Belshazzar’s Take Away

…continued from: The Blockchain: Quantum Attacks and Quark Attacks (Explain Like I’m 5)

So, Cryptoman, I keep hearing about “Proof of Stake.” What Does That Mean?

OK. Let’s return to the blockchain idea. There’s a cryptocurrency network, and various transactions are happening that correspond to people sending cryptocurrency to each other. These transactions are only confirmed when a block is created and added to the blockchain. There are many mining nodes and they need a way to reach a consensus on what the next block is and what it includes.

Well “Proof of Work” and “Proof of Stake” are different ways of reaching the consensus as to what the next block is.

So there are two ways to do that?

No there are more than that.

How many are there?

I don’t know.

I thought you knew everything.

I never said that RookieBoy. The truth is that it is a moving target. Developers think up new ways of reaching a block consensus every few weeks. It’s like it’s a hobby with some of them.

Are they all called “Proof of Something”?

None of them are called “Proof of Something.” But they all seem to have names that begin with “Proof of.”

There’s Proof of Importance, and Proof of Burn, to name but two.

Why didn’t everyone just stick with Proof of Work?

There are two reasons. The first is that “proof of work” has proved to be expensive. It requires a shed load of servers all of which are burning up lots of electricity 24 by 7. That’s a significant cost.

But isn’t that cost paid for by issuing new coins?

Yes, it is.

So it’s not a cost, is it?

Well, yes it is. The miners get paid.

But you pay them with new crypto that appears out of the air from nowhere. It’s like a David Copperfield trick.

They may seem to appear by magic with every new block, but their value is factored into the value of the cryptocurrency. It all balances out.

So if you could pay fewer coins for every new block that would be a good thing. It would make the currency less expensive to use. Proof of Work places a cost on every transaction there is.

And what’s reason #2 why Proof of Work is no good?

It’s the 51% problem we already talked about. The blockchain has to ensure that no miners can get 51% of the mining power. So some developers came up with an idea which fixed both problems.

And that’s Proof of Stake, right?

Yes. How did you guess?

Mama didn’t raise no stupid children.

[a long silence ensues]

So how does Proof of Stake work?

You still have mining nodes, but the choice of which mining node forges the next block is determined partly by which node holds the largest “stake” that is the largest amount of coins.

What do you mean “partly”?

A mathematical mechanism is added that makes it impossible to know exactly which node will forge the next block. But the probability is higher for the nodes with the largest number of coins staked. So they get to do more of the mining and get more of the rewards.

There’s nothing surer, the rich get richer, and the poor get poorer?

Not really. Everyone gets richer, in proportion to their stake.

And what’s good about Proof of Stake?

It has the advantage that once a sensible distribution of nodes is established it’s really difficult for anyone to get 51% of the mining power. If you place the right limits on nodes, it becomes impossible.

And how much cheaper is it?

It’s far cheaper in electricity costs, and you can even run it with a low number of nodes. So less electricity per node and fewer nodes.

Do any cryptos use Proof of Stake?

Yes.

Which ones?

Dash and Neo are two fairly well-known ones.

What does Ethereum use?

Currently, it uses Proof of Work but it is moving as fast as it can to Proof of Stake.

So a crypto can change its consensus mechanism?

Yes. As long as enough of the community agrees.

And if they don’t?

That’s how cryptocurrencies fork. The Ethereum community didn’t agree on how to handle the DAO hack, so Ethereum split into Ethereum (ETH) and Ethereum Classic (ETC). The Bitcoin community could not agree on block size, so they split into BTC and Bitcoin Cash (BCH).

If Proof of Work is expensive, and Proof of Stake is cheaper, will all the coins move to Proof of Stake?

As I said it’s up to the community. It’s impossible to know. It could be different for each coin. It is a dynamic field right now, awash with new ideas to reduce the vulnerabilities and costs of the blockchain. A completely different idea might dominate in the end.

And Proof of Stake has nothing to do with Count Dracula?

It’s hard to know for sure. There is a Dracula Coin. I suspect it avoids Proof of Stake like it was garlic. A posting on BitcoinTalk insisted that Dracula Coin was a wallet-stealing virus. It sinks its teeth into your crypto and drains your wealth. It turns you into one of the unrich.

Click here for: Which crypto should I buy? How do you spot a crypto scam? (Explain Like I’m 5)

Robin Bloor Ph D. is the Technology Evangelist for Permission.io, author of The “Common Sense” of Crypto Currency, cofounder of The Bloor Group and webmaster of TheDataRightsofMan.com.