Cryptocurrency tends to get quite technical and though it’s not always necessary to know the details of what’s going on under the hood. There are a few components that crypto holders need to understand. One of these components is the consensus algorithms, which make cryptocurrency blockchains secure, such as proof of work and proof of stake. Today, I’m going to explain the concept of consensus in plain English, tell you about the different categories of cryptocurrency consensus, algorithms, which crypto projects use them and how, before we mine and validate, there’s a disclaimer i need to state financial advice is great, but you won’t find Any in this place, mate, entertainment and education are the only genres of content. I make please contact a financial advisor before you make a mistake.
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Let’s crack on with cryptocurrency consensus, as most of you will hopefully know, consensus is just a fancy word for how a group of people agree on something now. Consensus in cryptocurrency is not all that different from consensus in everyday life. Consider the following suppose, you’re hanging out with four of your friends in a parking lot somewhere and you’re deciding whether to go to a restaurant or go to the movies. Note that there’s five people in total here, since it’s you plus four of them now a simple consensus algorithm in this case – would be a majority vote. If three of you vote to go to the restaurant you’re going to the restaurant, all the movies suck these days anyways right now, if the two people who voted to go to the movies were clever, they could invite two more of your mutual friends to the parking Lot and have them vote in favor of going to the movies.
Now it’s four versus three so you’re going to the movies because you’ve had enough to eat already now. Obviously this isn’t fair. So maybe you come up with a more elaborate consensus algorithm, which requires the people present to do something extra other than just cast their vote, so that the outcome is harder to manipulate. For example, you could require everyone present to solve a complex puzzle in exchange for a vote. Now this is analogous to proof of work where the computers aka miners need to solve a complex puzzle to process transactions.
Alternatively, you could require everyone present to put down some money in exchange for a vote. This is analogous to proof of stake where the computers aka validators, need to lock up coins or tokens to process transactions. In all four cases. The goal of these elaborate consensus, algorithms is to make it very difficult for anyone to come in and manipulate the outcome of a vote. Now.
Typically, a simple consensus algorithm is sufficient when dealing with real life scenarios such as deciding on whether to go to the restaurant or to the movies. This is because you can trust that your friends are honest and moral people who won’t manipulate the outcome. Most of the time anyhow, when it comes to cryptocurrencies, however, the stakes are much higher than a meal or a movie, and because anyone can become a miner or a validator, you need to create extremely elaborate consensus. Algorithms to ensure all the computers processing transactions are. Being honest and moral, broadly speaking, cryptocurrency consensus algorithms fall into one of four categories: proof of work, proof of stake, proof of authority and proof of space.
Now there are multiple flavors within each of these consensus categories and though the list i’ll be giving you today is not exhaustive. It covers almost all the novel consensus algorithms used by the biggest crypto projects, the first category of crypto consensus. Algorithms, is proof of work. Although bitcoin was the first cryptocurrency to use proof of work, the proof-of-work consensus, algorithm itself has existed since the 1990s and it was originally created by computer scientists, cynthia dwark and monty nauer to combat email. Spam bitcoin’s proof of work is the most basic and follows the process i mentioned a few moments ago: computers called miners, compete to essentially guess an extremely random number.
Now this is simplifying things massively, but the full explanation gets very complex and long-winded. So, let’s leave it at that for now the minor that guesses, the number first gets to create a block containing btc transactions and attach it to the bitcoin blockchain in exchange, they earn the btc block reward, as well as any transaction fees within the block. The primary perk of proof of work is that it makes it extremely difficult for someone to manipulate transactions. They would either have to hack all the miners connected to the network at the same time or have a minor powerful enough to create a chain of blocks containing bad transactions. Now both of these attack vectors become more difficult as more miners join the network.
The mining difficulty also automatically adjusts, based on the amount of computing power on the network, to make sure the bitcoin blockchain remains secure, as miners join or leave put simply proof of work is insanely secure, but it’s not perfect. The primary problem with proof-of-work is that it uses a lot of energy, which is why some cryptocurrency projects have created novel proof-of-work consensus, algorithms, which minimize energy usage, while maintaining security. One of these crypto projects is actually dogecoin, which uses auxiliary proof of work as its consensus. Algorithm auxiliary proof of work makes it possible to mine two proof-of-work cryptocurrencies at the same time, without using more energy so long as the specifics of their consensus. Algorithms are the same dogecoin and litecoin both use the script proof of work consensus algorithm.
Hence why doge can be merge mined with ltc. You can learn more about how that happened. Using the link in the description stacks is another cryptocurrency project with a novel proof of work, consensus, algorithm, called proof of transfer. Now proof of transfer essentially involves using btc coins themselves as a sort of proof of proof of work, since btc can only be created with energy-intensive proof-of-work mining in proof-of-transfer miners commit their btc to the stax blockchain to produce a block and earn stx coins. Meanwhile, stackers commit their stx coins to the stax blockchain to earn some of the btc committed by miners, because these btc transfers from miners to stackers are recorded on the bitcoin blockchain.
The stax blockchain can anchor itself to the bitcoin blockchain for additional security. Other novel, proof-of-work consensus, algorithms in cryptocurrency, don’t necessarily involve any computational work per se. A great example here is helium’s proof of coverage for context. Helium is a crypto project. That’S trying to decentralize the infrastructure of the internet itself.
It does this by providing open source software and hardware required to create and operate hotspots devices which transmit low frequency, radio and 5g to create truly peer-to-peer networks in proof of coverage. Helium hotspots basically check to see if other hotspots in their area are doing the work. I.E providing the network coverage they claim to be, since all helium hotspots passively earn the hnt cryptocurrency. Now you can learn more about how helium works, using the link in the top right.
The second category of consensus, algorithm is proof of stake, believe it or not, but proof of stakes. History begins with bitcoin, specifically a bitcoin talk forum post from 2011, when a user called quantum mechanic proposed using btc holdings as an alternative means of earning the right to process transactions. Today there are dozens of proof-of-stake cryptocurrencies, but what’s interesting is that there aren’t very many which conform to the original iteration of the proof-of-stake consensus algorithm. This original iteration is the most basic and it consists of locking up cryptocurrency coins to become a validator that produces blocks containing transactions in exchange they again get a cut of block rewards and any fees from transactions within that block. The likelihood that a validator is selected to do this is often pseudo-random, meaning it’s partially random and partially dependent on how much cryptocurrency that validator is staking now, in contrast to miners, validators, don’t usually need any heavy duty hardware since they’re not engaging in any energy intensive Computations they’re just processing transactions and that doesn’t take much computing power as such a standard laptop is usually enough to become a validator, though many proof-of-stake cryptocurrencies push for top-of-the-line hardware to optimize performance.
It’S also common for proof-of-stake cryptocurrencies to punish validators that stay offline for too long or try to manipulate transactions by destroying part of the coins that validator has staked. This is called slashing and slashing penalties range from zero to one hundred percent, depending on the cryptocurrency. One of the only cryptocurrencies which uses this standard proof-of-stake consensus algorithm, is actually helium. Now helium validators need to stake 10 000 hnt and keep it locked up for a minimum of five months. If you do the maths, this means it costs around four hundred thousand dollars to become a helium validator.
This high barrier to entry ensures helium security, but also makes it difficult for new validators to join, which is why most proof-of-stake cryptocurrencies use delegated proof-of-stake consensus algorithms. Instead i’ll use solana as an example here to clear up the common misconception that solana uses proof of history as its consensus algorithm. This is false. Proof of history is just a part of solana’s delegated proof-of-stake consensus algorithm more about solana in the description now in delegated proof of stake, delegators effectively lend their cryptocurrency to validators to earn a cut of staking rewards. In theory, delegators are incentivized to select high quality validators, because selecting low quality validators means they could risk losing their cryptocurrency.
Due to slashing in practice, however, delegators have a tendency to delegate to validators they recognize or whichever one is at the top of the list in whatever web app or wallet they’re using this has caused security and centralization issues for many cryptocurrencies that use delegated proof of Stake, including solana. This is why some cryptocurrencies such as algorand invented novel proof of stake algorithms, to prevent this from happening and algorands is called pure proof of stake. Now, in pure proof of stake, thousands of participant nodes which are analogous to delegators validate blocks containing transactions that are produced by a smaller subset of relay nodes which are analogous to validators but don’t actually validate any blocks. There is technically no minimum stake on algorand nor for many other delegated proof-of-stake cryptocurrencies. It’S also rare to see a lock-up period of more than a few days.
These lower barriers to entry make it easy to participate in consensus for delegated proof-of-stake cryptocurrencies. The primary advantage of proof-of-stake is that its lightweight consensus algorithm makes it possible for proof-of-stake cryptocurrencies to process tens of thousands of transactions per second. The primary problem with proof-of-stake is that it’s not nearly as secure as proof-of-work due to its pay-to-play design. It’S much easier to buy the coins required to corrupt a proof-of-stake blockchain than it is to buy the computing power required to corrupt a proof of work blockchain. You can learn more about the pros and cons of proof of stake and proof of work by watching my video about that, using the link in the top right, the third category of crypto consensus, algorithms is proof of authority.
Now proof of authority was first defined by ethereum co-founder and polkadot founder gavin wood in 2017.
Unlike other consensus, algorithms in cryptocurrency proof of authority does not necessarily require computing power, nor does it necessarily require money to secure a stake. Instead, proof of authority requires nodes to connect themselves to an institutional or individual identity to produce blocks on the blockchain. The rationale here is that proof of authority nodes won’t act maliciously, lest their reputation be ruined in the eyes of the crypto project and or community malicious proof of authority. Nodes could even end up in court since their identities are known to everyone.
What’S interesting. Is that proof of authority nodes? Don’T always earn block, rewards or transaction fees and are instead incentivized by their association with the crypto project, which is put on full display due to the identity requirement? Many modern cryptocurrencies began as proof of authority blockchains before they transitioned to proof of work or proof of stake, and one cryptocurrency, that’s currently in the middle of this transition is ronin. Ronin is a layer, 2 scaling solution for ethereum built specifically for axi infinity and its blockchain is currently secured by nodes run by companies such as ubisoft, binance and sky mavis.
The company behind axinfinity ronin will transition from proof of authority to proof of stake once the run token has been distributed to liquidity providers on the katana decks, and you can learn more about that by checking out my latest axi infinity update that’ll, be in the description. Anyways, the primary perk of proof of authority is the same as proof of stake. Proof of authority cryptocurrencies are fast, and most of them are much faster than their proof of stake versions. This is because there are no barriers to process transactions beyond hardware, no staking no mining. The primary problem with proof of authority is that proof of authority blockchains are almost always permissioned and centralized, because nodes must prove their identity to some centralized authority who approves or denies their application to join the blockchain and process transactions.
This is why some proof of authority cryptocurrencies, use novel proof of authority, consensus algorithms, which make it possible for permissionless third parties to provide additional security and decentralization to their blockchains. The crypto project that comes to mind here is theta, which uses a consensus algorithm that comes close to being a kind of delegated proof of authority. Theta’S blockchain is powered by 16 enterprise, validator nodes run by tech giants such as google and sony, which must stake a minimum of 2 million theta. Naturally, you need to be a big company to become an enterprise. Validator node theta would therefore be permissioned and centralized.
Were it not for the fact that theta’s blockchain is secured by 3440 guardian nodes which check that theta’s validator nodes are processing transactions correctly, anyone can become a guardian node, and the minimum stake is just one thousand theta. Some crypto projects, such as stella, have taken a similar approach to proof of authority. The stellar consensus, protocol or scp features many different types of nodes which secure the blockchain, with some being permissioned and others being permissionless. You can learn more about how stellar works by using the link in the top right. The fourth category of cryptoconsensus algorithm is proof of space.
Proof of space was first proposed by polish computer scientist and university. Professor stefan ziemboski in a 2013 paper proof of space was originally intended to be an alternative to proof of work, wherein miners would use storage space rather than computational power as a means of earning the right to produce blocks and add them to the blockchain. Now, to my knowledge, there isn’t a single cryptocurrency that uses the og version of proof of space. The one that comes closest seems to be chia network, which uses a spin-off of proof of storage, called proof of space and time in proof of space and time. Farmers fill their unused disk space with chia’s software in a process known as seeding.
This software generates a set of cryptographic numbers and organizes them into plots on the hard drive. Every so often chia will randomly select a farmer’s hard drive to see if it contains a specific plot. If it does, the farmer gets to produce a block and earn block. Rewards which are of course paid in chia’s xch cryptocurrency, now the likelihood that a farmer will produce a block depends partially on how much storage they’ve offered up relative to the total storage on chia. Some of you might remember that chia mining was insanely popular last summer, so much so that it caused supply chain shortages for hard drives.
This is despite the fact that chia apparently has no clear use case. This is not the case for most of the other cryptocurrencies which use proof of space consensus. Algorithms. Most of these crypto projects provide decentralized storage services and the adjustments they’ve made to the proof-of-space consensus algorithm have been impressive, to say the least. For instance, filecoin’s version of proof-of-space actually consists of two consensus: algorithms proof of replication, which proves that some piece of data has been successfully uploaded to a storage, miner and proof of space time, which proves that the piece of data is still being stored by that storage.
Miner filecoin also incorporates proof of stake, requiring storage miners to stake an amount of fill coins that correspond to the percentage of storage space they’re providing to filecoin. This is so that storage miners stand to lose a lot of fill if it turns out they’re not properly. Storing data r-weave uses an even more advanced variation of proof-of-space called succinct proofs of random access or spora spora is designed to incentivize miners on r-weave to store as much data as possible for as long as possible. This is done by requiring miners to prove that they’re still holding some piece of data related to a randomly selected previous block, called the recall block when they’re selected to produce a new block. If the miner isn’t storing this data, it won’t produce a new block, even if it was selected, fair and square.
The likelihood that a miner is selected to provide a block depends not only on their storage capacity but their computing power and internet speed as well. This is to ensure that data retrieval is as seamless as possible for the end user. This recall, block requirement, gives rweav’s blockchain a unique architecture called a block weave, and the storage endowment ensures that the amount of ar coin block rewards being given to miners are more than enough to cover their storage costs indefinitely into the future. Our weave’s purpose is to provide permanent data storage after all, and you can learn more about it. Using the link in the description now as amazing.
As all these decentralized storage, cryptocurrencies sound proof of space consensus, algorithms aren’t perfect either. The primary perk of proof of space is that almost anyone can participate in consensus without having to put down a dime. The primary problem with proof of space is that storage-dependent cryptocurrencies come with centralization risks, since wealthy individuals and institutions can easily dominate the network using existing and or newly purchased storage space. Now, if you want to learn more about other cryptocurrency categories, besides decentralized storage, be sure to check out my video about that, using the link in the top right, and that’s just about it. For today’s video about cryptocurrency consensus algorithms, now any true, crypto nerd will have their favorites so, which is yours.
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