Hey, everyone.
Today's video topic is about consensus protocols.
It doesn't sound very glamorous, but it is something that's
very important to understand if you're interested in cryptocurrency
or blockchain tech in general.
It is the groundwork for all of these coins that are out there,
so it's important to understand it so you can better understand the project.
Let's start with Proof of Work (POW).
This is one that you probably hear of most often, it is what Bitcoin uses.
And it is basically exactly what it sounds like.
Proving that work was done and proving that the work was correct.
Bitcoin and many other altcoins use this consensus system.
And they do that so the authenticity of the chain can be validated,
and that all parties agree that transactions that happen are correct and accurate.
I found an analogy online like usual that might be more helpful in explaining Proof of Work.
So imagine that you are a kid in a math class and you were taking an exam.
And the first kid to get to the answer and be able to prove and show their work
that they're correct gets rewarded.
Now applying that to the crypto world, the math exam is the transaction,
and the classroom is the blockchain.
The student is the computer or node.
And the brainpower is referring to the computing power.
And then the reference to a lot of effort on the side of the student refers to the
amount of electricity that's needed to prove in Proof of Work.
Some downsides for Proof of Work.
Most obviously, it requires work to be done and that requires electricity.
So as far as financial goes, it's definitely the most expensive
of the consensus systems.
Some of you may have figured this out on your own already,
but the hardware to mine is also exceptionally expensive.
To the point that unless you have a warehouse filled with mining equipment,
top end mining equipment, it's basically not even worth it anymore
based on the price you have to pay for the mining equipment and the amount
for electricity to run all of it, really.
So your bill at the end of the month ends up being more expensive than
the amount of Bitcoin that you're capable of mining.
Another issue is miners moving from the Bitcoin blockchain to another more profitable
easier blockchain, which we've seen happen in the past with Bitcoin and all
its little alternating forks.
Another downside is the issue with circulating supply.
As the circulating amount goes up, the incentive for miners to mine goes
down because the availability of coins to mine is decreasing.
So eventually people are going to switch to another blockchain.
A final downside to the Proof of Work consensus systems is something
I discussed in my Crypto 101 video where I covered blockchain tech.
The biggest issue is a 51% Attack.
And basically that means if you have enough computational power to maintain
and run 51% of the network, you then can control everything.
Proof of Stake (PoS) is the next most popular consensus system,
and unlike Proof of Work, it doesn't use computational
power and electricity to solve mathematical equations to come to a consensus.
Instead, each node will bet on a block.
When that block gets added to the blockchain, whatever node had bet on it will get rewarded.
A Proof of Stake system requires the prover to show a certain amount of
staking weight and it's age to be able to participate in the betting process.
In the Proof of Stake system, blocks are said to be minted and not mined.
And those who validate the transactions and help to maintain the network
are also referred to as nodes.
Those individuals receive the cryptocurrency as a reward
for holding X amount of crypto in their wallet, which helps
to again maintain the network.
In order to validate transactions and create a block,
users must first put their coins at stake, which is obviously where the name comes from.
In this system, if a node validates a fraudulent transaction,
they're going to lose all of their holdings.
And on top of that, they're not going to be allowed to participate
in the minting process in the future.
Meaning the nodes will be incentivized to validate only the correct transactions
and help maintain the health and security of the network.
In a very loose comparison, it's kind of like keeping money in a savings account.
You leave it there, you're not really supposed to touch it and you will
acrue interest over X amount of time.
Unlike Bitcoin, where you would need 51% of the mining power
in order to overtake the network, with the Proof of Stake system,
you would need 51% of the total circulating supply.
Depending on the project, that could be a very pricey endeavour.
So because of that this isn't something that most people are worried about happening.
A plus side to Proof of Stake is that you don't need expensive mining [hardware]
in order to participate in the network.
You need to leave your computer on 24/7, which is kind of a pain, and the wallet
needs to be up and running and on the latest version.
And obviously a side effect of that is that Proof of Stake is more efficient
and uses less energy because it's not actively doing work.
It's kind of just sitting there passively.
Some downsides to Proof of Stake.
So the same reason that it's good is also a weakness.
The more you hold in stake, the higher rewards you get.
And that's kind of a rich getting richer situation.
And for obvious reasons, because staking gives your rewards,
another weakness is usually this isn't a great currency for transactionary things,
because people want to hold it and maintain it in the wallet
to get rewards and because of that people horde it and it's not going
out and doing things and there's a lot less circulation.
Although this helps stabilize the network, eventually some of these coins are going to
reach their max circulating supply, and at that point they may become
scarce and difficult to get or very expensive to purchase.
I want to touch on a little bit more detail of the Proof of Stake system.
There's two kinds of rewards systems.
One is randomized, and a coin that uses the randomized consensus system is PIVX.
Basically, this means the nodes that are receiving the rewards are randomized.
This makes it more balanced and more fair for the community.
Coin Aged Based Selection is the next one.
And that is pretty self explainatory.
Basically it means that the next node is picked based on the age of the coins in the wallet.
This one is where it's a little bit more unfair, because this is calculated by the number
of days that the coins have been staking in the wallet times the amount you have,
which gives you a network weight.
So you can see where there would be a problem if you're not holding a lot of coins
that your network weight is going to be smaller,
and there's going to be a less chance of you getting the reward as frequently
as somebody who has a lot more coins than you.
Most projects have some kind of staking requirement.
Meaning, when you send the coins to the wallet they have to be in the wallet X amount
of days or they have to be confirmed by X amount of confirmations
before they will be eligible to be staked.
Once a user has made a block and received a reward,
their coin age resets to zero, and that means that they have
to wait a certain amount of time again to participate and get block rewards.
On to the next consensus system, which is Delegated Proof of Stake or DPoS.
This consensus system was first used with Bitshares,
but now you can see it being used with projects like Lisk and Ark.
The difference between Proof of Stake and Delegated Proof of Stake
is the difference between direct democracy and representative democracy.
In a regular Proof of Stake consensus system,
every wallet that holds coins has the ability to stake.
In a Delegated Proof of Stake system, every wallet that holds a certain amount
of coins has the ability to vote on a delegate.
These delegates perform the functions of validating
transactions and maintaining the network.
They get to take the transaction fees as profit and this process is
called forging or minting.
The idea is then that the delegates will share the profit that they receive
as the transactions fees with the people who voted for them.
For us in the United States, this is almost identical to
how we receive representation in Congress.
So a small amount of people that are elected from our States
represent us in the different Houses.
And we've seen how well that goes over.
A cool upside to Delegated Proof of Stake, is because you're voting on someone
to do the transactions and to maintain the network,
you're wallet doesn't need to be on because somebody else is doing that work for you.
So you can still participate in the network
and you will still receive some sort of minting reward,
but your wallet doesn't have to be on which means your computer doesn't have to be on.
For people just entering the cryptospace, Delegated Proof of Stake may seem
like a better option because they can join staking pools meaning they don't have
to hold a lot and they can pool with other people.
Whereas with Proof of Stake, which I brought up before,
you have to hold a lot of the coin in order for it to really be profitable.
Depending on how much that project is, that could be a really hefty investment.
Delegated Proof of Stake gives people with a small or medium bag of the coins
an option to participate in the network, receive rewards, and incentivizes them
into buying into the project.
Some down sides to Delegated Proof of Stake.
The argument is by voting for delegates that we're concentrating the power
to a limited amount of people and thus kind of recentralizing
a decentralized cryptocurrency.
It could also suffer from the same issues that we see in the democratic party,
which is voters not being engaged and the system not working properly
because there's not enough community involvement.
If regular users fail to vote, there will be a tendency
for the network to fall into larger stakeholders who at that point
can just vote for themselves.
And we've actually already seen this happen.
I touched on this in my Lisk video, but there's a delegate group called Elite
and they stopped paying out people who vote for them unless they vote
for the entire group of Elite.
Meaning that gives them control and they're able to manipulate the network.
And for the last consensus system, which is a little bit lesser known,
is Proof of Activity (PoA).
And this is only found on the Decred network,
and I covered that topic not too long ago.
But basically what they do is they're trying to take the
best parts of Proof of Stake and the best parts of Proof of Work
and combining them into one network so that they work in harmony.
Proof of Work miners are creating blocks, and the job of the Proof of Stake miners
is to make sure that the Proof of Work miners are creating blocks that are consistent
with the desires of the people that are holding the currency.
Some downsides to Proof of Activity would be that
Decred's the only project running it right now, and that basically means that we don't
really know as far as Bitcoin level of transactions if the Decred network
would be able to handle that.
A more major criticism that I've read or seen online about
the Proof of Activity consensus system,
is that because it's using Proof of Work and Proof of Stake that there is just
kind ofa lot of moving parts going on and it's not as easy to get involved with
from the beginning, so it might be a deterent from new people from getting
interested because these things by themselves are difficult to understand so taking all
of those parts and putting them together makes it even worse.
So to finalize my points, obviously there's pros and cons to everything.
I think that Proof of Work definitely laid the groundwork
to come up with more interesting and more efficient consensus systems.
I think that eventually Proof of Work is going to be,
I don't want to say obsolete, but definitely less desirable
to use for the sole purpose of efficiency and the fact that it's just going to be
way too expensive to continue to do that.
Overall I think that randomized selection Proof of Stake consensus systems like
PIVX uses is going to be the best for longevity.
It incentivizes people to stay and help stabilize the network,
but it also gives everybody an honest shot at actually earning some block rewards.
I'm sure eventually there'll be more consensus systems,
and I may even have to do this video again, but for the time being I think I covered
the ones that are at least the most popular, and the ones that you're going to read
about the most online.
If any of you guys have any more questions,
please feel free to pop on over to my Discord server.
I'll leave the info in the description.
I want to thank you guys again for watching, and I'll see you guys soon.