WEBVTT 00:00:00.333 --> 00:00:01.067 Hey, everyone. 00:00:01.068 --> 00:00:03.402 Today's video topic is about consensus protocols. 00:00:03.698 --> 00:00:06.093 It doesn't sound very glamorous, but it is something that's 00:00:06.119 --> 00:00:09.109 very important to understand if you're interested in cryptocurrency 00:00:09.135 --> 00:00:10.786 or blockchain tech in general. 00:00:11.227 --> 00:00:14.579 It is the groundwork for all of these coins that are out there, 00:00:14.857 --> 00:00:17.969 so it's important to understand it so you can better understand the project. 00:00:18.199 --> 00:00:19.699 Let's start with Proof of Work (POW). 00:00:19.832 --> 00:00:23.523 This is one that you probably hear of most often, it is what Bitcoin uses. 00:00:23.679 --> 00:00:26.125 And it is basically exactly what it sounds like. 00:00:26.434 --> 00:00:28.996 Proving that work was done and proving that the work was correct. 00:00:29.078 --> 00:00:31.932 Bitcoin and many other altcoins use this consensus system. 00:00:32.217 --> 00:00:35.502 And they do that so the authenticity of the chain can be validated, 00:00:35.748 --> 00:00:39.615 and that all parties agree that transactions that happen are correct and accurate. 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. 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. 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 00:00:53.320 --> 00:00:54.963 that they're correct gets rewarded. 00:00:55.134 --> 00:00:58.091 Now applying that to the crypto world, the math exam is the transaction, 00:00:58.117 --> 00:00:59.600 and the classroom is the blockchain. 00:00:59.731 --> 00:01:01.258 The student is the computer or node. 00:01:01.591 --> 00:01:04.397 And the brainpower is referring to the computing power. 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 00:01:08.201 --> 00:01:11.145 amount of electricity that's needed to prove in Proof of Work. 00:01:11.306 --> 00:01:12.805 Some downsides for Proof of Work. 00:01:12.919 --> 00:01:17.043 Most obviously, it requires work to be done and that requires electricity. 00:01:17.044 --> 00:01:20.447 So as far as financial goes, it's definitely the most expensive 00:01:20.447 --> 00:01:21.690 of the consensus systems. 00:01:21.775 --> 00:01:23.984 Some of you may have figured this out on your own already, 00:01:23.984 --> 00:01:26.894 but the hardware to mine is also exceptionally expensive. 00:01:27.303 --> 00:01:31.658 To the point that unless you have a warehouse filled with mining equipment, 00:01:31.658 --> 00:01:35.329 top end mining equipment, it's basically not even worth it anymore 00:01:35.329 --> 00:01:38.665 based on the price you have to pay for the mining equipment and the amount 00:01:38.665 --> 00:01:41.288 for electricity to run all of it, really. 00:01:41.510 --> 00:01:44.304 So your bill at the end of the month ends up being more expensive than 00:01:44.304 --> 00:01:46.515 the amount of Bitcoin that you're capable of mining. 00:01:46.681 --> 00:01:51.078 Another issue is miners moving from the Bitcoin blockchain to another more profitable 00:01:51.078 --> 00:01:55.248 easier blockchain, which we've seen happen in the past with Bitcoin and all 00:01:55.248 --> 00:01:56.658 its little alternating forks. 00:01:56.798 --> 00:01:59.352 Another downside is the issue with circulating supply. 00:01:59.671 --> 00:02:03.890 As the circulating amount goes up, the incentive for miners to mine goes 00:02:03.890 --> 00:02:07.603 down because the availability of coins to mine is decreasing. 00:02:07.789 --> 00:02:11.163 So eventually people are going to switch to another blockchain. 00:02:11.164 --> 00:02:14.768 A final downside to the Proof of Work consensus systems is something 00:02:14.768 --> 00:02:18.547 I discussed in my Crypto 101 video where I covered blockchain tech. 00:02:18.991 --> 00:02:21.195 The biggest issue is a 51% Attack. 00:02:21.449 --> 00:02:25.379 And basically that means if you have enough computational power to maintain 00:02:25.379 --> 00:02:29.244 and run 51% of the network, you then can control everything. 00:02:29.427 --> 00:02:31.910 Proof of Stake (PoS) is the next most popular consensus system, 00:02:32.077 --> 00:02:34.521 and unlike Proof of Work, it doesn't use computational 00:02:34.521 --> 00:02:38.220 power and electricity to solve mathematical equations to come to a consensus. 00:02:38.522 --> 00:02:41.060 Instead, each node will bet on a block. 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. 00:02:45.699 --> 00:02:48.869 A Proof of Stake system requires the prover to show a certain amount of 00:02:48.869 --> 00:02:52.981 staking weight and it's age to be able to participate in the betting process. 00:02:53.006 --> 00:02:56.509 In the Proof of Stake system, blocks are said to be minted and not mined. 00:02:56.510 --> 00:02:59.780 And those who validate the transactions and help to maintain the network 00:02:59.780 --> 00:03:01.719 are also referred to as nodes. 00:03:01.870 --> 00:03:05.085 Those individuals receive the cryptocurrency as a reward 00:03:05.111 --> 00:03:08.095 for holding X amount of crypto in their wallet, which helps 00:03:08.121 --> 00:03:09.447 to again maintain the network. 00:03:09.472 --> 00:03:12.092 In order to validate transactions and create a block, 00:03:12.375 --> 00:03:16.304 users must first put their coins at stake, which is obviously where the name comes from. 00:03:16.614 --> 00:03:19.800 In this system, if a node validates a fraudulent transaction, 00:03:20.085 --> 00:03:21.610 they're going to lose all of their holdings. 00:03:21.635 --> 00:03:24.237 And on top of that, they're not going to be allowed to participate 00:03:24.237 --> 00:03:25.847 in the minting process in the future. 00:03:25.963 --> 00:03:29.409 Meaning the nodes will be incentivized to validate only the correct transactions 00:03:29.639 --> 00:03:31.898 and help maintain the health and security of the network. 00:03:32.128 --> 00:03:36.515 In a very loose comparison, it's kind of like keeping money in a savings account. 00:03:36.880 --> 00:03:39.286 You leave it there, you're not really supposed to touch it and you will 00:03:39.286 --> 00:03:41.463 acrue interest over X amount of time. 00:03:41.695 --> 00:03:44.791 Unlike Bitcoin, where you would need 51% of the mining power 00:03:45.021 --> 00:03:47.694 in order to overtake the network, with the Proof of Stake system, 00:03:47.694 --> 00:03:50.637 you would need 51% of the total circulating supply. 00:03:51.026 --> 00:03:53.766 Depending on the project, that could be a very pricey endeavour. 00:03:53.905 --> 00:03:58.003 So because of that this isn't something that most people are worried about happening. 00:03:58.138 --> 00:04:01.708 A plus side to Proof of Stake is that you don't need expensive mining [hardware] 00:04:01.708 --> 00:04:03.418 in order to participate in the network. 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 00:04:06.913 --> 00:04:09.091 needs to be up and running and on the latest version. 00:04:09.116 --> 00:04:12.586 And obviously a side effect of that is that Proof of Stake is more efficient 00:04:12.586 --> 00:04:16.005 and uses less energy because it's not actively doing work. 00:04:16.315 --> 00:04:18.023 It's kind of just sitting there passively. 00:04:18.098 --> 00:04:19.439 Some downsides to Proof of Stake. 00:04:19.836 --> 00:04:22.510 So the same reason that it's good is also a weakness. 00:04:22.669 --> 00:04:25.369 The more you hold in stake, the higher rewards you get. 00:04:25.575 --> 00:04:28.267 And that's kind of a rich getting richer situation. 00:04:28.351 --> 00:04:31.338 And for obvious reasons, because staking gives your rewards, 00:04:31.338 --> 00:04:36.009 another weakness is usually this isn't a great currency for transactionary things, 00:04:36.247 --> 00:04:39.146 because people want to hold it and maintain it in the wallet 00:04:39.146 --> 00:04:42.449 to get rewards and because of that people horde it and it's not going 00:04:42.449 --> 00:04:44.904 out and doing things and there's a lot less circulation. 00:04:45.032 --> 00:04:48.355 Although this helps stabilize the network, eventually some of these coins are going to 00:04:48.355 --> 00:04:51.958 reach their max circulating supply, and at that point they may become 00:04:51.958 --> 00:04:55.228 scarce and difficult to get or very expensive to purchase. 00:04:55.355 --> 00:04:58.230 I want to touch on a little bit more detail of the Proof of Stake system. 00:04:58.544 --> 00:05:00.332 There's two kinds of rewards systems. 00:05:00.468 --> 00:05:04.837 One is randomized, and a coin that uses the randomized consensus system is PIVX. 00:05:04.981 --> 00:05:08.707 Basically, this means the nodes that are receiving the rewards are randomized. 00:05:08.989 --> 00:05:12.144 This makes it more balanced and more fair for the community. 00:05:12.234 --> 00:05:14.513 Coin Aged Based Selection is the next one. 00:05:14.514 --> 00:05:16.682 And that is pretty self explainatory. 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. 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 00:05:26.059 --> 00:05:29.963 of days that the coins have been staking in the wallet times the amount you have, 00:05:30.185 --> 00:05:31.498 which gives you a network weight. 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 00:05:35.202 --> 00:05:37.304 that your network weight is going to be smaller, 00:05:37.304 --> 00:05:40.574 and there's going to be a less chance of you getting the reward as frequently 00:05:40.574 --> 00:05:42.684 as somebody who has a lot more coins than you. 00:05:42.814 --> 00:05:45.411 Most projects have some kind of staking requirement. 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 00:05:49.616 --> 00:05:53.286 of days or they have to be confirmed by X amount of confirmations 00:05:53.571 --> 00:05:55.463 before they will be eligible to be staked. 00:05:55.488 --> 00:05:57.858 Once a user has made a block and received a reward, 00:05:57.858 --> 00:06:00.622 their coin age resets to zero, and that means that they have 00:06:00.648 --> 00:06:03.972 to wait a certain amount of time again to participate and get block rewards. 00:06:04.102 --> 00:06:08.035 On to the next consensus system, which is Delegated Proof of Stake or DPoS. 00:06:08.606 --> 00:06:11.145 This consensus system was first used with Bitshares, 00:06:11.383 --> 00:06:14.248 but now you can see it being used with projects like Lisk and Ark. 00:06:14.334 --> 00:06:17.477 The difference between Proof of Stake and Delegated Proof of Stake 00:06:17.878 --> 00:06:22.056 is the difference between direct democracy and representative democracy. 00:06:22.263 --> 00:06:24.217 In a regular Proof of Stake consensus system, 00:06:24.542 --> 00:06:27.395 every wallet that holds coins has the ability to stake. 00:06:27.914 --> 00:06:31.858 In a Delegated Proof of Stake system, every wallet that holds a certain amount 00:06:31.858 --> 00:06:33.980 of coins has the ability to vote on a delegate. 00:06:34.226 --> 00:06:36.363 These delegates perform the functions of validating 00:06:36.363 --> 00:06:38.106 transactions and maintaining the network. 00:06:38.700 --> 00:06:42.068 They get to take the transaction fees as profit and this process is 00:06:42.068 --> 00:06:43.452 called forging or minting. 00:06:43.690 --> 00:06:47.674 The idea is then that the delegates will share the profit that they receive 00:06:47.991 --> 00:06:50.619 as the transactions fees with the people who voted for them. 00:06:50.855 --> 00:06:53.046 For us in the United States, this is almost identical to 00:06:53.046 --> 00:06:55.307 how we receive representation in Congress. 00:06:55.672 --> 00:06:58.885 So a small amount of people that are elected from our States 00:06:59.170 --> 00:07:00.965 represent us in the different Houses. 00:07:01.814 --> 00:07:03.660 And we've seen how well that goes over. 00:07:03.977 --> 00:07:08.028 A cool upside to Delegated Proof of Stake, is because you're voting on someone 00:07:08.194 --> 00:07:10.530 to do the transactions and to maintain the network, 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. 00:07:14.370 --> 00:07:16.336 So you can still participate in the network 00:07:16.336 --> 00:07:19.272 and you will still receive some sort of minting reward, 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. 00:07:22.669 --> 00:07:26.079 For people just entering the cryptospace, Delegated Proof of Stake may seem 00:07:26.079 --> 00:07:29.716 like a better option because they can join staking pools meaning they don't have 00:07:29.716 --> 00:07:31.826 to hold a lot and they can pool with other people. 00:07:32.244 --> 00:07:34.621 Whereas with Proof of Stake, which I brought up before, 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. 00:07:38.604 --> 00:07:41.760 Depending on how much that project is, that could be a really hefty investment. 00:07:41.885 --> 00:07:45.932 Delegated Proof of Stake gives people with a small or medium bag of the coins 00:07:45.932 --> 00:07:49.903 an option to participate in the network, receive rewards, and incentivizes them 00:07:49.903 --> 00:07:51.379 into buying into the project. 00:07:51.404 --> 00:07:53.402 Some down sides to Delegated Proof of Stake. 00:07:53.886 --> 00:07:57.677 The argument is by voting for delegates that we're concentrating the power 00:07:57.939 --> 00:08:01.715 to a limited amount of people and thus kind of recentralizing 00:08:01.715 --> 00:08:03.290 a decentralized cryptocurrency. 00:08:03.440 --> 00:08:06.707 It could also suffer from the same issues that we see in the democratic party, 00:08:07.056 --> 00:08:10.256 which is voters not being engaged and the system not working properly 00:08:10.256 --> 00:08:11.985 because there's not enough community involvement. 00:08:12.192 --> 00:08:15.028 If regular users fail to vote, there will be a tendency 00:08:15.028 --> 00:08:18.231 for the network to fall into larger stakeholders who at that point 00:08:18.231 --> 00:08:19.652 can just vote for themselves. 00:08:19.834 --> 00:08:21.567 And we've actually already seen this happen. 00:08:21.858 --> 00:08:25.071 I touched on this in my Lisk video, but there's a delegate group called Elite 00:08:25.071 --> 00:08:28.775 and they stopped paying out people who vote for them unless they vote 00:08:28.775 --> 00:08:30.469 for the entire group of Elite. 00:08:30.850 --> 00:08:34.022 Meaning that gives them control and they're able to manipulate the network. 00:08:34.323 --> 00:08:37.117 And for the last consensus system, which is a little bit lesser known, 00:08:37.418 --> 00:08:38.513 is Proof of Activity (PoA). 00:08:39.021 --> 00:08:40.987 And this is only found on the Decred network, 00:08:40.987 --> 00:08:43.123 and I covered that topic not too long ago. 00:08:43.575 --> 00:08:46.026 But basically what they do is they're trying to take the 00:08:46.026 --> 00:08:49.162 best parts of Proof of Stake and the best parts of Proof of Work 00:08:49.471 --> 00:08:52.240 and combining them into one network so that they work in harmony. 00:08:52.265 --> 00:08:55.769 Proof of Work miners are creating blocks, and the job of the Proof of Stake miners 00:08:55.769 --> 00:09:00.040 is to make sure that the Proof of Work miners are creating blocks that are consistent 00:09:00.040 --> 00:09:02.683 with the desires of the people that are holding the currency. 00:09:02.842 --> 00:09:05.512 Some downsides to Proof of Activity would be that 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 00:09:10.417 --> 00:09:14.621 really know as far as Bitcoin level of transactions if the Decred network 00:09:14.621 --> 00:09:15.663 would be able to handle that. 00:09:15.688 --> 00:09:18.758 A more major criticism that I've read or seen online about 00:09:18.758 --> 00:09:20.502 the Proof of Activity consensus system, 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 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 00:09:29.402 --> 00:09:32.505 from the beginning, so it might be a deterent from new people from getting 00:09:32.505 --> 00:09:37.744 interested because these things by themselves are difficult to understand so taking all 00:09:37.744 --> 00:09:40.428 of those parts and putting them together makes it even worse. 00:09:40.539 --> 00:09:43.982 So to finalize my points, obviously there's pros and cons to everything. 00:09:44.314 --> 00:09:47.987 I think that Proof of Work definitely laid the groundwork 00:09:47.987 --> 00:09:52.065 to come up with more interesting and more efficient consensus systems. 00:09:52.517 --> 00:09:55.362 I think that eventually Proof of Work is going to be, 00:09:55.362 --> 00:09:59.365 I don't want to say obsolete, but definitely less desirable 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 00:10:03.870 --> 00:10:06.018 way too expensive to continue to do that. 00:10:06.240 --> 00:10:10.110 Overall I think that randomized selection Proof of Stake consensus systems like 00:10:10.110 --> 00:10:12.600 PIVX uses is going to be the best for longevity. 00:10:12.965 --> 00:10:16.149 It incentivizes people to stay and help stabilize the network, 00:10:16.557 --> 00:10:20.401 but it also gives everybody an honest shot at actually earning some block rewards. 00:10:20.671 --> 00:10:22.956 I'm sure eventually there'll be more consensus systems, 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 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 00:10:29.562 --> 00:10:30.714 about the most online. 00:10:30.952 --> 00:10:32.465 If any of you guys have any more questions, 00:10:32.690 --> 00:10:34.876 please feel free to pop on over to my Discord server. 00:10:35.095 --> 00:10:36.535 I'll leave the info in the description. 00:10:36.753 --> 00:10:39.706 I want to thank you guys again for watching, and I'll see you guys soon.