The Obelisk consensus algorithm is the pillar that holds up the Skycoin ecosystem. Skycoin and Obelisk were developed by ex-Bitcoin and Ethereum developers after a series of code audits revealed fatal flaws in the way Bitcoin mining works. These flaws in Bitcoin’s proof-of-work algorithm have resulted in centralization scares and malicious forks, causing massive price drops and general fear in the cryptocurrency community. Obelisk tackles these issues on a social level with its governance structure and on an economic level by removing perverse incentives to compromise the network.

Obelisk Makes Proof of Work Obsolete

Cryptocurrencies have hit a snag in their adoption as many people are losing faith in the ability of blockchain to solve the problems it promises to solve. The development of Obelisk is the keystone moment that solves the biggest issues in cryptocurrency adoption today: speed, scale, and safety. In the coming years Obelisk will take us from the current crypto reality of slow transactions and high fees to the crypto future where blockchains are used all throughout daily life. Skycoin powered by Obelisk makes possible crypto payments that clear faster than credit card payments with a network that’s immune to 51% attacks.

This article will explain how blockchain mining works, give you an overview of the state of the two most popular consensus algorithms, and introduce you to the revolutionary features of Obelisk.

Blockchain & Cryptocurrency Mining in a Nutshell

Blockchain can be thought of like a database, set of records, or spreadsheet that millions of computers all share and update. No one person or entity owns or moderates the network. Instead, updates happen by consensus. Every time new transactions happen they are bundled together and put in a “block” or record, and the block “chain” is the series of records going all the way back to when the blockchain was started. These blocks include account balances, transaction information, and a unique identifier for the block.

The system used to form an agreement between all the nodes on the network is known as a consensus algorithm. Currently the two most prolific blockchains, Bitcoin and Ethereum, use Proof-of-Work. When new blocks are created, the thousands of computers on the network compete to solve a mathematical puzzle that proves this block is valid and not a fake block with fraudulent transactions. The first one to solve it gets a reward and the block gets recorded.

Proof-of-Work is Not Working

In the earliest days of Bitcoin, it could be mined with a consumer desktop CPU or GPU. These were soon replaced by computers with ASIC chipsets, which are custom-designed and optimized for the Proof-of-Work algorithm. Any current viable mining operation requires a room full of expensive ASICs in order to be competitive on the network.

When Satoshi Nakamato created Bitcoin, the idea was to have a global decentralized network of hundreds of thousands of nodes located in different countries owned by different people so that no government could control or regulate Bitcoin.

In practice, Bitcoin has become dangerously centralized. Today, the top three mining pools control more than 51% of the mining market and they are all based in China. Two of those mining pools are owned by a single mining equipment manufacturer, Bitmain, also in China. When it comes to voting on forks to Proof-of-Work blockchains, these mining pools are incentivized to vote on whatever keeps their mining operations profitable, not necessarily what’s best for users or blockchain mass adoption. To combat this centralization, Obelisk gets rid of block rewards altogether.

The Block Reward Hoard

It’s important to remove the reward incentive from mining because it creates an incentive to game the network. No algorithm is fully safe from human exploitation as long as the reward for finding an exploit exists.

Bitcoin miners have been observed inserting fake transactions where they transfer money to themselves with a very high transaction fee that goes back to the miner. Regular transactions are then forced to big against these fake transactions. During the height of Bitcoin network congestion, transactions speeds were slower and more expensive than bank transfers.

Block rewards are also one of the biggest barriers to mass blockchain adoption because they’re essentially expensive payments for slow data entry.

“If we’re going to live a in a society where thousands of companies have their own blockchains… we cannot afford to pay nodes hundreds of thousands of dollars per block just to record transactions on a list and put them on a block.” - Synth, Skycoin Co-founder

Proof-of-Stake is Half-Baked

In a Proof-of-Stake system, users holding a certain number of coins create new blocks. These users must show proof of ownership and if they validate a fraudulent transaction they can lose their stake. Proof-of-stake is considered to be more fair than Proof-of-Work, however, it suffers from several vulnerabilities that have kept it from being adopted by the most prominent cryptocurrencies.

One such vulnerability is known as the “nothing at stake” problem that presents itself when there is a competing chain. In Proof-of-Work, if there is a competing chain, a miner must choose the chain where it will devote its computing power. With Proof-of-Stake, the miners can vote on as many versions of the chain as they want, without cost or penalty.

Another vulnerability with Proof-of-Stake is that those with the most money control the consensus. We’ve seen exchanges become the de facto rulers of Proof-of-Stake as they tend to accumulate the most coins in their wallets.

Delegated Proof-of-Stake is the next evolution of Proof-of-Stake, as it adds a governance layer and a system of trusted witnesses elected by users to oversee network transactions and create blocks. Delegated Proof-of-Stake is unsustainable as fees are still paid for block creation. Obelisk goes beyond a simple governance layer and gets rid of block rewards altogether.

Obelisk Features

Obelisk allows secure transactions to clear faster than Bitcoin, Ethereum, and credit cards. It’s computationally inexpensive, as it can be run from software nodes and low-end hardware, and can scale to handle more transactions per second than global credit card operators. Its speed allows developers to create decentralized apps and games that work using blockchain data in real time. The network has been built with immutability in mind, and it is protected from spam attacks, 51% attacks, and hacks by its unique governance structure.

Web-of-Trust

Obelisk relies not on computing power or coin wealth but on web-of-trust dynamics. Each node in the network is connected to other nodes and given an influence score. The more nodes it’s connected to the more trustworthy it’s considered and is given a higher influence score.

Separation of Powers

When it comes to voting on forks, purging false transactions, and removing bad actors, Obelisk has a more robust system than Delegated Proof-of-Stake. There are two types of democratic voting in Obelisk. One voting type represents coin holders and is based on coin fees. In this branch, the blockchain with the most burn of Coin Hours is the dominant chain. The other is the consensus network that’s built on trust between two node types, not ownership of coins.

Two-Node Structure

There are two types of nodes: block-making/minting nodes and consensus nodes. Minting nodes send data to consensus nodes; both types of nodes must verify transactions and when fraud is detected the malicious actors are quarantined and banned from the network.

A Triangle of Trust

In Obelisk’s consensus system, all of the nodes engaged in the consensus process are identified by public keys. All of the consensus activities between nodes are in a public ledger. If all the nodes obey the consensus protocol then the consensus algorithm is mathematically guaranteed to converge. In an ideal world with all nodes playing fairly, this would suffice, but no mathematical algorithm is completely immune to all types of attacks.

Obelisk takes security one step further with its public record of the consensus, known as the public broadcast channel, that allows users to ensure that the nodes obey the policy and rules set by the consensus algorithm. This governance layer is not a central authority — it merely acts as a monitor and informs nodes of malicious behavior. Nodes can then democratically and in a peer-to-peer fashion vote to take measures that secure the network. Three different groups operate Skycoin: minting nodes, consensus nodes, and coin holders, and they can all veto each other. The most trusted nodes are the consensus nodes, and if one person were to theoretically own 90% of coins and tried to change the rules to benefit himself, the consensus nodes could still stop him. The result is a network immune to 51% attacks and catastrophic failures.