rich wind up getting richer, and it is incredibly difficult for those with smaller stakes to break in.

 

From am efficiency perspective, proof-of-Stake blocks are also generally much more efficient in terms of resources (electricity needed to run) needed, as well as set-up costs, while still maintaining a high level of security for each block within the chain.

 

While the Proof-of-Stake mechanism may be better at allowing the blockchain to scale through less resource-heavy transactions, there are certainly some problem areas as well. One of the most glaring shortcomings of the Proof-of-Stake consensus is what’s referred to as “nothing at stake”. As we mentioned in part one, within Proof-of-Work, miners are disincentivized to work on a possibly corrupt block, or a sidechain by virtue of the fact that the network will always choose the chain with the stronger hash (more blocks) to work on. Blocks that are added to the sidechain will eventually be ignored, and any work that was put into mining it will be lost.

 

Since Proof-of-Stake miners are not solving complex equations, they do not have the same dis-incentivization to work on a sidechain. They can therefore continue mining both chains and force of the chain, without risking anything.

 

There are other, logistical issues, with Proof-of-Stake that need to be worked out as well, for example, when a Proof-of-Stake blockchain is initially released, how does the team distribute the currency so that individuals can be staked, there’s no centralization within the system, and mining can begin?

 

Other serious concerns include the infamous 51% attack, where either a single miner, or a group of miners could potentially amass 51% of the currency and take complete control over the blockchain. This would enable them to essentially rewrite the past, present, and future of the blockchain, which would effectively destroy immutable nature of the blockchain and its associated currency.

 

Finally, since within the Proof-of-Stake consensus mechanism, block mining is chosen based on the amount of currency held, similar to fears within the Proof-of-Work consensus, there is a fear that the result will be a de facto centralization of those adding blocks. Not everyone has the ability to compete with those individuals able to purchase significant amounts of currency, and therefore they will monopolize the mining rewards, the rich will get richer, and those with less currency will be forced to stake with a larger group if they want to be involved at all.

 

In order to address some of these issues, the Delegated Proof-of-Stake consensus was created. This process functions exactly the same way as a conventional Proof-of-Stake consensus. The only difference between the two is that within the Delegated Proof-of-Stake, everyone who has a stake votes for someone they want to process blocks. Once there are only a few miners left, who will represent all of the stakes, they will be the only ones able to process all transactions on the blockchain, and they will alternate in a set order. All individuals who have contributed their stake to a miner will receive a share in the rewards based on the size of their stake.

 

Recently, there has also been movement on creating more privacy surrounding the Proof-of-Stake system which spurred the creation of the Anonymous Proof-of-Stake process. This consensus algorithm is exactly the same as Proof-of-Stake, except that all transactions, amount staked, currency earned, and cryptocurrency stored in a wallet, will all remain private and anonymous.

 

Proof-of-Stake and SIRIN LABS

SIRIN LABS has been exploring the potential within both existing as well as developing blockchain technologies in order to understand which one will best suit the needs of our devices, and users. While the Proof-of-Stake model certainly takes significant strides towards the needs of a globally used and mass adopted blockchain protocol, it’s not quite there yet.

 

Blockchain technology must continue to evolve in order to achieve the correct balance between cost, both monetarily and resources, and speed. But we must never compromise on the security of the system. The immutable aspect of the blockchain must not be put into jeopardy.

 

Luckily, there are many different organizations who are working to solve this problem. SIRIN LABS, for example, will be partnering with an Israeli institute of higher education to research areas like this within crypto, and providing significant grants to further explore decentralized technology.  By working together on projects like this, we will be able to spread the decentralized world across the globe for a better tomorrow.

 

Go Crypto!

Reaching a Consensus Part 1: Proof-of-Work

Reaching a Consensus Part 1: Proof-of-Work

One of the fundamental beliefs within crypto is the idea of consensus. Decentralization hinges on the ability for an incredibly large number of individuals to all agree on the same history for each blockchain. Practically speaking, it would be like asking a hundred thousand people to all agree on a history of visa transactions. There would be no way for an individual to actively verify that the information is correct.

 

As a result, we’re forced to put our trust into those people who are maintaining and building the blockchain to continue building it honestly, and that they will not start inventing transactions and blocks, which would ultimately corrupt the very nature of blockchain and decentralization.

 

“Hold on a minute” you might think to yourself. Blockchain and cryptocurrency are supposed to be trust-less, meaning we specifically don’t need to have trust in the people we’re dealing with. You’d be correct. This is where consensus algorithms come in. These algorithms ensure that the miners who are tasked with keeping, maintaining, and building the blockchains, continue to adhere to the rules, and do not corrupt the validity or authenticity of the blockchain networks.

 

There are two major types of consensus algorithms: Proof-of-Work, and Proof-of-Stake. This is an overview for Proof-of-Work.

 

Proof-of-Work

Proof-of-Work consensus requires individuals who want to add blocks to the blockchain, also known as miners, to solve an incredibly complex mathematical equation. Due to the complexity of these equations, miners will often purchase expensive specialized hardware for this specific purpose.

 

In order to complete the calculation and solve the equation, miners are required to guess a random number, called a nonce. The nonce ensures that it is impossible to predict who will be able to add the next block and adds an aspect of randomness to block creation.

 

Miners are rewarded in cryptocurrency for adding blocks to the blockchain, and the equation needs to be solved again and again for each block to be added. On average, it will take a large group of miners approximately 10 minutes to solve an equation and add a block to the Bitcoin blockchain. This creates a race, where each miner is attempting to solve the equation and add a new block as quickly as possible in order to be able to claim the reward.

 

The theory behind the Proof-of-Work consensus mechanism is this: Solving equations, adding blocks to the blockchain, and thereby processing blockchain transactions is an incredibly costly investment. The hardware is expensive to both obtain as well as to use. As a result, Proof-of-Work miners are incentivized to maintain the authenticity and validity of the blockchain, since if they do not, people will stop using the network, and their investment will be lost. Alternatively, if they process blocks honestly, they will be rewarded with cryptocurrency, which will (in theory) offset the cost of processing blocks.

 

The Proof-of-Work consensus algorithm has some real advantages. Most notably, it is resistant to the infamous 51% attack, since it’s nearly impossible to amass 51% of the computing power on the bitcoin network. Additionally, Proof-of-Work systems are incredibly adaptive to ensure a predicted time to solve the equation and add a block. If the computational time starts to exceed 10 minutes, the network will begin to reduce the difficulty of the equations. Similarly, if the equations begin to be solved too quickly, the difficulty will be increased. This ensures that both the system and users can expect a new block to be added to the blockchain approximately every 10 minutes, regardless of how many or how few miners there are.

 

While the Proof-of-Work consensus mechanism is excellent at ensuring an ongoing vested interest in maintaining the accuracy and trust in the blockchain, there are a number of areas where it is significantly less effective. The most notable being the resources needed to maintain the system.  For the Proof-of-Work system to remain effective, it needs to have a large number of miners working simultaneously with incredibly powerful computers. Due to the power of these machines, they require a considerable amount of power to run, and create a huge impact on our global resources within the real world. It is estimated that a year of crypto mining could consume as much power as 5 million homes in the USA.

 

Another shortcoming from the Proof-of-Work system is the ability to scale and handle the traffic that will come with mass adoption. As an example, each block on the blockchain can only contain a finite number of transactions. A Bitcoin block contains approximately 2000 transactions, and those transactions can only be processed by being authenticated and validated by the blockchain through correctly guessing the nonce and solving the equation. This occurs, on average, once every 10 minutes. By contrast, Visa, on average, processes roughly 1500 transactions every second.

 

Do not fear, all is not lost! Blockchain developers are constantly looking to advance the technology to be able to adapt to the needs of the platform and system. SegWit and SegWit2x are both proposals that would effectively increase the number of transactions that could be processed every 10 minutes by both reducing the storage size of each transaction, and by increasing the maximum size of each block, respectively.

 

Additionally, the Zero Confirmation Transaction proposal is working to enable instantaneous transactions by running a check on them when they are broadcast to the network, but prior to their being confirmed within the immutable ledger of the blockchain itself.

 

Proof-of-Work and SIRIN LABS

All proposals like these have potential advantages and disadvantages within their implementation, which makes choosing a blockchain platform for any company a tricky endeavor. SIRIN LABS has been exploring the potential within both existing as well as developing blockchain technologies in order to understand which one will best suit the needs of our devices, and users.

 

Proof-of-Work creates additional challenges as a potential blockchain for SIRIN LABS due to the innate costs associated for the mining of blocks. These costs cause micropayments (the small 1$-5$ purchases) that we make regularly much less efficient. Nevertheless, we will continue our search, and if it doesn’t appear that our needs will be met, we will develop our own to ensure our users will have the freedom and functionality needed.

 

Regardless of whether SIRIN LABS chooses to use an existing blockchain, a new technology, or develop something independently, one thing is crystal clear. When mass adoption of cryptocurrency hits, all blockchains will need to have already evolved to meet the demand, or risk being left in the dust of the crypto revolution.

 

Go Crypto!