Part 1 - New Forms of Governance: Overview of 1st-Gen Consensus Protocols

1. Introduction: 10th birthday, a few concepts and a walk down memory lane

After 10 years of existence — with someone saying that the crypto-bubble has exploded while most of us were late to the party, and someone else still hoping to turn into a millionaire overnight — digital currencies and Blockchain technology are still there, with 2018 being the year which set the record for the number of traditional players — banks, financial institutions, governments, corporations — entering the space and implementing Blockchain systems within their existing business. How is that so? One of the main reasons is, obviously, that a depressed currency is less speculative, and with less speculative actions to take, all major players had some time to look at the underlying technology — distributed ledger technology (DLT) — and its use in the real world. Another one, and by far more interesting, it’s what DLT makes possible in terms of governance, in terms of how peers (and machines) interact with each other in a “non-organized” network.

In fact, if on one side makes sense to discuss the financial impact Blockchain and digital currencies had along the years, on the other side it has been too often neglected the potential which the technology itself made available for individuals — a shared, undeniable source of truth which every user/machine in the network can agree upon without trusting, knowing or even conversing with each other — be this “truth” a transaction/the time of a transaction, voting/the time of voting, sharing ownership over an intellectual/digital asset or any other action taken inside the network.

Along this article we are not only going to analyze the main types of Consensus, both at a mathematical and at a technical level, but also the behavior and the complex network dynamics which occur while x-amount of players interact with each other in a non-deterministic system.

For the rest of the article, in order to better analyse the Network Dynamics which occur in DLT, we will consider two macro-categories of convenience:

Consensus Algorithm Tokenomics

2. Self-driving Uber cars, and Bitcoin’s historical origins

As in everything history, different people see the same thing in different ways. In Bitcoin case, we can see two opposite, irreconcilable stances — with on one pole a group considering it a sort of alien miracle landed on Earth to save humankind, and on the other an even more extreme group who sees it as a speculative fraud which sooner or later will leave us alone for good. Now, in order not to undertake any prophetic stance ourselves, let’s state a clear, simple thing: Bitcoin was created to solve an actual problem, introducing an actual technological solution, with its own functions and mechanisms. This problem was the lack of a concrete, peer-focused alternative to banking institutions and middlemen, with their fees, their abuses, the lack of transparency, privacy — and, most of all, verifiable source of truth.

In fact, its mechanism of consensus allowed Bitcoin to be the first in human history to be a currency and a payment method at the same time. It’s like a person, A, being at the same time the passenger ordering an Uber, and the self-driving Uber car which brings the passenger to his final location. In Bitcoin’s case, this means that not only Stakeholders are fully responsible for the preservation of their digital assets, but also that the currency itself cannot be controlled, stopped, or tampered by any external third party service provider — removing issues of power, trust and fees.

3. Proof-of-Work (PoW): why and how Bitcoin consensus works

1.Consensus Algorithm

Bitcoin’s consensus is called Proof-of-Work (PoW) — which, as the name suggests, consists in reaching an agreement amongst the peers (and machines) in the network by using a specific type of Computational work, called “mining.”

Mining is the way peers (miners) use their resources and their electricity, in order for their machines to solve a mathematical puzzle (hash) and this way verify transactions occurring within the network. Once a tot number of transactions from the transaction-pool has been solved, the first machine solving the puzzle will add a new block to the blockchain. As it may happen that two machines/miners solve the cryptographic hash at the same time, generating two parallel blocks, to guarantee the non-ambiguity of the blockchain and prevent double-spending, miners will follow the block which has received the higher number of computational work (and consumed more energy).

2. Tokenomics

Now, if on one side cryptographic hashes and computational power guarantee the validity of the transactions, on the other side Miners would be free to arbitrarily follow a block which has been produced by using lower computational power and “forked” from the main chain. So why wouldn’t they do it?

Two reasons: tokenomics and Coordination Problem (Game Theory). The first one is connected to the system of incentives integrated in Bitcoin’s blockchain. In fact, by “doing the right thing” and mining the block where more computational work, Miners receive a block-reward (in coins) higher than the profit they would gain if they were to “make the wrong choice”. The second reason is directly connected to the first. In fact, an important concept in Game Theory, the Coordination Problem, shows how for the majority of players (individuals, peers) to switch from a condition/state to another, the incentive/profit/convenience of the new situation needs to be at least two times higher than the original state — if this doesn’t occur and the incentive presented by the alternative is too weak, the majority of players will not move, and will remain “loyal” to the original state.

4. Is PoW the ultimate solution to everything?

As we’ve seen this far, Bitcoin consensus mechanism works perfectly fine under the previous conditions, giving its stakeholders not only responsibilities, but rewards, autonomy and trust. That said, doesn’t mean that we should build everything “the Bitcoin way.” In fact, unfortunately — the Bitcoin way is far from being an “ultimate solution” to anything.

In fact, despite what some maximalists may say, and with all its merits and historical importance, if Bitcoin were to become the global currency, the computational power used for its PoW would single-handedly consume more energetic power than all the countries in the world combined.

This happens cause the very own way in which the network works — by purposely slowing down the validation-time of transactions in the transaction-pool — imposes high energy-consumption in the system which would most likely end up draining our planet’s resources within a few months.Like it or not, this fact alone doesn’t make it a good candidate for being the “ultimate solution” of anything. Added to that, though, PoW way of validation forces the network to an unscalably low performance in terms of transactions/second and confirmation period compared to any traditional global payment system.

If on one side Bitcoin succeeded in showing the world the existence of alternatives to traditional governance and institutional mediators, on the other side it failed in dealing with network dynamics on the large scale — the consequences, so to say, deriving from mass adoption.

5. Alternative protocols, peer-pressure and a new breed of elections

Since (1) exhaustingly long queues for confirming a payment and (2) probable energetic cataclysms on global-scale didn’t look good on the long term, shortly after Bitcoin inception, various projects attempted to implement Bitcoin’s algorithm with different mechanisms, which could preserve the incorruptibility of the blocks of data and approached distributed consensus while reducing energetical waste. Again, we needed a solution focused on governance in peer-networks, self-organizing systems without an official set of regulators, where individual behavior was influenced by peer pressure and network dynamics, therefore couldn’t be entirely predicted.

One attempt in that direction was made by Filecoin’s Proof-of-Spacetime (PoST) — a consensus mechanism based on the participation in the network (user’s amount of stored data), which relies on the concept that users deeper involved / committed to the network will have higher knowledge about it, and lower motivation in follow malicious intents. If on one side seems to be based on herd dynamics and peer-pressure as a human-sustainable network should be, on the other side it relies too broadly on individual’s choices such as “convenience” (if not enough incentivized, individual actors may leave the network or take selfish decisions) and the “weight” which a single user would have on the all system.

Another move in that direction is the Proof-of-Reputation (PoR) protocol — which, as the name implies, leverages on a sort of cryptographically secure “popularity game” where highest ranked users take decisions for their peers. Again, peer-pressure and good network-resistance (net-resistance) to group dynamics — but the trade-off here is that a reputation-based system risks to turn not only into a popularity game, but into a brand-new, Blockchain-type of public election.

Last but not least in our alternative consensus catwalk is the Proof-of-Authority (PoA) algorithm, by the POA Network. Since PoW-type of governance forces the system to slow-down, to consume excessive amount of energy and to be hardly scalable — POA’s solution was to introduce a set of “unbiased” validators (the authority) which could quickly take and record decisions in the POA Blockchain. The system has proved to be effective, as transactions are faster and inter-chain communications more feasible — but in order to do so, network’s users need to trust the judgement of validators (in this case US Notary), which seems a step-back in terms of decentralization.

6. Conclusion

So far we have seen, on one side how, as relevant as they have been, and still are, protocols based on authority and weight bring back “moderators” into place — despite their removal, as we’ve seen, was one of the major initial reasons why Blockchain was proposed and started to exist in the first place. And how their importance stands in being the first to try to create a peer-networks dealing with human and machine behaviour at the same time. On the other side we’ve seen how, despite its limitations in scalability, PoW has not only been a Consensus protocol for Blockchain Governance — but the open-liner to a brand-new generation of possibilities in decentralized, distributed peer-to-peer networks. Moreover it started a discussion about the feasibility of self-organizing, autonomous networks which allowed scenarios — practical or theoretical — which had never been possible before.

Now, as PoW and PoA-kind of protocols work as a snapshot of a so-called 1st generation of Distributed Ledger Technology, at the conclusion of the first part of this series about Governance and Consensus, it makes sense to mention what we have left out, rather than what we had space to include. As there are many important concepts we started discussing along this article, there are many others which are needed in order to understand the current state-of-art in Blockchain Governance. First and foremost, in the 2nd part the series, we will be introducing two more concepts:

Node distribution Smart Contracts automatization

And we will analyze them as the next step in decentralized governance. We will mention Ethereum network, where most of 2nd generation DLT started, and we will discuss Proof-of-Stake algorithm, which has been the first concrete attempt to deal with chaotic network dynamics on the large-scale — as well as all its applications, variations, modifications under a mathematical and socio-political perspective. At the end of this article, though, despite we didn’t find the secret recipe for starting to invest in crypto or find the best upcoming ICO’s of the month/the year/the century — we had the opportunity to focus on the actual disruption this technology brought into daily-life, which is a distributed consensus allowing trustless relationship between individuals, networks, machines, and other living/non-living beings.

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