Crypto 101: Proof of Whaa!?

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.