Hi there! My name is Xavier and you might have read
articles online saying that cryptocurrencies like Bitcoin uses enormous amounts of energy
to secure their networks. But why is that – and more importantly – what
are the alternatives? Mining new coins takes a lot of computing
power because of the proof-of-work algorithm. The idea was first introduced in 1993 to combat
spam emails and was formally called “proof-of-work” in 1997. However the technique went largely unused
until Satoshi Nakamoto created Bitcoin in 2009. He realized that this mechanism could be used
to reach consensus between many nodes on a network and he used it as a way to secure
the Bitcoin blockchain. However, the proof-of-work algorithm works
by having all nodes solve a cryptographic puzzle. This puzzle is solved by miners and the first
one to find the solution gets the miner reward.
This has led to a situation where people are
building larger and larger mining farms like this one. According to Digiconomist, Bitcoin miners
alone uses about 54 TWh of electricity, enough to power 5 million households in the US or
even power the entire country of New Zealand or Hungary. But it doesn’t stop there. Proof-of-work gives more rewards to people
with better and more equipment. The higher your hash rate is, the higher the
chance that you’ll get to create the next block and receive the mining reward. To increase chances even further, miners have
come together in what’s called “mining pools”. They combine their hashing power and distribute
the reward evenly across everyone in the pool. So to sum it up: proof-of-work is causing
miners to use massive amounts of energy and it encourages the use of mining pools which
makes the blockchain more centralized as opposed to decentralized. So to solve these issue’s we have to find
a new consensus algorithm that is as effective or better then proof-of-work. In 2011 a Bitcointalk forum user called QuantumMechanic
proposed a technique that he called “proof-of-stake”.
The basic idea is that letting everyone compete
against each other with mining is wasteful. So instead proof-of-stake uses an election
process in which 1 node is randomly chosen to validate the next block. Oh yeah, small difference in terminology there. Proof-of-stake has no miners but instead has
“validators” and it doesn’t let people “mine” blocks but instead “mint” or
“forge” blocks. Validators aren’t chosen completely randomly. To become a validator, a node has to deposit
a certain amount of coins into the network as stake. You can think of this as a security deposit. The size of the stake determines the chances
of a validator to be chosen to forge the next block. It’s a linear correlation. Let’s say Bob deposits $100 dollars into
the network while Alice deposits $1000. Alice now has a 10 times higher chance of
being chosen to forge the next block. This might not seem fair because it favors
the rich, but in reality it’s more fair compared to proof-of-work.
With proof-of-work rich people can enjoy the
power of economies at scale. The price they pay for mining equipment and
electricity doesn’t go up in a linear fashion. Instead the more they buy, the better prices
they can get. Economies at scale! But back to proof-of-stake. If a node is chosen to validate the next block,
he’ll check if all the transactions within it are indeed valid. If everything checks out, the node signs off
on the block and adds it to the blockchain. As a reward the node receives the fees that
are associated with each transaction. Okay but how can we trust other validators
on the network? Well that’s where the stake comes in.
Validators will lose a part of their stake
if they approve fraudulent transactions. As long as the stake is higher then what the
validator gets from the transaction fees, we can trust them to correctly do their job. Because if not, they lose more money then
they gain. It’s a financial motivator and holds up
as long as the stake is higher then the sum of all the transaction fees. If a node stops being a validator, his stake
plus all the transaction fees that he got will be released after a certain period of
time.
Not straight away because the network still
needs to be able to punish you, should they discover that some of your blocks where fraudulent. So the differences between Proof-of-work and
Proof-of-stake are quite significant. Proof-of-stake doesn’t let everyone mine
for new blocks and therefore uses considerably less energy. It’s also more decentralized. How is that? Well in proof-of-work we have something called
mining pools. Those are people who are teaming up to increase
their chances of mining a new block and thus collecting the reward. However these pools now control large portions
of the bitcoin blockchain. They centralize the mining process and that’s
dangerous. If the three biggest mining pools would merge
together, they would have a majority stake in the network and could start approving fraudulent
transactions. Another important advantage is that setting
up a node for a proof-of-stake based blockchain is a lot less expensive compared to a proof-of-work
based one.
You don’t need 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. But even proof-of-stake isn’t perfect and
it also has some flaws. You might think: “hold on a minute! If I buy a majority stake in the network,
I can effectively control it and approve fake transactions” and you would be correct. This is called the 51% attack and was first
discussed as a weak point of the proof-of-work algorithm.
If a single miner or group of miners can obtain
51% of the hashing power, they can effectively control the blockchain. Proof-of-stake on the other hand makes this
attack very impractical, depending on the value of a cryptocurrency. If Bitcoin would be converted to proof-of-stake,
acquiring 51% of all the coins would set you back a whopping 79 billion dollars. So the 51% attack is actually less likely
to happen with proof-of-stake. But that’s not the only risk. Proof-of-stake algorithms also have to be
careful how they select the next validators. It can’t be completely random because the
size of the stake has to be factored in. But at the same time the stake alone isn’t
enough because that will favor rich people, who will get chosen more frequently, will
collect more transaction fees, become even richer and thus increase their chances of
being chosen as validator even further. There are a number of proposals to fix this
like coin age based selection.
Another potential problem is when the network
choses the next validator but he doesn’t turn up to do his job. This could easily be solved by choosing a
large number of backup validators as a fallback. In short: proof-of-stake brings additional
risks when compared to proof-of-work and a lot of research is needed to understand these
risks and to mitigate them. Alright so now that we know what proof-of-stake
is, what benefits it has and what risks are involved, let’s look at real world usage. A few examples of coins that use it right
now are Peercoin, Lisk and Nxt but more cryptocurrencies are likely to follow in the future. Ethereum for instance is working on implementing
a proof-of-stake system which they call Casper.
It’s currently deployed on the Ethereum
testnet and is actively being developed. And also the Cardano project has long been
working on creating the a provable secure proof-of-stake algorithm that they call Ouroboros. More about that in this video right here. So that was it for this video. If you liked it, give it a thumbs up and consider
getting subscribed. Thank you very much for watching and I’ll
see you in the next video!.
