Proof of Stake: The Consensus Mechanism of the Future
Bitcoin introduced the world to cryptocurrency and blockchain technology. However, in the decade since the genesis block that changed the world, we have come to know a lot about the consensus mechanism that Satoshi Nakomoto used that enabled a distributed network to confidently ensure that all the nodes reflected the same state. Proof of Work was the tool that he used to share state. But these days, however, to maintain the Bitcoin network it requires the energy output of a small European nation. That’s not sustainable. While we love Bitcoin and everything that it represents, we at Konstellation feel it is vital for other blockchain projects to explore alternative consensus mechanisms. Not just because it’s better for the environment. We believe that Proof of Stake consensus mechanisms also provide for more equitable microeconomies.
Proof of Stake Defined
The principle of Proof of Stake (PoS) is fairly simple. You put a certain amount of your coins at stake, which gives you the right to become either a validator or delegator in the network. Thus, your stake contributes to the creation of a new block on the blockchain network on which you have staked your coins. Different PoS mechanisms use different methods to choose which validator gets to validate each block, but the basic idea is when you validate a block, you earn block rewards in the native token on the blockchain. If you have delegated to a validator that wins those block rewards, then you earn a pro rata portion of those block rewards.
Of course, if the only statistic to be considered was the amount of coins a participant has staked on the network, then the system would be skewed in favor of the rich. Only the wealthiest stakers would be chosen to create blocks, which would lead those participants to earn more tokens than others, thus reinforcing their wealth and making them more likely to earn more and more block rewards. That may be the case for some PoS blockchains out there, but it is not a hallmark of a durable and robust one.
Speed and Scalability
Luckily, there are other criteria that can be considered in the determination of validators for PoS blockchains. The first one is the time you have staked your tokens. The longer you stake it, the more likely you are to be selected to forge a new block. Whenever you are selected, this value is reset to zero in order to give everyone a chance to be a validator. The PeerCoin Blockchain is one of the first projects which have implemented this system. Other methods allow randomizing the selection by including the amount at stake such as Blackcoin or NxT.
Hard core bitcoiners condemn PoS systems because they claim that they are not as secure. However, Proof of Stake consensus mechanisms maintain a security level equivalent to Proof of Work (PoW) ones for two reasons. First, PoS incentivizes users to be committed to the network for the long term due to a positive feedback cycle. Delegation rewards increase as more tokens are staked on the platform. Second, most PoS systems, including the hottest new PoS blockchains out there Cosmos and Polkadot, have instituted some kind of slashing mechanism wherein a part of a user’s stake is reduced in response to dishonest behavior.
Contrary to Bitcoin’s original PoW consensus, PoS is infinitely more scalable due to the lack of gargantuan processing power needed to solve arduous mathematical calculus problems. Instead, PoS relies on the trust users have in the network validators. Thus, while Bitcoin’s Proof of Work system can process 7 transactions per second, a Proof of Stake system can perform several thousand transactions per second. We’re not there yet. But PoS definitely moves the industry closer to Visa speed, which is approximately 24,000 transactions per second.
Problems with Token Distribution
One of the main concerns about PoS revolves around initial token distribution. Because the number of tokens you hold undeniably defines your strength within the network, token “whales” can easily take advantage of the system. In the cryptoverse, whales are referred to as token holders with an inordinate amount of coins. One interesting solution is that proposed by Ethereum, which is to start from PoW and then transition to PoS over time, in order to smooth the distribution curve. This project is known as Casper and hopefully will be implemented within a couple of years (Ha!). However, we could question this assumption since the data clearly shows a strong inequality of distribution among Proof of Work blockchains. However, by comparing the two charts below, we can see that over time PoW chains lead to an increasingly decentralized token distribution. To wit, Bitcoin after 10 years of network operation displays a lower Gini coefficient than Ethereum after 5 years, 0.65 compared to 0.76.
By contrast, most of the top 100 cryptocurrencies, which are dominated by “pre-mined” Ethereum-based dapp projects, exhibit far more centralized token distributions. Earn.com founder Balaji S. Srinivasan showed in his Medium post that those Gini coefficients were 0.91, which is frighteningly close to perfectly inequal at a Gini coefficient of 1.
Clearly, token distribution systems in the blockchain industry are all still grand experiments, even granddaddy Bitcoin and his Turing complete son Ethereum. Many years will pass before we can make a determination that one system for distributing tokens is better than any other. That’s why it is important to stay engaged with the blockchain community and stay committed to further research. Over time, we as an industry will create the consensus mechanism robust and flexible enough for the digital economy of the future.
Delegated Proof of Stake, the case of everiToken
Among those blockchains offering up what is called a “third generation” solution to this consensus conundrum is of one of our partners, everiToken (EVT). The EVT consensus mechanism is a PoS variation that adds a reputation variable to the stake variable and is known as Delegated Proof of Stake (dPoS). While anyone can be a block producer in a typical PoS consensus system, dPoS restricts the designation of block producer status to only a few validators that can forge new blocks. In such a system, tokenholder power lies in the voting system, which allows you to delegate your tokens to a certain validator based on their reputation or other publicly available information. Each time a block producer that you have delegated your tokens to earns a block reward, a piece of the profit is given to you according to the percentage you have delegated as a total of all tokens delegated to and held by the validator. This method drastically improves performance since less time is lost in the block producer selection and block forging processes.
According to the EVT whitepaper, the everiToken blockchain will, at the outset, select 15 block producers (BPs) from those staking EVT on the network. These BPs are elected thanks to the users who staked their tokens. If these users unstake their EVT from that BP, then a new one will be chosen in the next round. Each round consists of 180 blocks, which equals to 15 BPs creating 12 blocks each. Users become eligible for validator status with 100,000 staked EVT tokens, including those delegated to them. The validators with the largest amount of staked tokens, including those delegated to them, become the BPs for that round. This system is very similar to the one used by EOS, with one large caveat. In EOS, the number of BPs is held static at 21, while in the EVT system that number will be held at 15 BPs only for the first year of operating the main chain. Afterwards, the number of BPs will be dynamically set at some number greater than or equal to 15 by an on-chain governance committee. This simple tweak to the basic DPoS system allows EVT to limit the possibility of BP collusion that has haunted the EOS blockchain since its launch.
The incentive structure implemented in everiToken is a point we have to analyze, since it is the spine of their staking system.
“Operating a validator node in everiToken is similar to running an investment fund. Every validator’s initial net value will always be equal to 1 EVT per share. The operation of staking will be similar to purchasing these shares at net value. For example, if you stake 1000 EVTs into one validator whose net value is 1 EVT per share, then you will get 1000 shares worth of that validator. “
In order to incentivize users to stake their token and either validate or elect a validator, Everitoken designed a revenue stream for the stakers. The system rewards users that stake their tokens to vote for a validator. In that configuration, 15 block producers as well as additional validators and users who have staked their tokens to either BPs or validators or both all receive an award for being part of the ecosystem.
In the long run, we at Konstellation believe that Proof of Stake systems are better for the future of the planet due to substantially less compute power required. In addition, Proof of Stake systems can, in theory, provide a more equitable token economy solution than other consensus mechanisms. That’s why when the mainnet for DARC token is finally released we will most certainly using a PoS mechanism.
Last week, we announced that DARCwallet was adding support for BNB and BEP2 Assets, and that we would be delisting from P2PB2B. We also shared an informational article about what BEP2 is.
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