Unlocking The Crypto Puzzle: Part 8 — Proof of Work/Proof of Stake/ Proof of Trust — Continued
(Unlocking The Crypto Puzzle is an ongoing series of articles to help demystify cryptocurrency for everyone.)
Proof of Work… Proof of Stake… Proof of Trust. The challenge of creating the best blockchain for cryptocurrency has never been more important… and more complicated.
Proof of… is a concept used in cryptocurrencies that is at the center of how blockchains work. In the last part of Unlocking the Crypto Puzzle, I discussed Proof of Work (POW) and how it’s algorithmic puzzles are the cornerstone of Bitcoin’s blockchain model. In this episode, I’m going to talk about Proof of Stake (POS) and how it aims to change the blockchain game.
PART 2: PROOF OF STAKE
As we discussed in the episode on POW, mining is a process that uses complex algorithms to verify blockchain transactions. Bitcoin originated the use of POW as a verification process in cryptocurrency with its use in its blockchain. Many other cryptocurrencies, including Ethereum, followed suit and made the POW mining model the industry standard. But it has inherent problems, which make it less than ideal as a permanent solution for blockchains.
— It requires a great deal of power (electricity) to run the mining rigs, which in turn means it cost the miners more to run the algorithms.
— The equipment (mining rigs) is expensive and to be able to compete you need to have hundreds, if not thousands of them rigged together.
— As mining is a business with profits as the goal, there is always the risk that miners will transfer their mining efforts to other cryptocurrencies in order to generate more profit.
— And, as we saw in the 2018 bear market, a drop in coin value can make running the mining rigs a losing proposition financially. In 2018, it was estimated that the cost of mining a single Bitcoin was around $6500. With the price of Bitcoin hovering in the 3K to 4K level, many mining operations were forced to close down because of financial losses.
Proof of Stake, on the other hand, eliminates the constant computing contest. Instead, it builds trust through a system of block validators who must take a “stake” in the system. This stake, which is a qualifying number of tokens or currency, creates a system where those creating the blocks are also protecting the system. This is because they actually own a percentage of the tokens being mined, or “forged” as the process is called in POS.
In POS, the creator of the next block is chosen using a combination of random selection and wealth (the amount of the coin the forger has “staked”).
Like POW, the end result of the algorithm is that it needs to choose who will create the next block in the blockchain. On the surface, it would seem that whoever has the largest number of coins would have an enormous advantage. But a combination of randomization and coin age keeps the playing field relatively even for forgers.
Randomization is a system that uses a formula combining low hash value with stake size to determine who will forge the next block. Because the ledger is public record, it is possible to predict with some accuracy who will forge the next block. Randomization is then combined with the concept of “coin age”, a number that is reached by multiplying the number of coins by the length of time those coins have been held.
This leveling of the playing field allows a wide variety of stakeholders to become involved in the forging process. By reducing the advantage of gigantic mining farms, it vastly decreases the risk of centralization of power to mega-miners, an issue currently faced in the mining of Bitcoin. Also, because there is no race to see who can solve the puzzle first, there is a huge decrease in the amount of power needed to process the block. This is a critical point as crypto looks towards future scalability.
There has been an enormous amount written about Ethereum’s move from POW mining to a POS system. Ethereum’s creator, Vitalik Buterin, has called POS a “vastly more efficient alternative to POW mining.” Although the transition from POW to POS was first announced in 2016, the practicality of making such an enormous change is challenging, to say the least. It has been announced that the major coding of the Casper protocol should be finished by the end of June 2019. That said, most experts agree that full implementation will not take place until 2021 at the earliest.
For all the advantages that POS seems to have over POW, there are also inherent disadvantages. In an article in CoinTelegraph, Colin Lacina lays out that a system based upon financial holdings will always favor those who have the largest wallets. Even with randomization, over the long-term, the bigger players will receive a larger portion of the block forging.
POS could also be vulnerable to 51% attacks, where if someone was able to control a majority of a given token it would destroy the network’s decentralization, essentially corrupting the very reason that the blockchain was formed in the first place. That said, there are now more advanced versions of POS coming into existence which address these issues. One such system is Delegated Proof of Stake (D-POS), which creates a team of “delegates” who preside over the process and make sure that no one abuses the system.
While POS is a solid step forward in the evolution of blockchain technology, only time will tell whether it has all the essential elements necessary to become the long-term solution we are all looking for.
In the next episode of Unlocking The Crypto Puzzle, we will explore a new model call Proof of Trust that is potentially the answer to crypto’s need for a super high-speed system to compete with Visa and MasterCard in the retail marketplace.
