Understanding The Proof of Stake Consensus Algorithm

Host: Welcome to the Inside Blockchain Podcast. My name is Tony Obiajuru, but you can call me Tonytalks.

Host: What I intend to achieve with this podcast is to help you make sense of the blockchain industry and how this amazing technology is redefining work, setting new paradigm shifts in businesses and helping to reshape societal interaction. I bring you Inside Blockchain Podcast, the most intellectual source of discuss with industry leaders and enthusiasts.

Host: Now, here’s just a brief disclaimer. All opinions shared by our guests on this podcast are exclusively their own opinions. They do not suggest Investments recommendations of their companies neither should you take this information as an investment advice as you are solely responsible for your own Investments.

Host: On today’s episode. We will be discussing one of the consensus models, which is the proof of stake and my guest today joining me all the way from Kenya is Felix Macharia. He is the COO of EOS Nairobi and also a co-trustee at the Africa digital assets Foundation. The topic we’re going to be talking about is everything and anything that has to do with the POs ecosystem. Now here is just a brief on Felix. He has three years of experience in blockchain supervising, blockchain education, research and development for EOS Nairobi. He is also an infrastructure provider for the EOS blockchain protocol and EOS sister chains. Felix also works for the Africa digital assets Foundation where he is charged with strategy and Community Development for the Consortium of blockchain companies looking to build businesses on this new technology.

Host: Hello Felix. Thank you for joining me on the show today. How are you?

Felix: Tony thank you for inviting me.

Host: Yeah you you’re welcome. You’re welcome. Okay. So the topic is the POS ecosystem and you were actually chosen because of your years of experience in this particular field. So tell us about these consensus models. What is proof of stake?

Felix: Okay, so to understand proof of stake one must backtrack a bit to 2008, to understand the consensus algorithm that underpins Bitcoins technology and that is proof of work. So you might have to bear with me Tony, maybe just for the purpose of our listeners. A Blockchain, what is a blockchain? So basically a blockchain is a bunch of digital files with transactions called blocks, which are cryptographically hashed and connected together and they form One continuous immutable record hence the chain in blockchain. Now this particular record or Ledger is not stored on a single server or database or computer as it is with, you know, traditional Tech. It is actually distributed around a group of computers called nodes and these nodes are connected in a network like the Bitcoin Network. Now obviously for us to maintain a single record or Ledger.

Felix: We must all agree on what the contents of the record or Ledger are and not only that we must also agree who gets to add the next transaction to the file or a block and that’s where really the issue of consensus comes in. Okay. So yes. Yes. So you have this consensus algorithms which are pieces of computer code that are written and they’re implemented in blockchain protocols to enable. Various computers the various nodes on the network to be able to reach consensus with each other on what on mainly two things; on who should add the next transaction to the block and what the actual contents of this Ledger should be.

Host: Okay. that is what the consensus models are designed for?

Felix: That’s what consensus algorithms are. Yes. Okay. Okay, so go ahead please. Yeah, so this was the genius of Satoshi Nakamoto the anonymous creator of Bitcoin and he basically found a way to make this process of reaching consensus possible without having to trust a centralized entity, you know to help us, you know reach consensus with each other and call that particular consensus algorithm proof of work. So the way proof-of-work functions is almost like a lottery and I think you cannot understand proof of stake until you’ve understood proof of the like proof of work. Yes. Yes. So basically what you have with proof of work is you have these nodes around the world that are working hard to solve a difficult mathematical problem the first node or the first computer to solve these mathematical problem is awarded Bitcoins by the software. And basically this is what is called mining because this Bitcoins are rare and they can only be produced by this process. Okay. Now that same node also gets to add transactions on the Block and transmits this information to other nodes on the network so that we have done a distributed account or distributed record of transactions. Now solving this difficult mathematical problem is very dependent on Computer Resources. So we’re talking CPU. We are talking RAM, talking bandwidth and we’re even talking electricity. So it basically means the more powerful and the more energy efficient your node is the more mathematical problems. You can be able to solve and therefore the more Bitcoins you can you can mine. Yes. Yes. Yes. So this is why it’s easy for example to be able to run mining firms in places like China because it’s good electricity the microchip industry exactly Microsoft and the microchip industry is quite developed and and so on. So anyway, this particular system are developed by Satoshi proved to be put to work very well because it meant for someone to change the Ledger. They have to first decrypt all the transactions on the Chain because each transaction that is added onto a block is actually encrypted. It passes through a hashing algorithm. And this encrypted these are cryptographic methods then apart from decrypting the transactions in the chain one has to add their own transactions if they want to change and they have to encrypt those transactions and simultaneously, they must also be able to at least control 51% of the networking resources. So basically the this particular these two things make it very difficult very resourcing setting intensive for any computer around the world to do actually with the current computers we have and with the kind of energy Available it is sort of like impossible to do these two things at the same time. So it makes Bitcoins technology. Very robust. Very unhackable very secure. And for that reason it made a lot of sense for Bitcoin to be a base for decentralized internet money. So the Bitcoins that you know, everyone talks about.

Felix: Yeah now proof-of-work first sort of like a challenge and that was mainly the electricity demand. So we will need all of that adds energy to run transactions as more and more people, you know, enter the network. In fact, I think Bitcoin Bitcoin Network at some point was using as much as three as much energy as three nuclear reactors at that time. The other challenge was because we must compete to solve these particular hard mathematical problem. Then the process of reaching consensus is kind of slow and for that reason Bitcoin proof, Very slow transactions about 4 transactions per second. Okay. Now the Bitcoin Community has since worked on some of these scaling problems and they have an initiative called lightning Network, which has helped them sort of like scale up the number of transactions that can happen on bitcoin but not to the extent required for real-world applications. For example, if you are trying to build a Facebook on bitcoin people have to wait at least 30 minutes for a live record a comment to be passed across the network. So so it’s quite slow for for real-world applications. So right now because of its its characteristic Bitcoin remains very much a store of value. It’s more of a digital gold than anything else. So this is where now proof of stick entered to solve some of these issues.

Host: Okay? before we talk about proof of Stake. I understand that these consensus models are actually the technical aspect or I could call them analysis of a blockchain project. But my question is does proof-of-work have anything to do with validating a transaction on the Block?

Felix: Yes. Yes very much for you to be able to be selected to add a transaction to the block and transmit that transaction across to other nodes on the network. Then you need to compete you need to participate in this process of trying to solve the hard mathematical problem. The algorithm the computer code chooses the particular note that solves the problem. So we use consensus algorithms to agree or two to choose randomly the particular node that solves the mathematical problem fast. So it’s very much a part of an important part of validation.

Host: Okay, let’s talk about proof of stake right now. What role does it play?

Felix: Okay. So back in 2012. I believe that there are two gentlemen who wrote Our research paper, one was called Sonic King and Scott Nadal and basically they are trying to propose a new method of reaching consensus while still maintaining the advantages of you know, traditional blockchain technology. That is the security, the immutability and so on. So proof of stake is a system, whereby your stake in the system in terms of the number of tokens you own put you at a better position to run transactions on behalf of the network. So simply put the more tokens I own in a proof of stake Network the greater my probability of being chosen as the next node to run transactions. So with this particular system, there is no racing, there’s no competition that is wasteful basically stake in these systems determines status. Now if you think about it, it makes a lot of sense if I own most stake In an ecosystem. I should make more decisions because if the Ecosystem fails and I had bought all these tokens, I have much more to lose than somebody who had bought less tokens than I have.

Host: Okay. So now let’s bring this down to the normal Corporation or company, the way a company operates. So we say proof of stake is just like shareholding right? Like purchasing a huge amount of shares which allows you to participate in the decision-making of that particular organization. So is that how proof of stake works? Like the more stakrs you have, the more power you have to make certain decisions within the ecosystem?

Felix: Yes. Yes pretty much pretty much so so in the case of in the case of something like Facebook the fact that Mark Zuckerberg has a person who owns a very large stick a very large percentage of shares and even in fact voting rights means that he has a very huge say in the direction of the company. So with proof of stake, the the validation rights increase as your stake in the in the in the ecosystem increases, so yes, yes, so it also means that as a higher staker. I have more interest to preserve the Network’s value and if the tokens are distributed, well, I will not have too much control of the ecosystem. So one of the worries that people have with proof of stake algorithms, is it sort of like it’s a rich man’s game, you know, like if I own most take in that ecosystem so sort of like a more important than everyone else everyone but yes, but the what matters is the models of token distribution, so there are various models of tokens distribution that are currently available around the world. So one good example, of course is the ICO model which has with time has sort of like gotten old and and and and quite regulated now, that’s another yes. That’s the initial coin offering yes. So the other methods that people are using to to sort of like distribute these tokens one of the methods is called an airdrop. We’re basically just give out the tokens for free to accounts on a network in the case of EOS. Whenever anyone launches a new chain on EOS. They can always take a snapshot of the initial EOS mainet we’ll probably discuss this later and we can give everyone on on mainet a couple of token. So you distribute the tokens to thousands of people or even millions of people around the world at the same time, so, So if I was a user and if I want to sort of like have more say in the network, I need to buy more tokens to be put in a position of higher probability to produce block. So the person who has let’s say 1 million tokens has a greater probability of producing transactions on behalf of the network in comparison to somebody who has let’s say 200 tokens. Okay, so it also means that yeah. Yeah. Yeah. Go ahead. Go ahead, please. I was gonna drop a question, but I’ll bring you the question very soon. Okay. Okay. Thank you. It also means because it is easier for us to choose the next miner sort of like we have these huge stakers within the ecosystem. So we know that the transactions whoever is running the transactions is really this huge stakers within the ecosystem and all we have to do is randomly assign any each node on the network. So like time to produce blocks. So it makes it easier to produce blocks. It makes proof of stake protocols faster. And for that reason with proof of stake protocols one can run more transactions than proof of work. Okay.

Host: Okay, then this serves like a more preferable alternative to proof of work and since you’ve already started highlighting the what do I call it? the benefits of the POS blockchain. What is now the cost of running it? Is the cost of running it higher or lower than the cost of running a proof-of-work ecosystem?

Felix: So the cost is definitely low in the proof of work ecosystem basically because it uses less computing resources for everyone on the network on the network because we are not competing. Yes. Yes because you’re not competing and we know who should be next in producing sort of like these transactions and adding these transactions to the block adding the blocks to a chain. We don’t all have to be using CPU Ram, net and bandwidth at the same time. We only use it when it is transmitted to us and we only use it when we are the ones who are producing blocks. So it’s a it’s a much simpler, much cheaper, less cost intensive process of reaching consensus. And if you actually think about it, that’s all proof-of-work consensus algorithm was meant to do it was meant for each consensus. So the the characteristics of the underlying blockchain technology are not really changed proof of stake Protocols are a secure and and they have they have a high sense of security. They have immutability. They have transparency that you will basically find in Bitcoin. But only that this time the method of reaching consensus is different is quite different different.

Host: Okay. So what are the examples of protocols that are using proof of stake? You might want to give that a line with a proof-of-work. So let’s talk about these examples of this protocols. What are they?

Felix: Okay, so so people went ahead and took this paper written by Scotland and then 17 back in 2012 on proof of stake and went on to improve on proof of stake as sort of like a consensus algorithm and they came up with these various variants of proof of stake and the various variants of proof of stake that are out there determine the various kinds of protocols that you find out there. So they are the various chains that use proof of stake. So they EOS there is TRON. There is KOMODO. There is the equator number about 21 by my accounting and and and basically each of them have a variant of delegated of of proof of stake. So for example in the case of EOS, he also was proposed by a gentleman called Dan Larryma back in 2014. He is famous In the blockchain ecosystem because he came up with two previous protocols. I think steamit and and. Yeah, so he proposed taking taking this proof of stake model and instead of just the guys who were the highest stakers in the ecosystem having to be the ones producing blocks. He said we can use our stake the stakers in the ecosystem can use their stake can use their tokens to vote for a delegate and this delegate can then produce blocks on behalf of the network only, so he called it delegated proof of stake. So exactly. Okay. So the way delegated proof of stake works for maybe people who are not. Yeah. Yeah. Go ahead. that are not very involed in this space. It’s almost like a democracy. So, you know in a in a democratic country, you have all these citizens who have Citizenship rights and one of the citizenship, right? Is the right to vote so you can vote for a leader and that leader once he receives their largest number of votes is the one who who is actually gets lead exactly. So it’s thesame with proof of stake algorithms only that with this delegated proof of stake. For example, what is found in EOS. The Voting is actually throughout so if I wanted to vote for a leader of a particular delegates now, I will vote for them and if I wanted to withdraw my vote I can withdraw my votes. So you’ll always find that with delegated proof of stake. There is sort of like movements on the table. There are people who are coming in and moving out but by the end of the day the person the people who have the highest number of votes and the ones who are producing blocks on behalf of the network.

Host: So, how it works, So Yeah quickly. So who are those that are validated to vote? Are they those who have the highest number of tokens or anyone with any amount of balance in your wallet?

Felix: So anyone with regardless? Yes, can afford using their tokens? Okay, okay, regardless of like what amount of tokens you have? It’s only that the tokens you have give you a certain power. So for example, if I had 1 million tokens, it gives me more voting weight than if I had somebody that has let’s say 10. okay. Okay. Yes, but it’s a more democratic model because what happens is the people who are chosen as delegates are actually people from the community. So depending on the kind of protocol you will have different demands on this delegates in the case of EOS for example, you are required to have a website you are required to say who the team members are you required to verify the node location you are required to say what you will do for the community. So why should the community really vote for you? What is the value that you’re bringing and towards the community? So it’s a very it’s an intensive process that involves a lot of people and for that reason makes this particular communities quite robust in the case of EOS, there are 121 of these delegates. They are called block producers, block producers because they are producing blocks. That’s essentially what they’re doing. They’re producing the the blocks we talked about earlier on behalf of the network. Yeah, there are 21 Main block producers on EOS and then we have about 100 standbys. So the way it works is this they are known as top 21 because they have the highest number of votes this 21 delegates are the ones who randomly are chosen by the by the by the consensus algorithm from time to time to produce blocks on behalf of the network in case any of them is heaps. So like any of them is pushed out they can be replaced by a standby block producer. So the person in number 22 will be immediately replaced by number 21 now. Yes. Yes, so so delegated proof of stake has proven to work very well. And for that reason they are many other chains that are come out with sort of like similar model. So like with TRON, we have I think a similar model you have 21 super representatives are called super representatives and then you have backup Representatives on something like ICON which is launching sometime in August. They have 22 Main public representatives and then they have 78 sub P reps or sub public representatives and it goes on like that like that. There are other forms. There are different forms of proof of stake. For example what we have in tender mint and what we have in Cosmos, so they work with something called as a synchronous Byzantine fault tolerance and they combine this with delegated proof of stake to Sort of like make the decision on who will be the next leaders on to produce blocks in. Okay.

Host: So now how big is this POS industry and what are the interesting things that people are actually doing?

Felix: Mmm, very good question. So so the top 10 proof of stake protocols right now are above 100 million dollars market capitalization the top 10 and therefore if you do the math roughly that comes to about total market capitalization of 11 billion dollars for the proof of stake proof of stake protocols that are out there. So if you take the total number of tokens that are out there and X the price the current price of the token in the exchanges in the markets, it will amount to about 11 billion dollars for all of these protocols. Now these protocols need to pay the people who are staking or the people who are producing blocks on behalf of the network because remember in the case of Bitcoin because of proof of work and when the miners are racing with each other to solve this difficult computer algorithm, they’re normally rewarded Bitcoins at the end of that process. So if I’m the one who solves the the problem fast, I’m rewarded with bitcoin and that’s what we call Bitcoin mining but for proof of stake what you have is you have the miners or the block producer so the sub represent the public Representatives all those validators. They are normally paid from a network fee and the network fee can arise from two places. One, it can arise from when it can arise when a user pays certain transaction fees on the network called gas gas fees and I think people who are familiar with Ethereum know that on Ethereum for example, you need to pay some gas to you know, carry out some transactions transactions, of course. Yes. Yes, of course. There’s a lot of the a lot of dissenting voices for this particular model because it makes running applications on a chain quite expensive. And so the other method that people have found is using inflation. So the inflation works is we have this total number of tokens. Maybe it can be 1 billion tokens. We can have an inflation by area of about 1% to 5% of tokens. So the computer algorithm produces about one percent more tokens each year. And for that reason these tokens can be used to to to pay to pay block producers on the network can be used to pay stakers on the network can be used to pay validators Network. The estimates currently by the staking Alliance is that this particular staking economy these stakers, this validators, this block producers, these public Representatives around the world are being paid about 383 million dollars every year. So we’re talking about an economy of about three hundred and eighty three million dollars. And remember that looking has not reached a point of mass adoption. Wow, this is this this big industry. It is.

Felix: It is so when we for example what we let me let me just talk briefly about what we’re doing at EOS Nairobi  as you have rightly put is an infrastructure provider for EOS and EOS sister chains. So EOS sister chains are just blockchains that look like EOS that looking that use the underlying yourself your code. So our mission basically is to enhance blocking adoption in Africa and vision since 2017. When we formed this particular Community has been a center for blockchain Education research and development on the African continent. And for that reason, we believe that there is a lot of opportunity for African enterpreneurs, especially African enterpreneurs in the BlockChain space who can be part of this staking economy. It is not that difficult to actually become a validator or to become a block producer on this. Particular networks. What you need to bridge is you need to bridge a small knowledge Gap as regards running a node because obviously you need to know how to run a node you need to know how to configure servers so that they are able to connect with other services on the network. That’s perhaps the only thing that stands in the way but this is a very good opportunity for for African blockchain entrepreneurs because these networks are basically permissionless, There is no person stopping you from joining the network and there is no person saying you’re from Africa and we have this very strict guidelines and cannot be able to join you can join even even from from Africa and you can participate in invalidating transactions on behalf of networks and unlike proof of work. You don’t really need those heavy, you know heavy computers The Arc, the the gpus and all those things that you hear and Bitcoin miners talk about you actually just need a server that meets basic minimum requirements depends on the particular blockchain protocol. Yes, and we can we are very interested in training people on the continent on how to stake on this particular networks on how to run transactions on this particular networks. Of course, there are other trainings that we do maybe we’ll talk about it later like like dap when it comes to decentralized applications. Yeah. Yes. Yes, but but this is this can be a very important source of income for African enterpreneurs and even African economies.

Host: Okay, so now from my understanding of the comparisons between the proof of work and the proof of stake. So we can say the proof of work is incredibly secure. All right, while the POS is actually new alright proof of work is cost effective, but POS is less cost effective. Yes. Okay. So out of the two? All right. Which one do you see taking the lead in the future when it comes to the consensus protocol? Which do you think will dominate the market?

Felix: Okay, so so so when I think when I think about the various consensus algorithms and when I think about which one will be more practical for the future of blockchain. Yeah, I will have to say proof of stake and I love to say proof of stake for various evidences. Yeah, the first evidence is when you look at the number of transactions that can be run on a proof of stake Yeah protocol. It’s pretty high. So if you’re looking at blocktivity.info which is a website that offers information on on these transaction being run by the various blockchains should look at blocktivity.info today. You will see that the top eight or nine blockchains there are proof of stake blockchain. So you’re talking of EOS, you’re talking of TRON, are talking of all those blockchains and basically they can be able to run a very large number of transactions and because of that then these particular protocols have been able to attract a lot of application developer. So again, if you’re looking at the largest number of decentralized applications developed on blockchains, they are developed on proof of Stake blockchains. I believe the that the yeah the two leading blockchain protocols right now in terms of the number of daps are EOS and TRON which are proof of stake blockchains, because it’s not so much of a cost to the people who are validating on behalf of the network and as an application developer, I do not have to think about the underlying technology or the politics of stakers. All I have to do is just plug and play. So today  if  you are developer who wants to build a blockchain application also known as a decentralized application. There are many proof of Stake protocols you can connect your app to and as long as you know how to code in, you know, the usual languages Java Script, CPlus depends on which chain you are also talking about as long as you can be able to code and as long as you own a few tokens on the network, yeah, then you can be able to build your decentralised application and therefore it’s a very it’s a very practical practical thing. So you will rarely find nowadays anybody who’s building a new Block Chain protocol talking about proof of work because they know proof of work is quite intensive. Yeah. the token that you are launching must be able to at least reach the price of Bitcoin for you to be able to incentivize people to maintain this very expensive hardware. And and we know that obviously Bitcoin has been around for quite a while now, it has been around for 10 years. Yeah. So your protocol if you were to launch with the proof of work will basically have a problem with the number of miners that you can you can have because very few people will be willing to run servers at a loss. So proof of work is a deterrent for people who are looking to launch protocols. But it is also costly to the people who are already running blocks on behalf of the network. So when you’re looking at speed, when you’re looking at ease of use when you’re looking at things like like the ability to be able to plug in play proof and you look at the number of deaths that have been able to be developed on proof of stake algorithms over the last proof of stake protocols over the last two years and it is very clear that proof of stake will lead. It will be the Gateway for blockchain adoption Mass adoption around the world, I believe.

Host: All right. Thank you so much for Felix. I actually look forward to discussing with the other guys that are part of the protocols that the yeah, the protocols you mentioned under the proof of stake which have to do with the EOS ecosystem, the EOS chain, the Telos chain and in our next episode. All right, we’re going to be having someone join us live on the show to tell us about the EOS, you know, ecosystem everything about EOS, what makes it so unique and it currency that, you know, people should look into investing. Thank you so much Felix. So Before I Let You Go, what do we expect to see like moving forward?

Felix: So there are several things you expect to see. Okay. So for this particular show, I think we will we will be hosting more proof of stake protocol. So it will be Cosmos. It will be tender mint, it will be Komodo it will Be EOS and it would be the various daps that are building within those particular ecosystems. So they are they are quite a variety. Yeah, they’re quite a variety of decentralized applications that are building in those ecosystems everything from fintech to edu-Tech to health to supply chain and so on so it will be hosting some of those steps as well for the various protocols as regards the future of blockchain I think proof of stake very much is proving very much to be sort of like the Gateway for Mass adoption. And for that reason we are going to see an explosion of proof of stake algorithm simply because it is a much easier process and and we also expect that as the blockchain space moves on it’s going to be a multi chain and a multi token Universe various ecosystems serving various purposes. Yeah, so it’s going to be it’s going to be very interesting. In fact, one of the one of the things that we are looking at at the Africa digital asset Foundation is how we can be able to bring together these businesses initially. We had brought this blocking businesses together to develop standards for the blockchain industry on the African continent because this have virtually non-existent in 2017. There was no law there was no regulation, no framework. But with time I think ADAF may actually build a protocol of its own and I think that protocol might actually end up being a proof of stake protocol and I think that we are going to have millions thousands if not millions of decentralized applications on the African continent building on an African Centric protocol. So I guess we are going to see a lot of this around.

Host: Coming soon coming soon, you heard it First from Felix. Thank you so much felix. All right, we’ve come to the end of this episode of Inside Blockchain Podcast. Don’t forget to visit us at cryptotvplus.com for news updates, trends, sources and links. You can also find us on social media @cryptotvplus and if you come across our YouTube products, that is I’m talking about our video. Don’t forget to hit the like as well as the Subscribe button. Till we come your way next time with the other protocols, which is the EOS ecosystem. It’s a bye for now coming from the studio. I am your host Tony Obiajuru.

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