Cardano blockchain protocol: why Proof-of-Stake?
In this article, we will explain what Proof-of-Stake (PoS) protocols are comparing their basic functioning to the well-known Proof-of-Work (PoW) protocols.
Proof-of-Work (PoW) protocols which currently fueled most of the crypto-projects which Bitcoin, Ethereum, Litecoin, Dash, etc.
This will help us to better understand why PoS consensus algorithms seem to have a brighter future than PoW in the crypto-ecosystem and why Cardano deciding to develop its own tailor made protocol; Ouroboros.
Basics
Bitcoin uses huge amounts of energy to secure its network.
But why is it consuming all this energy and what could be the alternatives?
Mining new bitcoins and securing the network require a lot of computing power because of its algorithm called “Proof-of-Work” (PoW).
The Bitcoin PoW algorithm works by having all nodes in the network solving the same cryptographic puzzle.
The nodes solving the puzzle are referred as miners and the first one to find the solution gets the reward; a certain amount of Bitcoin(s) (number decreasing every 4 years after a “Halving”).
In 2011 a Bitcointalk forum user called QuantumMechanic proposed a technique that he called “proof-of-stake”.
The idea is that letting everyone use computing power to compete against each other with mining to secure the network is wasteful.
Instead proof-of-stake uses an election process in which one node is randomly chosen to validate the next block.
Proof-of-stake (PoS) has no miners but instead has “validators” and it does not let people “mine” blocks but instead “mint” or “produce” blocks.
Block validators are not chosen completely randomly.
To become a validator, a node must deposit a certain amount of the blockchain native tokens into the network at stake (which can be seen as a security deposit).
If a node is chosen to validate the next block, it will verify the validity of all the transactions within the block.
If everything checks out, the node signs off on the block and adds it to the blockchain; it has produced a new block.
As a reward the node receives all or a fraction of the fees that are associated with each transaction, that depends on PoS protocols.
The size of the stake determines the chances of a validator to be chosen to mint the next block. The more tokens you have staked in the network the more chances to produce a new block.
This might seem unfair because it tends to favor rich entities owning a lot of tokens, but in the facts, it is fairer than PoW protocols.
Indeed, with PoW big entities/mining farms can benefit from economies of scale.
The price they pay for mining equipment and electricity does not go up linearly. Instead the more they buy, the better prices they can get.
The price they pay for mining equipment and electricity does not go up linearly. Instead the more they buy, the better prices they can get.
Energy consumption
PoW protocols offer more rewards to the most advanced and better equipped miners. The higher their hash rate (computing power) is, the higher their chance to create the next block and receive the reward.
If miners want to increase their chances even further, they should gather in what is called “mining pools”. Doing so, they combine their hashing rates and distribute the reward evenly to everyone in the pool.
This has led to a race where structured companies replaced early DIY nodes building by creating larger and larger mining farms equipped with dedicated mining devices (such as ASICs).
According to Digiconomist, Bitcoin miners alone uses about 60 TWh of electricity, enough to power an entire country such as Greece (11 million inhabitants).
So the differences between Proof-of-work and Proof-of-stake are quite important.
Proof-of-stake does not let everyone mine for new blocks so there is no competition between validators and no race for computing power. Therefore it uses considerably less energy.
As an example and according to Charles Hoskinson, CEO at IOHK, the entire Cardano Blockchain could be powered with using only 10 kW (power needed for few houses) which would decrease the energy consumption by million times compared to the Bitcoin blockchain.
Decentralization
As we have seen above, with proof-of-work protocols we have something called mining farms in which miners team up to increase their chances of producing new blocks and thus collecting rewards.
By now, these pools control large portions of the bitcoin blockchain. That means they somehow centralize the mining process and that is dangerous.
If the biggest mining farms would merge, they would have a majority stake in the network and could start approving fraudulent transactions. The related blockchain would instantly lose all its credibility and would be abandoned.
Setting up a node, and becoming a validator, in a proof-of-stake based blockchain is a lot less expensive compared to a proof-of-work based one.
Interested people do not need a huge investment in expensive mining equipment and thus proof-of-stake encourages more people to set up a node, making the network more decentralized and also more secure.
To sum up: Proof-of-Work protocols push miners to use massive amounts of energy and it encourages the use of mining pools which makes the blockchain more centralized instead of its initial goal of reaching decentralization.
PoS protocols tend to be fairer than PoW ones intrinsically avoiding big conglomerates. On top of that, each PoS protocol (such as Cardano with its pool saturation parameter) might add complementary rules to mitigate the predominance of validators having too much influence in the network.
Main goal is still the same, reaching decentralization.
Scalability
PoW protocols have proven to have a major weakness avoiding reaching mass adoption and utility as a global payment system: Scalability.
Scalability itself consists in three main issues that have to be solved:
- transactions per second,
- network bandwidth,
- storage.
Transactions per second is the most obvious one, and we will here only focus on this aspect.
The basic premise is simple: for a cryptocurrency to become a global payment system, you need to be able to handle a lot of transactions per second.
As a comparison when Visa system can proceed up to 5000 transactions per second (TPS). Bitcoin only allows up to 7 TPS.
During the “crypto-pump” of late 2017, huge increase in Bitcoin transaction volumes showed the protocol weakness, it took days for some transaction to be validated and inserted in the blockchain. Bitcoin’s potential for adoption is currently bottlenecked by its scalability.
Some projects developed protocols (such as Cardano’s Ouroboros) which solves this by adopting PoS instead of PoW.
As we have seen, Cardano PoS protocol does not allow everyone to compete producing new blocks. Instead, the network elects a few nodes to mint the next blocks; those nodes are called “slot leaders”.
To make this all work, Cardano divides the time into epochs and those into slots.
Slots are defined as a short period of time in which one block can be created.
The network then elects a slot leader for each slot, and this is the only one that can produce the block for that particular slot.
Slot leaders listen for new transactions, verify them, and then puts them inside a new block.
This technique makes Cardano highly scalable because the protocol might increase the number of slots per epoch and on top could run multiple epochs in parallel if needed.
Director of Edinburgh University’s Blockchain Laboratory, Aggelos Kiayias, says that Cardano scalability protocol, Ouroboros Hydra, would allow an almost infinite number of transactions per second which would break the current main barrier to crypto mass adoption.
51% Attacks
Another problem might happen in a blockchain system if one buys, owns, or have control over most tokens and stake them in the network. He can then effectively manipulate it allowing and approving fake transactions.
This is called the 51% attack and is also discussed as a weak point of PoW algorithms.
If a single miner or group of miners can obtain 51% of the hashing power, they can effectively control and manipulate the blockchain.
Proof-of-stake on the other hand might render this attack very unlikely, but this depends on the overall value of a cryptocurrency.
As in June 2020, If Bitcoin would switch to PoS, acquiring 51% of all the coins would cost more than 85 billion dollars. So, the 51% attack is less likely to happen with PoS.
In the meantime, detaining 51% of ada would “only” costs over 1 billion dollars… That leaves young PoS projects particularly weak in their early development phases.
How Cardano address those issues?
In short: proof-of-stake consensus tackles some issues when compared to proof-of-work but also brings some additional risks which need to be assessed, understood, and mitigated.
From the beginning, Cardano teams worked in that direction to endorse the main issues identified when running a PoS protocol and to overcome them.
To do so, Cardano used a different approach than other cryptocurrency projects because it is built around peer-reviewed papers. In other words, an academic approach.
So instead of writing a whitepaper and implementing it straight to code, the Cardano team makes sure that experts from around the world read their papers, improve them, and agree with the outcome. That assures the quality and robustness of the protocol but also takes a lot of time and are related to the “always delayed” tag that sticks with Cardano project.
During the different testing phases, development teams implemented their research and proved to be able to tackle most of the issues raised above.
For the release of Shelley (summer 2020), most of parameters have been tested and determined in order to bring as much security as possible to the network.
Moreover all these parameters are adjustable over time and will give the protocol all the necessary autonomy for its evolution and adaptation to future needs: decentralization, security, sobriety and scalability.
