Cointelegraph is following the development of an entirely new blockchain, from its inception to the mainnet and beyond, through its Inside the series. Blockchain Developer’s Mind. In the previous parts, Andrew Levine, from Koinos Group, spoke of some of the challenges the team has faced since it identified the key problems they sought to solve and outlined three of the “crises” that are holding back blockchain adoption: upgrade ability, the scalability and governance. This series focuses on the consensus algorithm: the first part is about proof-of-work, the second is about proof-of-stake, and the third is about proof-of-burn.
In this article, I want to leverage my unique perspective to help the reader understand more deeply a popular concept in Blockchain technology, but also one that is woefully misunderstood: the consensus algorithm.
To fully understand this component of a blockchain, one of the things I always like to do in these articles is start by taking a step back and looking at the big picture, because the consensus algorithm is only a small part of a much larger system. big.
Blockchains are a game in which players compete to validate transactions by grouping them into blocks that match the transaction blocks that other players create. Cryptography is used to hide data that would allow these people to cheat. A random process is used to distribute digital tokens to people who follow the rules and produce blocks that match those presented by other people. These blocks are chained together to create a verifiable record of all transactions performed on the network.
When people produce new blocks with different transactions, we call it a “fork” because the chain forks in two different directions. This is the exact opposite of what we want to happen. All the value of a blockchain comes from the fact that everyone agrees, reaches a consensus, on what transactions occurred and when. Consensus algorithms are intended to resolve forks.
Satoshi’s true innovation
Ultimately, ensuring that everyone updates their database to match everyone else’s comes down to how they are punished when they don’t. The protocols contain rules for the correct ordering of transactions, but if there is no repercussion for violating those rules, they will be ineffective. The real innovation that Satoshi Nakamoto brought to the Bitcoin (BTC) white paper was his graceful use of financial incentives.
Satoshi Nakamoto did not invent the idea of ”electronic currency”. He created an elegant system to combine cryptography with economics and take advantage of electronic currencies, now called cryptocurrencies, to use incentives to solve problems that algorithms alone cannot solve. Its design forced people to sacrifice money to mine transaction blocks. People would have to sacrifice this money over and over again by following the rules of the system and trying to organize the transactions into blocks that would be accepted by everyone else on the network. If they did it long enough, they would receive a reward in platform currency.
Of course, there is no way for the blockchain to know that the money was spent in the form of dollars, yen, or euros, so it used a proxy in the form of mindless work. It made block mining unnecessarily difficult, so that anyone who successfully mined a block must necessarily have spent money on hardware and energy to run that hardware. So every successfully mined block is backed by the money that has been sacrificed not just on the hardware, but the energy required to run that hardware and produce that block. When there are forks, Proof of Work (PoW) consensus algorithms are an automated system whereby the fork supported by the most work is the “correct” fork.
This means that everyone who continues to produce blocks on that fork will continue to earn rewards and everyone who continues to produce blocks on the other fork will not earn rewards. Since these people have already spent their money to acquire hardware and make it work to produce blocks, the punishment is easy because they were already punished monetarily. They have spent their money, so if they want to keep producing blocks on the wrong chain, no problem. They will not earn any rewards and they will not get their money back. They will have sacrificed that money for nothing. Your blocks will not be accepted by the network and you will not win no token.
This proof-of-work system ensures that the only way for someone who doesn’t want to play by the rules, a malicious actor, is to acquire and operate more hardware than everyone else put together, such as by mounting a 51% attack.
This is the elegance behind proof of work. The system cannot function without sacrificing increasing amounts of capital. Satoshi combined cryptography and economics to create a transaction book that is so reliable, it is not to be trusted.
However, there are different consensus algorithms that work slightly differently. The best known is proof-of-stake (PoS), which I will talk about in the next article in this series. Next, I will talk about the algorithm that we will use in Koinos, which is the first of its kind on a general-purpose blockchain.
The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Andrew Levine is the CEO of Koinos Group, where he and the former development team behind the blockchain Steem build blockchain-based solutions that allow people to take ownership and control of their digital selves. Its founding product is Koinos, a high-performance blockchain built on an entirely new framework designed to offer developers the features they need to deliver the user experiences necessary to spread blockchain adoption to the masses.
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