Headline: What is consensus within the realm of cryptocurrency?


Body:  We live in a democracy (OK, a democratic republic, feel better now?)  For anything to be passed into Law, a majority of legislators must agree, and consensus must be reached.   Cryptocurrency is really no different.  Several different people (miners) must agree upon the correctness of the transaction, then it is added to the blockchain.  But, in a democracy, this is simple to understand: The concept of “majority rule” has been around for millennia    But, in cryptocurrency, since there is no central authority, it is even more important that the miners all agree: otherwise, an invalid transaction will affect the blockchain forever. 

There’s a story, of a cryptocurrency…

In the Bitcoin world, the Proof of Work (PoW) consensus model is followed.  This model is very secure but requires an unimaginably large amount of electrical power to operate and cool the supercomputers used to make guesses at the correct hash total.  (Unlike school, the “wrong” answers don’t matter at all, thus one can easily imagine the arms race in finding faster computers to spit out hashes faster than the competition.)  Unsurprisingly, the time to corroborate transactions can be quite extensive.  This model is extremely resource intensive, and many want to eliminate it altogether in view of its resource inefficiency.   (Please note, though, that it was fantastic at keeping the first blockchain secure, that that was its primary job.)

So, in the Ethereum  world, the consensus model is different.   In this world, the minters go are chosen with a POS (Proof-of-Stake, hey, what kind of blog do you think this IS?) model.  This model is very much more efficient in terms of resources used.  For instance, if a very large  transaction came through the network, owners of several large wallets would be notified to act as potential minters (the people who verify the blocks of transactions.    (The more tokens are staked, the higher probability of being asked to be a minter.  Interestingly, the age of the tokens staked also matters: The longer unspent, the more likely to be asked to adjudicate the new transaction.  )    The theory goes that the person who is willing to stake a large number of tokens is unlikely so validate a set of invalid transactions.     As I see it, this system is still problematic, as it still boils down to whoever is most wealthy first, gets the most impact upon the blockchain.     Unless I have seriously misread the literature on decentralized finance, this is exactly the kind of thing they were attempting to avoid.  So, I was very intrigued when I came across a new concept (to me at least) called delegated proof of stake (d-PoS).   In this system, the people who put up coins to stake, are the voters, and they elect an evaluator of a transaction block (i.e. the delegate.)  The advantage of the d-PoS system over normal PoS system is that delegates are more directly encouraged to be efficient.   Thus, d-PoS has faster transaction times and is more scalable.

So, is delegated proof of stake the Holy Grail?

No, it is not.  Though it is a vast improvement over PoW, it too can be “punked.”  There is a social media platform called Steemit, and they have a private blockchain to establish ownership of intellectual property.  To trade the properties on the site, they have a currency called STEEM.  In 2020, Justin Sun bought a large number of STEEM tokens and used them to add invalid transactions to the blockchain.  With this large number of tokens, he “hired” his own controlled group of “witnesses” and they did whatever they wanted to within the private blockchain.   Some community members became fed up with this behavior and instituted a hard fork, initiating their own new chain, called Hive.

So, which consensus model is best?

The short answer is that we don’t know.  We know that PoW has 12 years of success, undergirding the Bitcoin infrastructure.  Similarly, we know that this model has problems such as inefficiencies and the fact that an “arms race” of faster and faster competing computers inevitably results.   On the other hand, there is PoS which is still largely experimental.  Though it is more scalable and transaction time is better, it still has the problem that more money going in will make that person more powerful on that blockchain.   Delegated PoS seems like a wonderful improvement on this model.   But it is EXTREMELY experimental and can still be effectively co-opted by somebody wealthy enough (evidenced by the Steemit debacle.)  We have not yet come to a consensus.

The Verdict

I know that these might seem like castle on a cloud concepts, and they kind of are.   But, given the expansion of cryptocurrencies, it is undeniably an important conversation to have.  Who knows, you might come up with your own, improved consensus model.  If you do, please document it in your whitepaper.  And, if it’s not too large an ask, can you cite my blog?   Thanks.






Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.


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