Blockchains use consensus mechanisms in order to secure the network. Bitcoin uses Proof of Work which has been very successful, however there are newer consensus mechanisms being developed all the time. Each consensus mechanism has its own tradeoffs. It’s important to understand which consensus mechanism to choose for a specific use case.
Watch the 11th episode of Blockchain Beyond Hype with Roberto Capodieci, Founder and CEO of Blockchain Zoo who talks about Proof of Work, Proof of Stake, and other consensus mechanisms to secure a blockchain.
Laks: So we are here today with Roberto. We’re excited to have you here to discuss your thoughts on Proof of Work as a method to secure a blockchain. You’ve spent all your life in IT and running businesses. You were an early adopter, and now you’re dealing with a trendy technology which is blockchain. However, you’ve never done an ICO, could you explain to us why?
Roberto: I started a project in 2014. However, at that time, the name ICO had not come out yet. Not to mention projects couldn’t raise anywhere near the money we’re seeing now. I don’t think an ICO is the most ethical way to get a business founded. In fact, a very small percentage of ICO projects have achieved any meaningful level of success. Most fail, and a lot end up being scams. That’s why I support some form of regulation to protect consumers. It’s also true that many ICOs were launched by speculators to simply pump the price of their token. These are the reasons why I stayed away from launching my own ICO. However, I have managed to run several projects on a blockchain that were good and ethical. Maybe in the future, we’ll offer a coin through our website, who knows.
Laks: Blockchain Zoo is a group of consultants specialized in blockchain technology. What’s the story behind the 8 co-founders coming together to form this organization?
Roberto: That’s a very interesting story. Fortunately, I arrived at a point where I decide to retire. I did well, and I didn’t need to really work much anymore.
And yet, it was a very crazy moment in the cryptocurrency space. I was receiving requests from potential customers looking for blockchain solutions. However, I didn’t have anyone to refer them too. Unfortunately, there are many people in the blockchain space who are good at marketing but have no technical capacity. Finally, 2.5 years ago, I stumbled into an amazing project that I couldn’t resist. I put together a team of the best people I know in the blockchain space.
This project ended up not going as well as I had hoped. However, the team was committed to working together. We continually received requests to work on interesting projects which turned into Blockchain Zoo
Laks: Ok. So Bitcoin has popularized the blockchain tremendously, which is great because blockchain gained huge fame. But it also limited the view of the blockchain to being seen as “torrent for money”. From the top of your head, what other use cases would you bring up speaking to businesses that want to look into blockchain adoption?
Roberto: That question has a very complex answer. First of all, if blockchain wasn’t the solution for something like electronic money, I don’t think it would have become so popular. I usually say if blockchain was the solution for hairdressers, it wouldn’t have become known around the world. So the fact that money was on top of blockchain as being very useful to bring the attention of the masses on this technology.
It’s also true that the technology can facilitate many other use cases. Blockchains can be used in supply chain management, for example. Or handling financial documentation instead of the actual money transfer aspect. Blockchains can be designed to fit the use case where they’re needed. Now many people are trying to innovate on the blockchain concept for non-financial use cases.
Laks: So a current way to confirm a transaction or let’s say “change” data on the blockchain is a ‘consensus mechanism’. Consensus mechanisms enable us to trust the information on a blockchain without needing third parties for verification. How revolutionary is this distribution of trust for different industries?
Roberto: Well, it is an incredible next step in the information technology revolution. Getting rid of central parties is scary for some and exciting for others. There are many political aspects behind this movement. It’s not only technological innovation. But I do believe that moving the responsibility from a central point to the users themselves is an essential aspect of the internet. It will make for a more secure and more private internet. I believe that the biggest advantage blockchains provide us with is a kind of a distributed, decentralized, dispersed system of handling data. And we just started. We’re at day zero.
Laks: So what are the current consensus mechanisms used by such popular blockchains as Bitcoin, Ethereum or Dash?
Roberto: Bitcoin implemented a consensus mechanism called Proof of Work (PoW). Proof of Work guarantees the quality of the data by only allowing the most secure chain add to the blockchain. I am going to go a little bit more in detail. This answer is going to take a little bit more time, but it’s essential to understand. There is a mathematical function which can only be calculated in one direction. This is called hashing. So from a set of data, it produces a string. There is no way to calculate the group of data from just the string. So it is unidirectional.
Guessing the correct string is really hard, the only way is to brute force it. Meaning each mining uses a specialized computer to continually make guesses until someone finds the “right string.” This is the work in Proof of Work. Whoever finds the valid string gets to create the next block and they are paid in newly minted bitcoin and transaction fees.
Bitcoin aims to produce a new block every 10 minutes. Satoshi engineered a mechanism called the “difficulty adjustment,” which increases or decreases the difficulty of guessing the string to get close to 10 minute block times.
For example, one computer guesses 1,000 times to find the string which takes about 10 minutes. Then if we distribute this problem to two separate computers, then they each only need to guess 500 times which means the total time it takes to guess the string is cut in half (5 minutes instead of 10). Since Bitcoin targets 10-minute blocks, the protocol would increase the difficulty of finding a new string to keep it as close to 10 minutes as possible. Mining Bitcoin has become a massive industry, and everyone uses specialized hardware that’s efficient at guessing the correct string. Now most miners pool their resources together, which enables a more consistent payout. Most of the miners are in China right now.
Laks: So the majority of blockchains following Bitcoin are using Proof of Work as a consensus mechanism. This doesn’t sound very sustainable as powerful computers consume a lot of electricity. What are other less obvious downsides of Proof of Work?
Roberto: Well the electricity consumption is one of the negative aspects and the fact that this exercise doesn’t produce any interesting results except guessing numbers. My first thought was to replace finding a hash with trying to solve astrophysics problems, medical problems, or DNA sequencing. At least then the work would produce a useful result besides only security for Bitcoin.
But besides electricity, there are other bigger issues. The fact that somebody with more than 51% of the processing power can overpower the rest of the network is risky. Also, if the price of Bitcoin goes too low, then some miners will no longer be profitable and will stop mining. This has risks for the security of the network going down, and attackers could rent the hardware and attempt an attack.
Some people decided to copy Bitcoin’s code and “fork” the network. These minor networks (forks) use the same mining algorithm and the same hardware as Bitcoin. This is risky for the minority network because if the Bitcoin miners decided to attack Bitcoin Cash or another fork, then it would be easy to double spend transactions on the network. We saw this happen with Ethereum Classic, which is a minority fork of Ethereum. While the dominant chain for any mining algorithm (Example: Bitcoin and Ethereum) are safe from this attack, the minority forks like Bitcoin Cash and Ethereum classic will always be at risk of a 51% attack.
Laks: Scott Nadal and Sunny King created a Proof of Stake model in 2012. Apparently, the core motivation was that Bitcoin with its Proof of Work model generated an equivalent of $150,000 in daily electricity costs. In your opinion, is this an evolution of blockchain? Or are we still waiting for even better models?
Roberto: I did participate in the first actual blockchain that was successful after Bitcoin, and it was based on Proof of Stake — it was called Next or NXT. And yet, there are many complaints about how Proof of Stake has been designed. Most Proof of Stake blockchains distributed all the wealth at the beginning which is unfair. Compared to Bitcoin, which releases new coins slowly over time, which is much fairer.
Proof of Stake asks users to put their tokens at risk in order to protect the blockchain. The philosophy is that in order to hack the blockchain, a user needs to own the majority of the value in the system. Why would anyone attack a network where they own a majority of the value in? They would damage themselves.
When a blockchain is put in place to handle medical records, both Proof of Stake and Proof of Work will not be very effective because there is no token with value in the system. It’s essential to create new technology to support non-financial use cases. So far there are more than 40 consensus mechanisms attempting to secure blockchains. However, most are intended to protect a coin or token.
At Blockchain Zoo are working to a new consensus mechanism called Proof of Participation. That will make a blockchain secure just by the maintenance of the network and the participation of the nodes. We’re planning to release it in the next few months. I shouldn’t talk much about it, but it is a great step forward in providing security for non-financial blockchain applications.
Laks: So what benefits is Proof of Stake bringing compared to Proof of Work. Let’s take perspectives separately. What is the benefit to society, end users, and businesses?
Roberto: Well, Proof of Stake doesn’t burn all the electricity that the Proof of Work does. Allows also single parties to participate and have a chance to create a new block without running huge computer or data center. In fact, with NXT we put the nodes in a small computer like a RaspberryPi or Arduino. These are $20 computers and can run on solar panels. However, Proof of Stake has its limit. The only people in a Proof of Stake system that have any influence are those with large amounts of money locked in the system.
Laks: Since the most powerful blockchain, Bitcoin, is using Proof of Work, do you think the adoption of other consensus mechanisms will be slowed down? Ethereum is planning a change, that’s a promising sign. What are your thoughts on the development of various models?
Roberto: Well, as I was saying it depends on the intended use case and business model. There are many ways to secure a blockchain, and the best consensus mechanism fits the intended use case. So obviously there will be many more ways to secure a blockchain.
The fact that the Bitcoin is using Proof of Work doesn’t mean that tomorrow others cannot use a different proof. Bitcoin is a brand. Bitcoin is something that people look at as Bitcoin. What technology is underneath to run it is a secondary issue. Some people are borderline religion and believe that you cannot have a blockchain without Proof of Work. Proof of Stake has his own issues. But more and better systems are coming.
Laks: So, people have started creating ‘mining pools’ where they ‘pool’ their resources together to get a better chance of solving the cryptographic puzzle. Just four mining pools, the majority of them located in China, can control more than 50% of the Bitcoin mining power. Sounds like an unfair system like you were saying because the average person has no chance of ever winning the mining reward. How do you see that this aspect of centralization will be resolved?
Roberto: Probably won’t be solved. The only way to solve it is to change the algorithm for Bitcoin. As a weekend hobby with one or two other co-founders of Blockchain Zoo, we spend a lot of time trying to design a Proof of Work algorithm that avoids pooling so where each computer, each account has one chance. To give you an analogy, let’s pretend that it’s a lottery, okay? You win when you someone creates a block.
So if there are 1000 total lottery tickets and I buy 500, then obviously I have a 50 percent chance to win. But the other 500 are distributed to 500 people each with only 1/1000 chance to win.
With the pooling to distribute the calculation problem, it doesn’t match the example of the lottery because as soon as people pool together, the other individual people have almost no chance of winning the block reward. So miners who own 50 percent, are essentially buying a 99 percent chance to win the lottery ticket. So what we want to do is to bring a Proof of Work mechanics to one lottery ticket per computer. So if somebody has one hundred computers, that means they have 100 lottery tickets which increases their chance to win, but it doesn’t remove the chance to win from the others.
Laks: So electricity consumption is certainly a big issue for the Proof of Work model. Is there any chance to overcome it? Maybe mining farms powered by renewable energy?
Roberto: I think that’s just old technology. If we think how much one of the first cars was burning gasoline to run just a few kilometers and how this is being perfected with time to have cars that burn very little. That’s pretty much the same thing. Proof of Work was the first invention, it’s amazing, it’s very romantic, it’s beautiful code. I think that the Satoshi Nakamoto team didn’t think about the possibility of people pooling. They were not considering the fact that people can have more computers to split the problem, and in that case, each person had a chance against everybody else. But as we go, we need to abandon technology that was no good but was necessary to do the first step into this decentralization system.
Laks: Security is also an issue for Proof of Work – 51% Attack is a real threat. When having more than half of the mining power, frauds can be performed, and data in a block can be changed for personal gains. Is it the main failure point for Proof of Work?
Roberto: Yes, electricity consumption is a big issue, but it’s opinionable. People can say who cares, spending electricity to create Bitcoin is what gives it value. But the fact that the Proof of Work can be attacked in order to rewrite the blockchain is a security issue. That’s why is the system that needs to be abandoned, in my opinion.
Laks: Well, this has been very interesting. Thank you for telling us about why Proof of Work is the wrong method to secure a blockchain. We do like to ask all of our guests. How do you envision blockchain changing the world?
Roberto: For sure, blockchain, as I was saying, is the next big revolution. It’s the starting point to a decentralized system. To get rid of central parties, to get rid of centralized control. So that’s for sure a big step into the future of information technology.
Laks: And how do you think the market for blockchain-based solutions will evolve?
Roberto: Yes, as everything is moving towards decentralization, most of the application we use online today are moving toward a decentralized system. So blockchains and other decentralized technology will continue to be hot topics in IT. Things are going very well for Blockchain Zoo – it’s a great market to be in right now.
Laks: Well, this has been fascinating. Thank you again for talking with us about the way that Proof of Work works or rather how it doesn’t work. Thank you for watching guys. We at Blockchain Zoo are excited to bring you our new guest on our next episode.
BBH guest: Roberto Capodieci, Founder & CEO at Blockchain Zoo
Roberto discovered a passion for Information Technology at the tender age of 6 when, with the help of his father, he started to learn computer programming. By age 10 he had developed and sold his first video game. Four years later he began an entrepreneurship career when authorized by Italy’s court for minors, he opened his first IT company. In the formative years of the internet, he expanded his business reach into the online world and quickly found his company’ services in great demand. Roberto, specialized in Lawful Interception systems and big data analysis, is also a consultant to law enforcement agencies. Moved to Asia in 2004, Roberto was a member of the Nxt foundation, and now he’s a founder and CEO of the Blockchain Zoo Association, and creator of the Decentralised Business Network open platform.