1 00:00:00,333 --> 00:00:01,067 Hey, everyone. 2 00:00:01,068 --> 00:00:03,402 Today's video topic is about consensus protocols. 3 00:00:03,698 --> 00:00:06,093 It doesn't sound very glamorous, but it is something that's 4 00:00:06,119 --> 00:00:09,109 very important to understand if you're interested in cryptocurrency 5 00:00:09,135 --> 00:00:10,786 or blockchain tech in general. 6 00:00:11,227 --> 00:00:14,579 It is the groundwork for all of these coins that are out there, 7 00:00:14,857 --> 00:00:17,969 so it's important to understand it so you can better understand the project. 8 00:00:18,199 --> 00:00:19,699 Let's start with Proof of Work (POW). 9 00:00:19,832 --> 00:00:23,523 This is one that you probably hear of most often, it is what Bitcoin uses. 10 00:00:23,679 --> 00:00:26,125 And it is basically exactly what it sounds like. 11 00:00:26,434 --> 00:00:28,996 Proving that work was done and proving that the work was correct. 12 00:00:29,078 --> 00:00:31,932 Bitcoin and many other altcoins use this consensus system. 13 00:00:32,217 --> 00:00:35,502 And they do that so the authenticity of the chain can be validated, 14 00:00:35,748 --> 00:00:39,615 and that all parties agree that transactions that happen are correct and accurate. 15 00:00:39,895 --> 00:00:44,278 I found an analogy online like usual that might be more helpful in explaining Proof of Work. 16 00:00:44,630 --> 00:00:49,315 So imagine that you are a kid in a math class and you were taking an exam. 17 00:00:49,559 --> 00:00:53,320 And the first kid to get to the answer and be able to prove and show their work 18 00:00:53,320 --> 00:00:54,963 that they're correct gets rewarded. 19 00:00:55,134 --> 00:00:58,091 Now applying that to the crypto world, the math exam is the transaction, 20 00:00:58,117 --> 00:00:59,600 and the classroom is the blockchain. 21 00:00:59,731 --> 00:01:01,258 The student is the computer or node. 22 00:01:01,591 --> 00:01:04,397 And the brainpower is referring to the computing power. 23 00:01:04,663 --> 00:01:08,201 And then the reference to a lot of effort on the side of the student refers to the 24 00:01:08,201 --> 00:01:11,145 amount of electricity that's needed to prove in Proof of Work. 25 00:01:11,306 --> 00:01:12,805 Some downsides for Proof of Work. 26 00:01:12,919 --> 00:01:17,043 Most obviously, it requires work to be done and that requires electricity. 27 00:01:17,044 --> 00:01:20,447 So as far as financial goes, it's definitely the most expensive 28 00:01:20,447 --> 00:01:21,690 of the consensus systems. 29 00:01:21,775 --> 00:01:23,984 Some of you may have figured this out on your own already, 30 00:01:23,984 --> 00:01:26,894 but the hardware to mine is also exceptionally expensive. 31 00:01:27,303 --> 00:01:31,658 To the point that unless you have a warehouse filled with mining equipment, 32 00:01:31,658 --> 00:01:35,329 top end mining equipment, it's basically not even worth it anymore 33 00:01:35,329 --> 00:01:38,665 based on the price you have to pay for the mining equipment and the amount 34 00:01:38,665 --> 00:01:41,288 for electricity to run all of it, really. 35 00:01:41,510 --> 00:01:44,304 So your bill at the end of the month ends up being more expensive than 36 00:01:44,304 --> 00:01:46,515 the amount of Bitcoin that you're capable of mining. 37 00:01:46,681 --> 00:01:51,078 Another issue is miners moving from the Bitcoin blockchain to another more profitable 38 00:01:51,078 --> 00:01:55,248 easier blockchain, which we've seen happen in the past with Bitcoin and all 39 00:01:55,248 --> 00:01:56,658 its little alternating forks. 40 00:01:56,798 --> 00:01:59,352 Another downside is the issue with circulating supply. 41 00:01:59,671 --> 00:02:03,890 As the circulating amount goes up, the incentive for miners to mine goes 42 00:02:03,890 --> 00:02:07,603 down because the availability of coins to mine is decreasing. 43 00:02:07,789 --> 00:02:11,163 So eventually people are going to switch to another blockchain. 44 00:02:11,164 --> 00:02:14,768 A final downside to the Proof of Work consensus systems is something 45 00:02:14,768 --> 00:02:18,547 I discussed in my Crypto 101 video where I covered blockchain tech. 46 00:02:18,991 --> 00:02:21,195 The biggest issue is a 51% Attack. 47 00:02:21,449 --> 00:02:25,379 And basically that means if you have enough computational power to maintain 48 00:02:25,379 --> 00:02:29,244 and run 51% of the network, you then can control everything. 49 00:02:29,427 --> 00:02:31,910 Proof of Stake (PoS) is the next most popular consensus system, 50 00:02:32,077 --> 00:02:34,521 and unlike Proof of Work, it doesn't use computational 51 00:02:34,521 --> 00:02:38,220 power and electricity to solve mathematical equations to come to a consensus. 52 00:02:38,522 --> 00:02:41,060 Instead, each node will bet on a block. 53 00:02:41,166 --> 00:02:45,698 When that block gets added to the blockchain, whatever node had bet on it will get rewarded. 54 00:02:45,699 --> 00:02:48,869 A Proof of Stake system requires the prover to show a certain amount of 55 00:02:48,869 --> 00:02:52,981 staking weight and it's age to be able to participate in the betting process. 56 00:02:53,006 --> 00:02:56,509 In the Proof of Stake system, blocks are said to be minted and not mined. 57 00:02:56,510 --> 00:02:59,780 And those who validate the transactions and help to maintain the network 58 00:02:59,780 --> 00:03:01,719 are also referred to as nodes. 59 00:03:01,870 --> 00:03:05,085 Those individuals receive the cryptocurrency as a reward 60 00:03:05,111 --> 00:03:08,095 for holding X amount of crypto in their wallet, which helps 61 00:03:08,121 --> 00:03:09,447 to again maintain the network. 62 00:03:09,472 --> 00:03:12,092 In order to validate transactions and create a block, 63 00:03:12,375 --> 00:03:16,304 users must first put their coins at stake, which is obviously where the name comes from. 64 00:03:16,614 --> 00:03:19,800 In this system, if a node validates a fraudulent transaction, 65 00:03:20,085 --> 00:03:21,610 they're going to lose all of their holdings. 66 00:03:21,635 --> 00:03:24,237 And on top of that, they're not going to be allowed to participate 67 00:03:24,237 --> 00:03:25,847 in the minting process in the future. 68 00:03:25,963 --> 00:03:29,409 Meaning the nodes will be incentivized to validate only the correct transactions 69 00:03:29,639 --> 00:03:31,898 and help maintain the health and security of the network. 70 00:03:32,128 --> 00:03:36,515 In a very loose comparison, it's kind of like keeping money in a savings account. 71 00:03:36,880 --> 00:03:39,286 You leave it there, you're not really supposed to touch it and you will 72 00:03:39,286 --> 00:03:41,463 acrue interest over X amount of time. 73 00:03:41,695 --> 00:03:44,791 Unlike Bitcoin, where you would need 51% of the mining power 74 00:03:45,021 --> 00:03:47,694 in order to overtake the network, with the Proof of Stake system, 75 00:03:47,694 --> 00:03:50,637 you would need 51% of the total circulating supply. 76 00:03:51,026 --> 00:03:53,766 Depending on the project, that could be a very pricey endeavour. 77 00:03:53,905 --> 00:03:58,003 So because of that this isn't something that most people are worried about happening. 78 00:03:58,138 --> 00:04:01,708 A plus side to Proof of Stake is that you don't need expensive mining [hardware] 79 00:04:01,708 --> 00:04:03,418 in order to participate in the network. 80 00:04:03,639 --> 00:04:06,913 You need to leave your computer on 24/7, which is kind of a pain, and the wallet 81 00:04:06,913 --> 00:04:09,091 needs to be up and running and on the latest version. 82 00:04:09,116 --> 00:04:12,586 And obviously a side effect of that is that Proof of Stake is more efficient 83 00:04:12,586 --> 00:04:16,005 and uses less energy because it's not actively doing work. 84 00:04:16,315 --> 00:04:18,023 It's kind of just sitting there passively. 85 00:04:18,098 --> 00:04:19,439 Some downsides to Proof of Stake. 86 00:04:19,836 --> 00:04:22,510 So the same reason that it's good is also a weakness. 87 00:04:22,669 --> 00:04:25,369 The more you hold in stake, the higher rewards you get. 88 00:04:25,575 --> 00:04:28,267 And that's kind of a rich getting richer situation. 89 00:04:28,351 --> 00:04:31,338 And for obvious reasons, because staking gives your rewards, 90 00:04:31,338 --> 00:04:36,009 another weakness is usually this isn't a great currency for transactionary things, 91 00:04:36,247 --> 00:04:39,146 because people want to hold it and maintain it in the wallet 92 00:04:39,146 --> 00:04:42,449 to get rewards and because of that people horde it and it's not going 93 00:04:42,449 --> 00:04:44,904 out and doing things and there's a lot less circulation. 94 00:04:45,032 --> 00:04:48,355 Although this helps stabilize the network, eventually some of these coins are going to 95 00:04:48,355 --> 00:04:51,958 reach their max circulating supply, and at that point they may become 96 00:04:51,958 --> 00:04:55,228 scarce and difficult to get or very expensive to purchase. 97 00:04:55,355 --> 00:04:58,230 I want to touch on a little bit more detail of the Proof of Stake system. 98 00:04:58,544 --> 00:05:00,332 There's two kinds of rewards systems. 99 00:05:00,468 --> 00:05:04,837 One is randomized, and a coin that uses the randomized consensus system is PIVX. 100 00:05:04,981 --> 00:05:08,707 Basically, this means the nodes that are receiving the rewards are randomized. 101 00:05:08,989 --> 00:05:12,144 This makes it more balanced and more fair for the community. 102 00:05:12,234 --> 00:05:14,513 Coin Aged Based Selection is the next one. 103 00:05:14,514 --> 00:05:16,682 And that is pretty self explainatory. 104 00:05:16,941 --> 00:05:21,187 Basically it means that the next node is picked based on the age of the coins in the wallet. 105 00:05:21,276 --> 00:05:26,059 This one is where it's a little bit more unfair, because this is calculated by the number 106 00:05:26,059 --> 00:05:29,963 of days that the coins have been staking in the wallet times the amount you have, 107 00:05:30,185 --> 00:05:31,498 which gives you a network weight. 108 00:05:31,918 --> 00:05:35,202 So you can see where there would be a problem if you're not holding a lot of coins 109 00:05:35,202 --> 00:05:37,304 that your network weight is going to be smaller, 110 00:05:37,304 --> 00:05:40,574 and there's going to be a less chance of you getting the reward as frequently 111 00:05:40,574 --> 00:05:42,684 as somebody who has a lot more coins than you. 112 00:05:42,814 --> 00:05:45,411 Most projects have some kind of staking requirement. 113 00:05:45,498 --> 00:05:49,616 Meaning, when you send the coins to the wallet they have to be in the wallet X amount 114 00:05:49,616 --> 00:05:53,286 of days or they have to be confirmed by X amount of confirmations 115 00:05:53,571 --> 00:05:55,463 before they will be eligible to be staked. 116 00:05:55,488 --> 00:05:57,858 Once a user has made a block and received a reward, 117 00:05:57,858 --> 00:06:00,622 their coin age resets to zero, and that means that they have 118 00:06:00,648 --> 00:06:03,972 to wait a certain amount of time again to participate and get block rewards. 119 00:06:04,102 --> 00:06:08,035 On to the next consensus system, which is Delegated Proof of Stake or DPoS. 120 00:06:08,606 --> 00:06:11,145 This consensus system was first used with Bitshares, 121 00:06:11,383 --> 00:06:14,248 but now you can see it being used with projects like Lisk and Ark. 122 00:06:14,334 --> 00:06:17,477 The difference between Proof of Stake and Delegated Proof of Stake 123 00:06:17,878 --> 00:06:22,056 is the difference between direct democracy and representative democracy. 124 00:06:22,263 --> 00:06:24,217 In a regular Proof of Stake consensus system, 125 00:06:24,542 --> 00:06:27,395 every wallet that holds coins has the ability to stake. 126 00:06:27,914 --> 00:06:31,858 In a Delegated Proof of Stake system, every wallet that holds a certain amount 127 00:06:31,858 --> 00:06:33,980 of coins has the ability to vote on a delegate. 128 00:06:34,226 --> 00:06:36,363 These delegates perform the functions of validating 129 00:06:36,363 --> 00:06:38,106 transactions and maintaining the network. 130 00:06:38,700 --> 00:06:42,068 They get to take the transaction fees as profit and this process is 131 00:06:42,068 --> 00:06:43,452 called forging or minting. 132 00:06:43,690 --> 00:06:47,674 The idea is then that the delegates will share the profit that they receive 133 00:06:47,991 --> 00:06:50,619 as the transactions fees with the people who voted for them. 134 00:06:50,855 --> 00:06:53,046 For us in the United States, this is almost identical to 135 00:06:53,046 --> 00:06:55,307 how we receive representation in Congress. 136 00:06:55,672 --> 00:06:58,885 So a small amount of people that are elected from our States 137 00:06:59,170 --> 00:07:00,965 represent us in the different Houses. 138 00:07:01,814 --> 00:07:03,660 And we've seen how well that goes over. 139 00:07:03,977 --> 00:07:08,028 A cool upside to Delegated Proof of Stake, is because you're voting on someone 140 00:07:08,194 --> 00:07:10,530 to do the transactions and to maintain the network, 141 00:07:10,839 --> 00:07:14,175 you're wallet doesn't need to be on because somebody else is doing that work for you. 142 00:07:14,370 --> 00:07:16,336 So you can still participate in the network 143 00:07:16,336 --> 00:07:19,272 and you will still receive some sort of minting reward, 144 00:07:19,510 --> 00:07:22,518 but your wallet doesn't have to be on which means your computer doesn't have to be on. 145 00:07:22,669 --> 00:07:26,079 For people just entering the cryptospace, Delegated Proof of Stake may seem 146 00:07:26,079 --> 00:07:29,716 like a better option because they can join staking pools meaning they don't have 147 00:07:29,716 --> 00:07:31,826 to hold a lot and they can pool with other people. 148 00:07:32,244 --> 00:07:34,621 Whereas with Proof of Stake, which I brought up before, 149 00:07:34,850 --> 00:07:38,400 you have to hold a lot of the coin in order for it to really be profitable. 150 00:07:38,604 --> 00:07:41,760 Depending on how much that project is, that could be a really hefty investment. 151 00:07:41,885 --> 00:07:45,932 Delegated Proof of Stake gives people with a small or medium bag of the coins 152 00:07:45,932 --> 00:07:49,903 an option to participate in the network, receive rewards, and incentivizes them 153 00:07:49,903 --> 00:07:51,379 into buying into the project. 154 00:07:51,404 --> 00:07:53,402 Some down sides to Delegated Proof of Stake. 155 00:07:53,886 --> 00:07:57,677 The argument is by voting for delegates that we're concentrating the power 156 00:07:57,939 --> 00:08:01,715 to a limited amount of people and thus kind of recentralizing 157 00:08:01,715 --> 00:08:03,290 a decentralized cryptocurrency. 158 00:08:03,440 --> 00:08:06,707 It could also suffer from the same issues that we see in the democratic party, 159 00:08:07,056 --> 00:08:10,256 which is voters not being engaged and the system not working properly 160 00:08:10,256 --> 00:08:11,985 because there's not enough community involvement. 161 00:08:12,192 --> 00:08:15,028 If regular users fail to vote, there will be a tendency 162 00:08:15,028 --> 00:08:18,231 for the network to fall into larger stakeholders who at that point 163 00:08:18,231 --> 00:08:19,652 can just vote for themselves. 164 00:08:19,834 --> 00:08:21,567 And we've actually already seen this happen. 165 00:08:21,858 --> 00:08:25,071 I touched on this in my Lisk video, but there's a delegate group called Elite 166 00:08:25,071 --> 00:08:28,775 and they stopped paying out people who vote for them unless they vote 167 00:08:28,775 --> 00:08:30,469 for the entire group of Elite. 168 00:08:30,850 --> 00:08:34,022 Meaning that gives them control and they're able to manipulate the network. 169 00:08:34,323 --> 00:08:37,117 And for the last consensus system, which is a little bit lesser known, 170 00:08:37,418 --> 00:08:38,513 is Proof of Activity (PoA). 171 00:08:39,021 --> 00:08:40,987 And this is only found on the Decred network, 172 00:08:40,987 --> 00:08:43,123 and I covered that topic not too long ago. 173 00:08:43,575 --> 00:08:46,026 But basically what they do is they're trying to take the 174 00:08:46,026 --> 00:08:49,162 best parts of Proof of Stake and the best parts of Proof of Work 175 00:08:49,471 --> 00:08:52,240 and combining them into one network so that they work in harmony. 176 00:08:52,265 --> 00:08:55,769 Proof of Work miners are creating blocks, and the job of the Proof of Stake miners 177 00:08:55,769 --> 00:09:00,040 is to make sure that the Proof of Work miners are creating blocks that are consistent 178 00:09:00,040 --> 00:09:02,683 with the desires of the people that are holding the currency. 179 00:09:02,842 --> 00:09:05,512 Some downsides to Proof of Activity would be that 180 00:09:05,512 --> 00:09:10,417 Decred's the only project running it right now, and that basically means that we don't 181 00:09:10,417 --> 00:09:14,621 really know as far as Bitcoin level of transactions if the Decred network 182 00:09:14,621 --> 00:09:15,663 would be able to handle that. 183 00:09:15,688 --> 00:09:18,758 A more major criticism that I've read or seen online about 184 00:09:18,758 --> 00:09:20,502 the Proof of Activity consensus system, 185 00:09:21,030 --> 00:09:24,731 is that because it's using Proof of Work and Proof of Stake that there is just 186 00:09:24,731 --> 00:09:29,402 kind ofa lot of moving parts going on and it's not as easy to get involved with 187 00:09:29,402 --> 00:09:32,505 from the beginning, so it might be a deterent from new people from getting 188 00:09:32,505 --> 00:09:37,744 interested because these things by themselves are difficult to understand so taking all 189 00:09:37,744 --> 00:09:40,428 of those parts and putting them together makes it even worse. 190 00:09:40,539 --> 00:09:43,982 So to finalize my points, obviously there's pros and cons to everything. 191 00:09:44,314 --> 00:09:47,987 I think that Proof of Work definitely laid the groundwork 192 00:09:47,987 --> 00:09:52,065 to come up with more interesting and more efficient consensus systems. 193 00:09:52,517 --> 00:09:55,362 I think that eventually Proof of Work is going to be, 194 00:09:55,362 --> 00:09:59,365 I don't want to say obsolete, but definitely less desirable 195 00:09:59,365 --> 00:10:03,870 to use for the sole purpose of efficiency and the fact that it's just going to be 196 00:10:03,870 --> 00:10:06,018 way too expensive to continue to do that. 197 00:10:06,240 --> 00:10:10,110 Overall I think that randomized selection Proof of Stake consensus systems like 198 00:10:10,110 --> 00:10:12,600 PIVX uses is going to be the best for longevity. 199 00:10:12,965 --> 00:10:16,149 It incentivizes people to stay and help stabilize the network, 200 00:10:16,557 --> 00:10:20,401 but it also gives everybody an honest shot at actually earning some block rewards. 201 00:10:20,671 --> 00:10:22,956 I'm sure eventually there'll be more consensus systems, 202 00:10:22,956 --> 00:10:26,493 and I may even have to do this video again, but for the time being I think I covered 203 00:10:26,493 --> 00:10:29,562 the ones that are at least the most popular, and the ones that you're going to read 204 00:10:29,562 --> 00:10:30,714 about the most online. 205 00:10:30,952 --> 00:10:32,465 If any of you guys have any more questions, 206 00:10:32,690 --> 00:10:34,876 please feel free to pop on over to my Discord server. 207 00:10:35,095 --> 00:10:36,535 I'll leave the info in the description. 208 00:10:36,753 --> 00:10:39,706 I want to thank you guys again for watching, and I'll see you guys soon.