Proof-of-Stake (vs proof-of-work)
Hi there! My name is Xavier and you might have readarticles online saying that cryptocurrencies like Bitcoin uses enormous amounts of energyto secure their networks. But why is that – and more importantly – whatare the alternatives? Mining new coins takes a lot of computingpower because of the proof-of-work algorithm. The suggestion was first introduced in 1993 to combatspam emails and was formally announced proof-of-work in 1997. However the method used croaked mainly unuseduntil Satoshi Nakamoto created Bitcoin in 2009. He realized that this mechanism could be usedto reach consensus between numerous nodes on a system and he utilized it as a room to securethe Bitcoin blockchain. However, the proof-of-work algorithm worksby having all nodes solve a cryptographic riddle. This problem is solved by miners and the firstone to find the solution gets the miner reward. This has led to a situation where people arebuilding larger and larger mining farms like this one. Harmonizing to Digiconomist, Bitcoin minersalone uses about 54 TWh of energy, enough to power 5 million households in the US oreven power the entire country of New Zealand or Hungary. But it doesnt stop there.Proof-of-work gives more honors to peoplewith better and more equipment. The higher your hash pace is, the higher thechance that youll get to create the next block and receive the mining payoff. To increase hazards so far, miners havecome together in whats announced mining ponds. They combine their hashing ability and distributethe honor evenly across everyone in the pool. So to summarize it up: proof-of-work is causingminers to use massive amounts of energy and it supports the use of quarrying kitties whichmakes the blockchain more centralized as opposed to decentralized.So to solve these issues we have to finda brand-new consensus algorithm that is as effective or better then proof-of-work. In 2011 a Bitcointalk forum user called QuantumMechanicproposed a skill that he called proof-of-stake. The basic thought is that letting everyone competeagainst each other with mining is wasteful. So instead proof-of-stake utilizes an electionprocess in which 1 node is randomly chosen to validate the next block. Oh yeah, small-minded gap in word there. Proof-of-stake has no miners but instead hasvalidators and it doesnt cause people mine blocks but instead mint orforge blocks. Validators arent selected altogether randomly.To become a validator, a node has to deposita certain amount of coins into the network as venture. You can think of this as a security deposit. The length of the bet determined by the chancesof a validator to be chosen to forge the next block. Its a linear correlation. Lets say Bob accumulations $100 dollars intothe network while Alice sediments $1000. Alice now has a 10 times higher chance ofbeing chosen to forge the next block. This might not seem fair because it favorsthe rich, but in reality its more fair compared to proof-of-work. With proof-of-work rich people can enjoy thepower of economies at flake. The cost they pay for mining equipment andelectricity doesnt go up in a linear fashion. Instead the more they buy, the better pricesthey can get. Economies at scale! But back to proof-of-stake. If a node is chosen to validate the next block, inferno check if all the transactions within it are indeed valid. If everything checks out, the node signalings offon the block and supplements it to the blockchain. As a reinforce the node receives the rewards thatare associated with each transaction. Okay but how can we trust other validatorson the network? Well thats where the post comes in.Validators will lose a part of their stakeif they approve sham business. As long as the venture is higher then what thevalidator comes from the busines rewards, we can trust them to correctly do their job. Because if not, they lose more fund thenthey amplification. Its a fiscal motivator and regards upas long as the stake is higher then the sum of all the transaction rewards. If a node stops being a validator, his stakeplus all the transaction costs that he got will be released after a certain period oftime. Not straight away because the network stillneeds to be able to punish you, should they had found that some of your blocks where sham. So the differences between Proof-of-work andProof-of-stake are quite significant. Proof-of-stake doesnt let everyone minefor brand-new blocks and therefore expends considerably less energy. Its likewise more decentralized. How is that? Well in proof-of-work we have something calledmining ponds. Those are people who are teaming up to increasetheir chances of mining a new block and thus obtaining the reward. However these kitties now command large portionsof the bitcoin blockchain.They centralize the mining process and thatsdangerous. If the three biggest mining funds would mergetogether, they would have a majority stake in the network and could start approving fraudulenttransactions. Another important advantage is that settingup a node for a proof-of-stake located blockchain is a lot less expensive compared to a proof-of-workbased one. You dont need expensive mining equipmentand thus proof-of-stake spurs more beings to set up a node, meeting the network moredecentralized and also more secure. But even proof-of-stake isnt perfect andit also has some flaws. You might judge: hold the line a instant! If I buy a majority stake in the network, I is to be able to authority it and approve hoax events and you would be correct.This is called the 51% affect and was firstdiscussed as a weak point of the proof-of-work algorithm. If a single miner or group of miners can obtain5 1% of the hashing power, they can effectively control the blockchain. Proof-of-stake on the other hand spawns thisattack exceedingly impractical, depending on the value of a cryptocurrency. If Bitcoin would be converted to proof-of-stake, acquiring 51% of all the coins would give you back a whopping 79 billion dollars.So the 51% attack is actually less likelyto happen with proof-of-stake. But thats not the only gamble. Proof-of-stake algorithms likewise have to becareful how they select the next validators. It cant be completely random because thesize of the venture has to be factored in. But at the same time the stake alone isntenough because that will favor rich people, who will get choice more often, willcollect more busines costs, become even richer and thus increase their chances ofbeing chosen as validator even further. There are a number of proposals to fix thislike silver age based assortment. Another capability problem is when the networkchoses the next validator but he doesnt turn up to do his undertaking. This could easily be solved by choosing alarge number of backup validators as a fallback. In short: proof-of-stake introduces additionalrisks when compared to proof-of-work and a lot of research is needed to understand theserisks and to mitigate them. Alright so now that we know what proof-of-stakeis, what benefits it has and what risks are involved, tells look at real world usage. A few a few examples of coins that use it rightnow are Peercoin, Lisk and Nxt but more cryptocurrencies are likely to follow in the future.Ethereum for example is working on implementinga proof-of-stake system which they announce Casper. Its currently deployed on the Ethereumtestnet and is actively being developed. And too the Cardano project has long beenworking on creating the a provable fasten 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 considergetting subscribed. Thank you very much for watching and Illsee you in the next video !.