Putting some real skin in the game…
An overview of staking, stacking, and proofs for all the diamond hands out there
There is no easy way to say this. Crypto is failing. Failing to deliver the revolution that it so readily promised the mainstreamers months ago. Turn away from your arcane and backwards institutions and let us provide you with unending security and borderless transfers away from corrupt countries and valueless currencies. Sound too good to be true? That’s because it is. No system can appear out of thin air and solve all of society’s legacy issues while bending all of our current industries to its will within a matter of months.
The reality is, crypto didn’t appear out of thin air. It has been on a steady trajectory towards mainstream adoption since 2013 thanks to the tireless work of the visionary and skilled teams that have dedicated their lives to the fray. From the conception of blockchain, every step forward has achieved more in terms of security, reliability, and viability. Before the full vision of Web 3.0 can be realized however, some longstanding conundrums from the very beginning of crypto are going to have to be won by duel. None of these quagmires are more relevant than Proof-of-Work vs. Proof-of-Stake.
Proof-of-Work vs. Proof-of-Stake
Comparing these two consensus mechanisms in one broad stroke comes with several large caveats. The first one being that without PoW, none of this would be happening at all. So, respect needs to be given to the grandfather consensus mechanism of them all for the timeless achievements that it made, and for still powering BTC and ETH today. The genius design of PoW is that to unlock the value in the decentralized network, you need to solve a random and difficult mathematical puzzle. This prevents malicious actors from corrupting and gaming the system in their favor on a massive scale; and allows the entire system to function on its own with confidence in each transaction without the oversight of a third party. PoW is inherently difficult to corrupt as re-mining a single block on the blockchain would require re-mining all the subsequent blocks attached to it. This makes PoW too energy intensive to try and corrupt the entire network at one time, thus achieving security by a massive resource barrier.
PoW originated first, and as Bitcoin and other cryptocurrencies have grown we now have more reliable data on how these systems operate. PoW is secure and tested, but resource intensive. Adapting it to a global scale to compete with current financial systems is a logistical nightmare. Mining needs to be done in pools to justify the cost-benefit ratios. This creates an inherent imbalance of power over who can possibly accumulate the most crypto resources depending on their mining capabilities at the start. This type of imbalance is exactly what the crypto community aims to eliminate through the democratization of exchanges; however, it isn’t fully realized yet.
The next phase
What is going to fix the inherent inefficiencies built into the original system? In the years since the Bitcoin and Ethereum whitepapers were published, some interesting things have occurred. Various companies have emerged to facilitate the development of products on each blockchain, and altcoins have diversified into their own community with varying degrees of success. How accessible each cryptocurrency is to individual participation and smart contract writing is a factor in the overall usefulness and longevity of the technology. This is where PoS comes in. PoS is an idea as old as PoW and allows users to mine or validate block transactions on the blockchain based how many coins or “stake” the user already has within the system.
PoS has not yet been fully realized; it is being built right now. This was always the plan as announced in the Ethereum 2 upgrades and vision. The upgrades directly address the issues of network congestion, disk space, and high energy consumption that currently plague the Ethereum and Bitcoin blockchains from the original PoW construction. PoS is being developed towards higher energy efficiency, lower entry barriers, strengthening decentralization, and the creation of shard chains. For Ethereum, users will need to stake 32 ETH in order to become a validator. The staking itself is a self-regulating system to encourage good behavior because users could lose stake by failing to validate or colluding the process intentionally. By validating in PoS, a user is saying that this new block is valid to enter the system through “attesting.” The beacon chain is currently being created to generate shard chains — separate blockchains that will need to be individually validated — but actually require less effort from validators because they will only need to run their individual shard and not the entire Ethereum chain. This process of splitting the chain into shards is less energy intensive for this reason.
With all of the upgrades being planned for PoS, it will be interesting to see how the projects remaining on PoW can compete. PoW is the consensus mechanism that created the foundations that Bitcoin are built on, which is currently the most secure and leading blockchain in the world. However, for mainstream adoption to occur, the entry barriers and sheer resource consumption needed to mine and run Bitcoin will need to be equally as competitive for operation on a global scale. Fortunately, this problem has long been identified, and some creative innovations have been proposed to improve upon PoW without PoS. One of the most promising methods for improving current efficiency on Bitcoin is Proof-of-Transfer, otherwise known as PoX. This was proposed in May of 2020 by the creators of Stacks, a virtual blockchain that runs on top of Bitcoin that was launched in 2018. Every transaction on Stacks also happens on Bitcoin simultaneously. The issue that Stacks was faced with is that their transactions need to be separately validated by nodes that do not receive any rewards for their validating efforts. Proof-of-Burn was initially proposed to address this by allowing their own miners to compete to destroy blocks without consuming further electricity and then gain rewards in a new cryptocurrency. However, this mechanism is somewhat disincentivizing while the reward cryptocurrency remains less valuable or viable than Bitcoin.
In PoX, instead of destroying the blocks as occurs in PoB, PoX transfers the validated blocks to some other participant within the network, thus earning them rewards in the base cryptocurrency. PoX re-incentivizes activity on the network and can also be leveraged for generating developer funds over the lifetime of a new blockchain that won’t impact the value of the current cryptocurrency. While all other consensus mechanisms require a high upfront cost in terms of either electricity input, economic stake, or participation in destroying, PoX strikes a balance by leveraging a stable base blockchain such as Bitcoin to mint new blocks of another cryptocurrency. The Stacks Ecosystem is currently betting on Bitcoin as the most secure and well-established blockchain to lead the future of this type of development towards Web 3.0 powered by PoX. What is initially required to become an active participant in either PoX or PoS is compared below.
There is no doubt that PoS will revolutionize how developers build and accumulate value within the Ethereum network, and only time will tell how quickly and accurately those upgrades impact the market. In the meantime, alternative mechanisms such as PoX can simultaneously address some of the pressing issues that are holding crypto back from its full potential, while allowing users to build on top of the Bitcoin network. Both mechanisms improve upon the amount of natural resources necessary to sustain this activity, while addressing security issues and other barriers to entry.
So which will you be building on this summer? For more info check out these handy resources below: