Cointelegraph is tracking the development process of a brand new blockchain from the beginning to the mainnet through its “Blockchain Developer’s Mind” series. In the previous part, Andrew Levine Discussion of Koinos Group Some challenges Since identifying the key issues they intend to solve and outlining the three “crises” that hindered blockchain adoption, the team has been facing: Upgradability, Scalability and Governance. This series focuses on the consensus algorithm: Part 1 is about proof of work, Part 2 is about proof of equity, and part 3 is about proof of burning.

This article is the second in a series of articles on consensus algorithms. In this article, I use my unique perspective to help readers understand this often misunderstood concept. In the first article of this series, I discussed Proof of Work (OG consensus algorithm), and in this article, I will discuss Proof of Stake.

As I explained in the previous article, from the perspective of game theory, blockchain is a game where players compete Confirm By grouping transactions into blocks that match transaction blocks created by other players.Cryptography is used to hide the data that allows these people to cheat, and then use a random process to distribute digital tokens to comply with the rules and Production block Match blocks submitted by others. These blocks are then linked together to create a verifiable record of all transactions that have ever been executed on the network.

When people generate a new block containing different transactions, we call it a “fork” because the chain now forks in two different directions, and what makes sure everyone updates their database to match each other is that they are punished The way of punishment at the time. do not want.

The true innovation of Bitcoin (Bitcoin) Is to create an elegant system that combines cryptography and economics to use electronic coins (now called “cryptocurrencies”) to use incentives to solve problems that cannot be solved by algorithms alone. People are forced to perform meaningless work to mine blocks, but security does not stem from the performance of the work, but knows that this work is impossible to complete without the sacrifice of capital. If this is not the case, then the system has no economic component.

The work is verifiable agent For the sacrifice of capital. Since the network cannot “understand” external currencies, it needs to implement a system to convert external incentives (fiat currency) into something the network can understand-hashing. The more hashes an account creates, the more capital it must sacrifice, and the more motivated it is to produce blocks on the correct fork.

Since these people have spent money to buy hardware and run it to produce blocks, their incentive penalties are easy because they have already been punished! They spent money, so if they want to continue producing blocks on the wrong chain, that’s great. They will not receive any rewards, nor will they earn their money back. They will sacrifice the money for nothing.Their blocks will not be accepted by the network and They will not earn any tokens.

This proof-of-work system ensures that the only way for people who do not want to follow the rules (that is, malicious actors) is to acquire and run more hardware than others combined (that is, to launch a 51% attack). This is the elegance behind proof of work. Without sacrificing ever-increasing capital, the system will not function. However, proof-of-stake operates in a fundamentally different way and has important game theory consequences.

related: Proof of Equity and Proof of Work: Explaining the Difference

Proof of equity

Proof of Stake (PoS) is the first suggested In 2011, QuantumMechanic, a member of the Bitcointalk forum, as a low-cost (for miners) alternative to proof-of-work:

“I want to know if Bitcoin will become more widely distributed, will there be a shift from a proof-of-work-based system to a proof-of-stake. What I mean by proof-of-stake is that it’s not about your accepted transaction history.” Voting is “weighted by the share of computing resources you bring to the network, but by the number of bitcoins you can prove that you own, using your private key.”

In proof of equity, token holders only need to sacrifice assets on the blockchain, instead of forcing block producers to sacrifice capital to acquire and operate hardware to obtain the ability to obtain block rewards. fluidity Their capital gets block rewards. Those who already hold network tokens, if they give up the right to transfer these tokens within a period of time, they can get more tokens.

This is an attractive proposal for people who are used to spending money to buy and run hardware to obtain block rewards. Proof of work is very useful for the start-up of cryptocurrencies. Once the stage is over, holders of this valuable currency will find that they have to exchange the fruits of their labor-this valuable currency-into a External currencies (usually fiat currencies that they ostensibly compete with) purchase capital equipment and energy only to maintain their systems.

related: Proof of equity and proof of work: which one is more “fair”?

Proof of equity is very suitable for these people to increase their profit margins while allowing them to maintain control of the network. The problem is that it reduces network security, because malicious actors no longer need to sacrifice money on a large amount of hardware and run it to launch an attack. The attacker only needs to obtain 51% of the platform’s base currency and mortgage it to control the network.

In order to prevent such attacks, the PoS system must implement additional systems to “cut” the block rewards of validators who produce irreversible blocks on the “lost” chain (“reduction conditions”). The idea is that if someone gets 49% of the token supply and uses that stake to produce blocks on a failed fork, they will lose their collateralized tokens on the main chain.

These are complex systems designed to “recover” block rewards from user accounts, which increases the computational cost of the network and raises legitimate ethical questions (“If it can be reduced, is this my money?”). They are also effective only if the attacker fails to obtain 51% of the token supply. This is especially problematic in the world of centralized exchanges with custodial mortgages.This means that it is entirely possible for exchanges to control more than 51% of the supply of a given token without taking any risks, thereby reducing the cost of attacks at the lowest limitIn fact, this has occurred in one of the most commonly used blockchains in the world in recent history, once worth nearly 2 billion U.S. dollars: Steem.

An excellent history of the event can be found hereAccording to this account, the important detail of our purpose is that the funds held by the three exchanges have been successfully used to obtain 51% control of a major blockchain. From the most charitable point of view of all participants, the “cost” of all these entities controlling the chain is very small because they acquire a large number of shares at a very low cost.In fact, the centralized exchange is literally Paid Accumulate a large number of shares because their purpose is to act as a centralized custodian of tokens.

related: How the Steem Legend exposed the dangers of the betting pool

Implementing these reductions is no easy task, which is why so many proof-of-stake projects like Solana, they admit, launched a centralized solution, and why so many other projects (such as ETH 2.0) are adopting this approach for long-term implementation PoS. The typical solution is to give the foundation a large enough stake so that it can determine who the malicious actors are and cut their rewards.

In summary, the workload proved to be conducive to guide decentralization, but it is inefficient. Compared with proof of work, proof of equity can help reduce the operating costs of decentralized networks, but it further strengthens the position of miners, requires complex and ethically questionable reduction conditions, and cannot prevent “exchange attacks.”

The hypothetical question I will discuss in the next article is whether there is a “best of both worlds” solution that can achieve the decentralization and security of proof of work through the efficiency of proof of equity. So, stay tuned!

The views, thoughts and opinions expressed here are only those of the author, and do not necessarily reflect or represent the views and opinions of Cointelegraph.