Proof of Transfer-A Beginner’s Guide
Introduction
Stacks blockchain made Bitcoin programmable with the consensus algorithm Proof of Transfer. Refer to my previous article on “What is Stacks? — A Beginner’s guide” to understand more.
Let’s first understand what a consensus algorithm is.
What is a consensus algorithm?
Cryptocurrencies and blockchains are both decentralized networks with no centralized authority. The desired, one-of-a-kind features are enabled by decentralization (censorship resistance, seizure resistance, trust minimization, etc.).
However, there is a cost to decentralization: how do we ensure that network participants agree on the “truth” when no one is “in charge?” .That is where the consensus algorithm helps. In the absence of a centralized authority, trust is established through “consensus protocols.”
Consensus protocols can be thought of as a set of rules that incentivize actors to create a record of the truth, such as which funds belong to which addresses in a public ledger system, allowing everyone else to verify the truth.
As seen in the previous chapter, Bitcoin is the most secure blockchain because of its consensus algorithm Proof of Work (PoW), which has high decentralization and security levels.
If Proof of Work makes Bitcoin secure, why invent a new consensus algorithm?
To answer this, let’s find out what is Proof of Work, its advantages and limitations.
What is Proof of Work (PoW)?
Proof of work is the algorithm that secures many cryptocurrencies, including Bitcoin and Ethereum. It works so that nodes within a network have to solve a math problem to construct the next block. Second, getting the math problem's solution gets the consensus permission to pick the block that should be added next to the board. This process of creating a new block will take approximately 10 minutes, and this is kept to ensure the spammers are avoided.
This entire process is called Mining. And this process utilizes lots of energy(electricity) to solve complex mathematical problems. Hence it needs a specialized computer for the mining. Those who participate in this process are called Miners.
In short, In a PoW based chain, Miners spend electricity and are paid in newly minted coins in exchange for their services.
PoW, by default, ensures trust in a trustless system and secures the entire network. Say, for example: If enough nodes compete to find a particular solution, then for any single bad actor or even a single group of bad actors, the computational power required to overwhelm and control a network becomes unachievable.
But PoW based Bitcoin chain also had certain limitations. The chain is secure because it has a minimal scripting language with a small attack surface, among other properties. Introducing new features to the Bitcoin core protocol is hard and not desirable as these features add complexity.
Stacks eliminates the issues of PoW based Bitcoin blockchain with the help of the new mining consensus algorithm Proof of Transfer (PoX).
What is Proof of Transfer?
Proof of Transfer (PoX) is the first consensus algorithm between two blockchains. For participating in PoX based Stacks mining, the miners don’t need any specialized hardware. All they need is Bitcoin. In a way, Pox helps to bootstrap the new blockchains securely.
In PoX, leader election happens on the Bitcoin blockchain. Instead of burning electricity on proof of work, PoX reuses already minted bitcoins as “proof of computation” and miners represent their cost of mining in bitcoins directly.
How does POX Work?
In a POX-based Stacks Blockchain, there are 2 major network participants.
- Miners-They spend Bitcoin and earn new Stacks tokens, smart contracts, and transaction processing fees.
- Stackers-They signals their support by Stacking STX tokens and earn Bitcoins.
Now, let’s dive deep.
Mining & Stacking
STX miners bid for becoming the leader in mining the next block. For this process, they spend Bitcoins. The protocol selects the winning miner (i.e., the leader) around using a verifiable random function (VRF). This is made to ensure a fair chance. Once elected, the leader writes the Stacks blockchain's new block and mints the rewards: newly minted Stacks for the block, fees for smart contracts, and transactions.
Bitcoins used for miner bids are sent to specific addresses corresponding to Stacks STX tokens holders that actively participate in consensus. Again these reward addresses are also random and are selected with the help of VRF. Thus, the bitcoins consumed in the mining process go to productive Stacks holders as a reward based on their holdings of Stacks and participation in the Stacking algorithm. This is called Stacking.
This is incredible. However, the Stacking portion resembles Staking in several respects. Is this accurate? Furthermore, why are Stacks built on a PoW-based blockchain rather than a PoS-based blockchain?
To answer this, let’s understand PoS first.
Proof of Stake (PoS )
In this mining, the network participants will stake some tokens to prove they are interested in securing. This system has the below limitations.
- Lack of initial Liquidity: The initial validating nodes are reluctant to transfer coins to other nodes as the opportunity to mine is directly proportional to the value of coins accumulated by the node
- Second Spend Chain: There is a possibility that the second spend may get recorded as a valid transaction. A corrupt node can secretly build & grow an alternative chain using that second spend block. Once it grows bigger than the valid chain, the network will have to accept it as the main chain, and hence sanity of consensus will be destroyed.
- 51% risk: If an entity owns 51% or more of the currency, it can corrupt the blockchain by gaining most of the network.
- Restricted Liquidity: As the miners' network grows more, native cryptocurrency becomes idle and can’t be traded as more mining nodes hold it.
Why PoX is not based on PoS
PoX is an extension to PoW based blockchain to make it more programmable. There is a reason why Stacks is not being based on top of a PoS blockchain.
In PoS, if a node has been disconnected for a sufficiently long time or is bootstrapping and presented with two conflicting transaction histories, the network can't determine which one is the “true” chain without some external input.
This is because it is impossible to know whether or not the “committee” that validates the chain is majority-honest and not post-facto corrupted (i.e., attacker-controlled). This is not the case for PoW blockchains, where the valid chain with the most cumulative proof-of-work is always the “true” chain.
This is not to say that PoS is insecure or is a bad idea. But, PoS has undesirable security assumptions compared to PoW. Refer to this article to know more.
Stacking vs. Staking
Also, one more notable point here is Stacking is a part of the consensus. Stacks chain will make progress even if no one participates in Stacking. Also, the network security is much better in PoX. One example, as per the PoX consensus, PoX will fall back to Proof of Burn (PoB) when there is an act of a malicious miner.
What is Proof of Burn (PoB)
This is the consensus algorithm proposed before PoX for the Stacks 2.0 blockchain.
In PoX, the miners transfer the tokens to Stackers, whereas in PoB, before Stacks 2.0, this will be like miners will burn the BTC and are rewarded in a new cryptocurrency.
PoB is destructive, requiring miners to destroy value to secure the blockchain. So, PoB suffers from a potential bootstrapping problem. This is because, Before the PoB chain matures and the new cryptocurrency gains value and stability, miners may be unwilling to destroy Bitcoin to participate.
Why PoX is the best tool for user-owned Internet?
For building a user-owned Internet, PoX based Stacks blockchain is truly a powerful tool. In this process, network participants are incentivized to hold the tokens so long as the service/network resource given back is worth it. If that changes, they can leave their creations and connections intact. Also, this is secured by the PoW based blockchain.
This model of digital ownership is what will fix our broken internet and become the standard. It finally rewards power and value to the people responsible for making it what it is in the first place.
Summary
Consensus protocols are a set of instructions that keeps the blockchain secure. Different consensus algorithms are available, and they have their own pros and cons. PoX is a novel consensus algorithm of the Stacks 2.0 blockchain that helps solve the new blockchain's potential bootstrapping problems. Also, it rewards the network participants, thus ensuring sustainability.
Imagine the possibilities with such a setup, allowing you to use web apps, all without the risk of mass data breaches, loss of user privacy, and the lack of data portability. Physical assets and new forms of assets can be digitized on the blockchain and be transferred freely, with the Bitcoin network's security, thus allowing for new business models, governance, and funding mechanisms.
Call-To-Action
Let’s build apps and smart contracts on the Stacks blockchain. Let’s secure the future Internet together!!
