Cointelegraph is following the development of an entirely new blockchain from inception to mainnet and beyond through its series Inside the Blockchain Developer’s Mind. In previous parts, Andrew Levine of Koinos Group discussed some of the challenges the team has faced since identifying the key issues they intend to solve and outlined three of the “crises” that are holding back blockchain adoption: upgradeability, scalability and governance. This series is focused on the consensus algorithm: Part 1 is about proof-of-work, Part 2 is about proof-of-stake and Part 3 is about proof-of-burn.
This article is the second in my series about consensus algorithms, in which I leverage my unique perspective to help the reader gain a deeper understanding of this often misunderstood concept. In the first article in the series, I explored proof-of-work (the OG consensus algorithm) and, in this article, I’ll be exploring proof-of-stake.
As I explained in the last article, from a game theoretical perspective, blockchains are a game in which players compete to validate transactions by grouping them into blocks that match the blocks of transactions being created by other players. Cryptography is used to hide the data that would allow these people to cheat, and then a random process is used to distribute digital tokens to people who play by the rules and produce blocks that match the blocks submitted by other people. These blocks are then chained together to create a verifiable record of all the transactions that were ever performed on the network.
When people produce new blocks with different transactions in them, we call this a “fork,” because the chain is now forking off into two different directions, and what ensures that everyone updates their database to match one another is how they are punished when they do not.
The real innovation in Bitcoin (BTC) was the creation of an elegant system for combining cryptography with economics to leverage electronic coins (now called “cryptocurrencies”) to use incentives to solve problems that algorithms alone cannot solve. People were forced to perform meaningless work to mine blocks, but the security stems not from the performance of work, but the knowledge that this work could not have been achieved without the sacrifice of capital. Were this not the case, then there would be no economic component to the system.
The work is a verifiable proxy for sacrificed capital. Because the network has no means of “understanding” money that is external to it, a system needed to be implemented that converted the external incentive (fiat currency) into something the network can understand — hashes. The more hashes an account creates, the more capital it must have sacrificed, and the more incentivized it is to produce blocks on the correct fork.
Since these people have already spent their money to acquire hardware and run it to produce blocks, their incentivizing punishment is easy because they’ve already been punished! They spent their money, so if they want to continue producing blocks on the wrong chain, that’s fine. They won’t earn any rewards and they won’t make their money back. They will have sacrificed that money for nothing. Their blocks won’t get accepted by the network and they won’t earn any tokens.
This proof-of-work system ensures that the only way someone who does not want to play by the rules (a.k.a. a malicious actor) is to acquire and run more hardware than everyone else combined (i.e., mounting a 51% attack). This is the elegance behind proof-of-work. The system can’t not work without sacrificing ever increasing amounts of capital. Proof-of-stake, however, operates in a fundamentally different way that has important game theoretical consequences.
Related: Proof-of-stake vs. proof-of-work: Differences explained
Proof-of-stake
Proof-of-stake (PoS) was first proposed in 2011 by Bitcointalk forum member QuantumMechanic as a less costly (for the miner) alternative to…
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