Proof of Stake vs Proof of Work

In the world of cryptocurrency, there's a need for algorithms to create a consensus for validating transactions. Bitcoin uses Proof of Work. Ethereum 2.0 will use Proof of Stake. What the heck is the difference?

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Episode Transcript

Speaker 1 (00:04):
Welcome to Tech Stuff, a production from I Heart Radio.
Hey there, and welcome to tech Stuff. I'm your host,
John than Strickland. I'm an executive producer with I Heart Radio,
and I love all things tech. And one thing that
I have covered in the past on this show is
cryptocurrency and blockchain. But I pretty much always talk about

(00:28):
blockchain in terms of proof of work. Cryptocurrencies and proof
of work blockchains and there are other types. So I
thought we could go over some of this and talk
about what all of this means and what the differences are.
And to start off, we need to talk about proof
of work. Even though I've done it before, We've got
to establish that first. So when you've heard me talk

(00:51):
about how bitcoin mining, you know, is really equivalent to
a computer solving a really hard math problem, or that
your computer is essentially making the first accurate guests for
a particularly large unknown number, you know, I've I've often
kind of made that analogy. Proof of work is related

(01:15):
to that. However, the actual concept of proof of work
predates that of blockchain, or at least of blockchain in
the term of cryptocurrencies. Blockchain itself also predates cryptocurrency. In fact,
one could argue that the brilliance of bitcoin was bringing
these different ideas together into a a new format. So

(01:39):
the proof of work concept was first described in a
paper that Cynthia Dwark and Mony Nyor wrote back in
the early nineties. They did not coin the phrase proof
of work, but what they described effectively is proof of work.
They were looking to solve a different problem from cryptocurrencies,

(02:00):
you know, how do we create a system of which
people can mine a digital currency and validate transactions. They
were looking at ways to discourage spam email. Their paper
is titled Pricing via Processing or Combating Junk Mail. So
one of the reasons that spam even exists is that

(02:22):
it doesn't cost very much to send it out at
a massive scale. If you had to hire people to
manually type out spam messages or even just fill in
the address bar in the email, that would be cost
prohibitive because the return would be way too low. It's
actually kind of hard to cite statistics on this because

(02:45):
there are a lot of different metrics that are used
in a lot of different time periods we can look at.
But generally speaking, the response rate on spam, that is
the percentage of people who actually not only open up
a spam message, but they on it in some way.
That response rate is abysmally low. According to a study

(03:05):
from the University of California, Berkeley, and you see San
Diego back in two thousand and eight, only one in
twelve point five million messages gets a response. That's way low.
Right now, I'm not sure if the rate was much
higher or if it was even lower back in the

(03:26):
early nineties when the researchers were working on this concept
to discourage spam. But when you've got a success rate
that is that small, the question arises, how the heck
can it be worthwhile? I mean, how can it be
worth the time and effort of operating a business that
sends out spam emails if you have a success rate

(03:47):
that is that low. Well, the secret is to operate
on an enormous scale. So, yeah, you're only getting one
hit out of twelve and a half million people, but
you're sending out emails two hundreds of millions of people.
You also have to have a very low cost of operation.
You know, it can't cost much to actually do your business,

(04:07):
and you have to have a pretty enormous return when
you do have a success, like when you get a hit,
it's significant, and preferably you have all of these at
the same time. Keeping costs low is a huge part
of this. With database is full of email addresses, automated
systems that use boilerplate copy, and you know, an automated

(04:31):
robocolor style email program that can plug addresses in and
and attach it to this boiler plate, you can really
churn those suckers out. If you get a bit over zealous,
then you might make authorities upset and they might come
at you and wants you to answer some questions. That
can be a problem. We've seen that happen where spam

(04:53):
operations got shut down because you know, local politicians got
fed up with it and started looking into it. But
you know, you can make a profit working this way.
You just again, you have to be brutal with cost
control in order to make this work at scale. So
the researchers wanted to find ways to make the cost

(05:14):
of operation go up. Even if it only went up
by a tiny little bit, that could be enough to
wipe out the return on investment for spam operators and
they would likely abandon the practice. If there's no money
to be made, then there's no reason to send out spam, right,
if you could actually make it expensive enough, then it

(05:35):
would cost more money to send out spam. Then you
would recoup whenever you got those rare successful responses, and
that would definitely bring the practice to an end. So
let's say you're looking at folks who are sending spam
out and you're trying to discourage them. You're trying to
find a way so that the spammers give up on
what they're doing. Now, if you could just put a

(05:58):
price on sending an email, that would probably do it. Right.
There is a price on sending email because operating a
computational device has energy requirements, and that means you have
to pay an energy bill at some point. But you
want that price to be even higher. You want to
just attach it straight to an email specifically, not just

(06:19):
operating a computer. So let's say that you decide that
all emails will cost a fraction of a cent to
spend to to send one. So if you're gonna send
an email, you're gonna get charged, you know, a fraction
of one penny for normal folks just sending on emails.
It would be such a small charge that you probably

(06:40):
wouldn't notice. I mean, you wouldn't be happy about it,
But it's not like it would amount too much. If
you're sending out maybe ten emails a day, maybe you're
getting close to spending half a penny. That would not
be a big deal, right, But for organizations that are
trying to blast out hundreds of millions of messages, it
quickly becomes cost for hipative. But this approach comes with

(07:03):
all sorts of problems because normal folks wouldn't be thrilled
at having to pay even a fraction of a cent
to send email. Like even if you framed it that way,
people would object. They'd say, why are you making it
cost me anything to send something electronically? There are no
physical components to to be handled in this. Plus you'd

(07:25):
have to set up some sort of payment system in
the first place, and and whom are you paying? To
whom does the money go? This This makes it a
difficult and thus unworkable solution. So the authors of the
paper suggested an alternative. Instead of charging money outright to
send an email, why not build into email systems a

(07:46):
processing requirement, as in a computer process or requirement. Each
time someone wants to send an email, their computer must
first solve a mathematical problem. Uh. And in order to
solve a mathematical problem, the eater must expend resources it's
got to send spend some of its processing capability on

(08:06):
solving this problem, and also some of its time. The
difficulty of the problem would require some amount of computational
output that's equivalent to a fraction of assent. In other words,
you technically you're still charging folks to use email, but
the cost is in effort and time, not directly in money,

(08:29):
and that is something that people would probably be a
little more receptive to. And again, for the average person,
they probably wouldn't even notice sending an email might take
a little longer than it did before, but not by
so much that they would make that big of a difference.
So their computer would have to solve some sort of
mathematical problem, and the proof of the solution would need

(08:50):
to be you know, signed into the email itself. The
problem would need to be difficult to solve but easy
to verify. So in other words, you you can send
this email until whatever system is handling it verifies that
you did solve the problem. It's kind of like they're
not allowed to go to bed without your parents checking

(09:11):
to make sure you did your homework first. Same kind
of idea, So it needed to be the kind of
problem where you have to work out an answer, and
that part is hard, but once you have the answer,
it's very easy to plug that answer into the original
problem and see that it works. So you can think
of something like an algebraic equation and it has an

(09:33):
unknown value in it that you represent as a variable,
the classic being the letter X. Well, once you solve
this equation, and you solve for x, you can then
plug that solution that x value back into the original
equation and prove that it works well. Their approach was
sort of the same thing, only much more complicated than that. Moreover,

(09:57):
they pointed out that if after you limited the solution,
you saw spammers trying to, you know, power through it
and just continue to spam despite the fact that you've
put this computational requirement in the way, well, you can
just adjust the difficulty of the problems that they have
to solve before they can send out more emails. You

(10:18):
make the problem tougher. Then it takes the computers more
resources to solve the problems. So the harder the problem
gets the more quote unquote expensive it is to send
an email. And once you get to that tipping point,
then spammers will see that the amount of time and

(10:40):
energy that they're using in order to just send out
the spam emails is not offset by the amount they're
making when the spam finally starts hitting responses. This was
a really interesting proposal. Now let's skip ahead to the
two thousand's, like two thousand seven, two thousand eight. It
was in two thousand eight that we first got a

(11:00):
white paper written by someone using or someone or some
some people potentially using the pseudonym Satoshi Nakamoto, and this
was the famous white paper describing bitcoin. Now, in this piece,
the author or authors combined the proof of work concept
with another one that again predated bitcoin, and that was blockchain.

(11:24):
What blockchain does is establish a timeline of events of
some sort. So in the case of bitcoin, the events
are transactions, so their bitcoin transactions when bitcoin changes hands
from one entity to another. And let's think about timelines
for a second. In our experience, there is no way

(11:46):
to travel back in time. The only way to travel
through time is the way we all do it normally,
where time progresses forward for us there's no turning back.
So that dumb thing you did when you were a kid,
you know, you know which dumb thing I'm talking about.
It's that dumb thing where sometimes when you're just trying
to fall asleep, your brain digs up this dumb thing

(12:09):
and says, hey, remember when you did that dumb thing,
and do you remember how horrible you feel about it? Now? Well,
that that dumb thing you did, there's no way for
you to go back in time and to not do
that dumb thing. You can't erase it. It's in the timeline.
And really, everything that's happened to you afterward in your
life has that dumb thing factored into it, at least

(12:32):
on some level. Even if it's undetectable, it's there because
it happened, you know, that dumb dumb thing. Well. Blockchain
is a computational process that establishes something similar to a timeline.
The idea is that with a blockchain, you have a
timeline of processes, and this timeline is also unalterable. Someone

(12:55):
cannot go back earlier into the timeline, travel back into
the blockchain, and make a change, because if they did,
it would mean that all the later blocks in the
chain would also have to change, and folks would notice that.
Because the chain preserves the timeline, everything is built on
what has come before, So changing something from before would

(13:19):
change everything that comes afterward, and and the the jig
would be up. You would be found out immediately. So,
for example, if you spent bitcoin and then you thought,
I'm gonna get sneaky, and I'm gonna wait a while,
and after a while, I'm going to go into the
blockchain and alter that that record so that I didn't

(13:40):
spend that bitcoin, and then I magically get the bitcoin back,
it would be as if money were just magically appearing
inside your wallet. Well, because all future transactions are built
upon past ones, going in and trying to alter the
blockchain would become visible all the way down and you
would immediately be found out. So that's how the blockchain

(14:02):
protects the order of processes that once you start to
validate a block of transactions, it is cemented effectively. Now,
occasionally the chain might fork, but at some point one
branch of this chain is going to be longer than
the others and it becomes the true chain. The other

(14:25):
branches become orphaned blocks. Uh, So over time you will
see things split off from the blockchain, but whichever one
gets built on the most within a given amount of
time becomes the true chain. Alright, So block chains this
digital method of establishing a series of unalterable processes. Where

(14:47):
does proof of work come in? All right? So one
thing that's used a lot in computer science are hash functions.
These are a little tricky to talk about, all right.
So first let's talk about encryption. And I want to
point out right away at the very beginning, encryption is
not the same thing as a hash function. Encryption is

(15:10):
where you have some data and you perform a mathematical
process on that data, and you transform it into different data,
something that looks absolutely meaningless. You've jumbled it up. No
one can make head or tail of it just by
looking at it. But someone with the correct decryption key
can reverse that process and get at the original data

(15:33):
and read whatever it was you wrote. That is reversible.
That is encryption and decryption. Hashing is not reversible. You've
got some data, all right, let's say it's even the
same message. Is what we were just talking about with
encryption and decryption, and you have an operation that is
one way, which means you can perform this operation on

(15:54):
the data, and you will get a result, but there's
no reverse process where you can take that result and
turn it back into the original data. Frequently, hash functions
have a set number of characters that they will generate
no matter what original value you plug in. So let's
say that you've got a hash function that will generate

(16:14):
an eighty character hash once you apply the function to
the incoming data. That means your result will have eighty characters.
Whether your incoming data is a one or if it's
a one billion or any other number, you end up
with an eighty character hash. Hashes can be collections of

(16:35):
letters and numbers, and there are lots of different hash functions,
which is what proof of work cryptocurrency kind of really
depends upon. And and here's where we get to the
key bit. The proof of work cryptocurrencies create a hash
that is based off the block of transactions that need
to be verified, as in the next block to join

(16:56):
the chain. But it doesn't just involved the hash of
that block or the hashing of that block. The hash
also incorporates the hash from the previous block of verified transactions,
the one that came right before. This is where we
have that link that ultimately goes all the way back

(17:16):
to the first block, right, because block two's hash incorporates
the hash from block one. Block three's hash incorporates the
hash from block two, which, as we just mentioned, incorporates
the hash of block one. So this continues from block
number one all the way down to the last block
in the chain. All right, So the bitcoin system generates

(17:40):
this hash. You've got this value in front of you.
It's a hash value. You have no idea what information
went into this to create this hash. Computers connected, you know,
the nodes connected to the system are essentially all trying
to figure out how the system generated this specific ific hash.

(18:01):
And again, the process isn't reversible, so it's not like
you can take the hash value that the system presents
and then reverse engineer it. Instead, essentially you have to
guess what value would have created this particular hash using
the hash function of the algorithm. You're you're trying to
figure out what number was it that made this happen essentially,

(18:25):
and I'll give a really oversimplified kind of idea of
how this works just in case you're having some trouble
with it. So again this is an oversimplification, but Let's
say I tell you the answer to this math problem
is six? What was the math problem? So all I've
done is given you the answer, and I'm asking you
what math problem did I do that gave me the

(18:47):
answer six? And you could say four plus two, you
could say two times three, you could say sixteen minus ten,
and so on. And the point is there's an infinite
number of potential answers, right Like, you could say all
sorts of different things that would be accurate in that
it would it would create a six, but doesn't necessarily

(19:11):
mean that that was the math problem I did, Right,
You're just guessing until someone hits the right math problem. Well,
in a way, that's what the computer nodes are doing
within a proof of work blockchain system like Bitcoin, and
the first computer to guess it correctly wins. Essentially, other

(19:33):
computers in the system can verify that the guess is correct,
because once you have a guess, then you can plug
that into the hashing formula and find out if in fact,
it generates the hash you were looking for. Then if
it does, you got it right, and the winning computer
system gets the reward of a certain amount of cryptocurrency

(19:56):
units for bitcoin. Right now, that I'm out is six
point to five bitcoins per block. Now, as I record
this episode, the value bitcoin is almost fifty seven thousand dollars,
so a six point to five reward is equal to
nearly three hundred fifty five thousand bucks. And there are

(20:17):
around one forty four blocks added to the chain per
day at around three thousand dollars per block. So there
is a huge financial incentive to run a computer system
or network of systems that is the first to get
to this right answer. Right. I mean, there's just an
enormous amount of money to be made if you are

(20:40):
number one, So there's a huge incentive to be number one.
This is why you'll hear about bitcoin mining operations that
have incredibly powerful machines just racing constantly to get the
right answer. These machines need a lot of power. Thus
they need a lot of electricity. This means a lot
of power consumption for any sort of proof of work cryptocurrency,

(21:02):
with Bitcoin obviously being the really big one, and that
number can go through the roof as a currency's value increases,
so bitcoin mining actually eats up more electricity than some
countries do. I've got a lot more to say, both
about proof of work and its alternatives. But first let's
take a quick break. So I left off talking about

(21:30):
how bitcoin mining leads to this sort of escalation um
with people putting more and more powerful systems at play
to compete against one another and try and mind each
block in a blockchain in order to get more and
more bitcoin. This becomes a kind of a vicious cycle,
right because as long as the amount of bitcoin you're

(21:53):
getting back is greater than the investment you've put forward
to try and get the bitcoin, it's off it. Right.
If I'm spending you know, five dollars on a computer
system and power needs like I'm I'm paying you know
these rates to get electricity to power all these computers.

(22:15):
If I'm if I spend half a million on that, well, really,
I just I just need to successfully mine two blocks
a bitcoin to pay off that investment. Right, then, as
long as I'm hitting more success in the future frequently enough,
I can offset the costs of operation and just keep

(22:37):
making profit. So that's why it's so um tempting to
get into bitcoin mining, is that. Yeah, At this point,
being a serious mining operation means you have to put
in a huge amount of money because there are huge
players out there already that are running ridiculously powerful computer networks,

(22:59):
some times co located with power plants, like you've got
old coal based power plants in different parts of the
world where people have built out bitcoin mining operations in
the power plant itself in order to have direct access
to electricity at all at a cost that's as low
as they can possibly get it. And again it's so

(23:21):
that you can get that that maximum amount of profit
um and even then it's not guaranteed because there's so
many of these systems all around the world. So this
has obviously led to some people to have some objections
to bitcoin because it has this kind of runaway UH
consumption associated to it. And it also means that you

(23:46):
could argue that bitcoin can be connected to things like
carbon emissions and climate change, because if the power that is,
you know, allowing these systems to operate, if it's coming
from a power plant that's using fossil fuels, then that
power plant is having to to generate enough electricity to

(24:06):
send to these systems and thus consuming more and more
fossil fuels and generating more carbon emissions. Now, there are
some bitcoin defenders who say that the vast majority of
bitcoin are connected to systems that are running on renewables.
But even if you look at it that way, you're saying, well,
this is a significant drain on our energy resources. There's

(24:29):
an enormous amount of energy that's having to go just
towards bitcoin mining. And even if you argue that's coming
from renewable sources, you could say, well, that that energy
could be either stored so that we can use it
for other stuff down the line when we aren't able
to get at those renewable sources as easily, for example,

(24:52):
solar at night, or that we can just direct that
energy towards something else besides bitcoin mining. Anyway, I also
have to add that the bitcoin approach has some built
in adjustments that are kind of ingenious. So the goal
is to keep this process more or less consistent with
an ideal solution time of ten minutes per block in

(25:16):
the chain, So a new block getting added to the
chain approximately every ten minutes, that's the goal. Well, obviously,
if you add more and more a computational power to
the system, the time it would be needed to to
reach the solution for any given block is going to
come down. Right, for a given difficulty of mathematical problem.

(25:40):
If you're throwing more and more computer power at it,
you're gonna reduce the amount of time it takes to
get the solution. Well, that means that the system will
take an automatic kind of assessment of how long it takes,
generally speaking, for a block to get verified, and if
it's below ten minutes, it'll make those problems more difficult,

(26:04):
thus increasing the amount of time it takes to solve
those problems. So it's self correcting. In other words, it's saying,
all right, these blocks are starting to come out a
little too frequently. We need to slow it down. We'll
make the problems even harder. And now these computer systems
will have to work harder, it will take longer for
them to get the right answer. And again, as long

(26:26):
as the return on investment is good, that is, as
long as the bitcoin being mined is more than enough
to pay for the expense of operating a bunch of
power hungry computers, then you've got a positive return on investment,
and you'll have people investing even more in their systems.
They'll be making them more powerful, adding more computers to

(26:47):
their networks. But if it ever gets you know, more
expensive to operate to mine then you get from your cryptocurrency.
Let's say that you factor in like you figure out,
I'm actually losing money in the long run in this
process because of how much I have to spend to
keep pace with everybody else and in order to pay
my power bill. If it gets too expensive, then more

(27:10):
and more people will drop out of the system, and
the total computational power connected to the system will also drop.
That can sometimes mean that it starts to take longer
to solve the problem than ten minutes. Well again, the
system says, all right, well, now it's taking you know,
fourteen minutes to solve a block instead of ten. I'm

(27:31):
going to make the problems a little easier. So it's
constantly tweaking itself. Well, not constantly, it's regularly tweaking itself
to meet the abilities of the overall system in order
to keep that time to solve more or less consistent. However,

(27:51):
one of the downsides of this is that it that
the system totally doesn't care how much computational power is
being used. Right, It doesn't care if if coal power
plants all over the world are firing up more than
ever just in order to fuel bitcoin mining operations. Uh,

(28:12):
the the algorithm is just concerned with trying to keep
that time to solve pretty consistent. So that is another potential,
you know, downfall of proof of work systems. But let's
talk about the probably you know, some of the best
known cryptocurrencies that use proof of work, and of course
the top of that list is Bitcoin. I would argue

(28:33):
Bitcoin really was responsible for putting cryptocurrency on the map.
Not only was it famous in that paper, but it
remains like the best known of all the cryptocurrencies that
have come out since Bitcoin debut. But there's also Ethereum
one point oh, that's a proof of work cryptocurrency. We'll
talk about Ethereum two point oh in uh just a

(28:54):
short while. And also dog coin does cooin is another
proof of work crypto currency, and there are plenty of
other famous ones bitcoins. The heavy hitter Ethereum has really
emerged as a popular cryptocurrency, and a lot of other
technologies like n f t s actually rely on Ethereum's blockchain.
So ethereums blockchain allows for other innovations to exist on

(29:17):
top of it. In addition to ethereum cryptocurrency, which is
called ether dose coins started off as a joke, and
despite a few attempts to turn it into a legit currency,
is still mostly a joke that a lot of people
poured a lot of money into. I'm not saying people
didn't make money off doge coin. I'm saying that a
lot of people made money off doge coin by convincing

(29:40):
other people to get into doge coin, thus potentially artificially
driving up the value of the cryptocurrency. That's another thing
I should really address very quickly. A lot of this
stuff we'll talk about talks about the value of cryptocurrency.
Cryptocurrency doesn't necessarily have an innate value to it because
it's not tied to like a centralized financial institution. Its

(30:03):
value is dictated by the market, like the system itself.
It's it's kind of self supportive that way. So we
see a lot of these cryptocurrencies have pretty volatile values.
They go up and down dramatically sometimes sometimes why they
order of tens of thousands of dollars. In the case

(30:23):
of bitcoin, you know, we saw it nearly at sixty
dollars per bitcoin, then down to around twenty thousand dollars.
Now it's back up to almost sixty thousand. Again, that's
all within the span of a year. It's crazy anyway. Um, yeah,
it's that that's a separate entity that doesn't necessarily have

(30:44):
anything to do with the tech. So now we're gonna
talk about proof of steak. Uh. And in order to
understand that, we have to talk about what proof of
steak and proof of work both need to do. So again,
we've got our blockchain, we have to have a way
to verify transactions. We need some sort of system in
place that says person X sent person why some cryptocurrency

(31:08):
equaling z amount? Right, you gotta have some record of this. Otherwise,
because it's all digital, people could just try and keep
spending the same digital unit of currency more than once,
or they might you know, quote unquote give themselves a
billion dollars by copying a digital unit. So you have
to have some method to keep order in this system,

(31:29):
or else the system just doesn't work. So there has
to be a process by which you verify and publish
these transactions. Uh. In the case of cryptocurrencies and blockchains,
that's in a centralized ledger, not a central a decentralized ledger. Actually,
because every node has access to seeing the ledger um.

(31:51):
You also need to have some means of circulating new
units of currency into the system. You have to have
some way of mining. In other words, So let's talk
about bitcoin again for a second. Bitcoin launched with a
cap on how many bitcoin there will ever be. Ever,
that cap is twenty one million bitcoin, and Nakamoto did

(32:12):
not release all twenty one million units of bitcoin into
circulation at once. Instead, bitcoin stands as a reward for
verifying bitcoin transactions. It's an incentive for people to dedicate
computational power to provide proof of work and verify transactions.
So it's a very delicate ecosystem designed to perpetuate the

(32:35):
usefulness of bitcoin. So every time a computer solves a block,
it gets a bitcoin reward, but the amount of that
reward decreases by half every four years or so. So
back in two thousand nine, in the early days of bitcoin,
the reward to minor block was fifty bitcoin. Well by

(32:57):
two thousand twelve, that came down to twenty five bitcoin.
By two thousand and sixteen we got down to twelve
and a half bitcoin. Now we're at six point to
five bitcoin. In four it will drop again to three
point one to five bitcoin and so on. Also, the
total number of unmined bitcoin has dropped, right like, over time,

(33:20):
we have mined more and more of the total bitcoin.
Today we're looking at around two million bitcoin that have
yet to be mined. So that means that almost nineteen
million bitcoin are already out in circulation, some of which
are just lost forever because they got stored in you know,
like uh hard drive that got inaccessible. So not all

(33:43):
of the those nearly nineteen million bitcoin are still valid
these days. They I mean, they exist, they still have value,
just no one can get to them. Well, you might
wonder what happens when all the bitcoins that can be
mined have been mined. Now, due to the way bitcoin
does rounding, it actually means we're not going to see

(34:06):
all twenty one million bitcoins intercirculation. There will be a
small amount, a very very small amount that just remains
unmined because the math just doesn't work out. There are
a lot of unknown variables about this that we have
to take into account. Uh, and so it means that
ultimately nobody really knows. But one thing that we, you know,

(34:28):
have to think about is that we don't know what
the value of bitcoin is going to be by the
time we get to the point where the final bitcoins
are going to be mined. Because the number awarded drops
by every four years, we see the total unmined number
of bitcoin dropping less during each four year period. So
early on we saw that the total number dropped quickly

(34:51):
because folks were getting fifty bitcoin per block, hundred forty
four blocks per day, it's going down pretty fast. These days,
the number drops more slowly because it's six point to
five bitcoins per block now. It will be even slower
after four and so on. So the schedule means that
while we've mined around nine percent of all bitcoins already,

(35:14):
we won't have hit the bottom until that's the year
where we will essentially have all the bitcoins out. So
unless the value for bitcoin really goes bonkers, and it might,
then we should see more folks drop off of bitcoin
mining in several years, because again the returns will be lower,

(35:36):
like if if it's you know, if it holds steady,
if the value holds steady, but you're getting fewer bitcoins
than eventually you start to hit that that negative return
on investment where you're losing money to go so hard
trying to get bitcoin. Then if it costs more to
operate your computer, then you're getting back in bitcoins thence

(35:56):
and that loss you're gonna stop, and once all the
bitcoin er in circulation, there are no more coins to mine.
So verifying a block of transactions could generate payouts the
form of transaction fees, and that means there will still
be at least an incentive for nodes to participate in
the bitcoin system, but the transaction fees might be really

(36:20):
modest compared to what we're seeing in mining, and honestly,
no one's really sure how this is all going to
shake out in the long run. But the reason I
even talk about that is because proof of steake has
to solve the same issues proof of work does. In
order for the blockchain to be useful, there has to
be a way to verify transactions. There needs to be

(36:40):
a way to release more cryptocurrency into circulation. You have
to reward people for participating in order to encourage them
to participate in the first place, and unless you're just
dumping everything out at once, there does have to be
a method of, you know, metering out a certain amount
of cryptocurrency every given amount of time. So proof of steak.

(37:04):
The phrase gives you a bit of a hint about
what's going on. The people, or rather you know, the nodes,
the computer systems that are participating within this cryptocurrency block chain. Uh,
the ones that are responsible for verifying a block of
transactions have to post a stake of cryptocurrency that they

(37:24):
possess within that system. Something of that native cryptocurrency has
to go into a pool of steaks, so they have
to contribute some minimum amount in order to be part
of the verification process. Now, in proof of work approaches,
we talk about systems being miners, right, they are mining cryptocurrency.

(37:46):
In proof of steak systems, we talk about validators. These
are people who have systems that validate or verify a transaction,
and then the other stakeholders validate that verified block so
that joins a chain. And other words, they're checking the
work of the primary validator. They're saying, is this a

(38:07):
valid block in the blockchain? All right, I'm gonna need
to take a quick breath and then we'll come back
with more about proof of steak. Okay, so we've got

(38:27):
this proof of steak approach where in order to participate,
you have to put up a steak of the native cryptocurrency,
and that will allow you to be a validator. Uh.
The systems reward people who have established uh that sufficient
amount of cryptocurrency. And let's use an example, because this

(38:49):
is getting too vague, we'll use ethereum two point oh.
So you remember I said ethereum one point oh is
proof of work. Well, for a few years now, Ethereum
has been laying the groundwork to switch over to a
proof of steak system, and that's going to be Ethereum
two point oh and essentially one point oh is going
to get merged into two point oh. Now, in order

(39:12):
to be a validator in ethereum two's ecosystem, you have
to put up a stake of at least thirty to ether.
Ether is the unit of currency within Ethereum. Now at
the moment, one unit of ether, so one ether is
equivalent to nearly three thousand, six hundred bucks, and you

(39:33):
have to have at least thirty two of them, which
is the equivalent of around a hundred fifteen thousand dollars
to be a validator for Ethereum two point oh. So
you probably already see something that's a bit of a
barrier in here but we'll get back to that all right.
So to be part of proof of steak, you have

(39:54):
to stake whatever that minimum amount is, you know, like
the thirty two ether. The system then's the likes a
winning validator from the pool of people who have placed
a stake into this cryptocurrency pool, and the system will
typically choose a winner based on two criteria. How much
cryptocurrency have they staked. So remember thirty two is the minimum,

(40:18):
it's not the maximum. So if you put in way more,
you are increasing your chances of being chosen as the winner.
Two uh to verify or validate a block of transactions.
The other criteria is that how long the steak has
actually been in the pool, So the system rewards people

(40:39):
who have been part of the system longest and who
have the largest steaks in the system. So the more
you stake and the longer you do it, the more
likely you're gonna get chosen as the winner. When you
are chosen as the winner, then your computer goes through
the process of validating the transactions and upon your system
saying all right, I figured it out. I've got this lution.

(41:00):
Then the other validators that have put a stake into
this cryptocurrency pool will test your solution during the atestation phase,
and once enough validators have verified that your solution is correct,
that block joins the blockchain. All participating validators then get
paid out a reward in cryptocurrency. So in the ethereum case,

(41:23):
they would get some ethereum, and the amount given to
each validator would be you know, proportional in some regard
to the size of the steak that they put in.
So if you put in a really big steak, you'll
get a bigger percentage of the reward each time. Now,
you don't have to be a winner to get a reward,

(41:44):
you just have to participate in the process. You have
to be an active node in the ethereum system. In
this case, however, this does mean that in order to
be a participant, you first have to meet that minimum criteria.
And this is a really steep cost, and it's so
much though that it's effectively a barrier. I mean, it's
a system that disproportionately rewards the people who already have

(42:08):
a substantial ownership in that system, or if you want
to think of it in another way, the rich get richer,
and they get richer because they're already rich. If you're
not a hundred gees deep in ether, you're out of luck.
You don't have enough to post a thirty two ether
steak and become a validator. It becomes a bit of

(42:30):
a catch twenty two because you can't afford to join
the validators without making more ether, and you're not going
to make more ether without being a validator and getting
those rewards. Now, you could always purchase more ether and
thus build up your ether over time, or you could
join a steak pool. This is something that is sometimes

(42:50):
called delegating. This is where you join a group of
folks who are all pooling smaller amounts of cryptocurrency that
collectively meet the requirements of a full steak in the
validation process. So essentially, there's a leader who's who's node
is acting as the focal point for all this. Everyone

(43:11):
else pours their smaller cryptocurrency investments into a pool the
again collectively gets staked for this one node. The node
ends up receiving rewards based upon the size and of
that steak, and then divvies it up amongst the people
who invested in that pool. Essentially, it's the same thing

(43:34):
as the general proof of steak approach, but on a
smaller level. Now, that does tend to be one of
the big criticisms for proof of steak, that it's something
that prevents a lot of people from meaningful participation in
the system, and it's rewarding people who are already financially
well off because that's how the system works. While cryptocurrencies

(43:55):
are decentralized and that they don't rely on a single
financial authority, they can somewhat functionally become centralized, kind of
like by a cabal that has a large enough steak
in the stuff and everybody else is just kind of
on the periphery. Uh. It's also possible to have your
steak reduced in these systems. So let's say that you

(44:17):
were picked as a winner to verify a block of
transactions and you end up validating a bad block of transactions,
and then others during the aida station phase they test
your solution and they realize this, there's something wrong here. Well,
you could get dinged for that, and you can see
the system actually take away part of your steak that

(44:39):
you had put up into the cryptocurrency pool. You might
even fall below the amount needed to be a validator
and you would have to add in extra cryptocurrency to
bring you back up to the minimum, so you could
get really hurt that way. Or let's say your validation
node hasn't met the minimum requirement for active hours on
the system. Now remember these validate as are necessary to

(45:02):
make sure that transactions actually get verified or else the
whole system just doesn't work as a financial system. So
if someone's not pulling their weight, then they might also
see their steake get dinged as a result. Now that
being said, proof of steake does have some pretty big
advantages as well. One of those is that proof of
steake approach generally speaking, has a lower resource requirement than

(45:25):
proof of work, or at least lower resource requirements than
proof of work systems that are as active as say bitcoins.
When a proof of work cryptocurrencies value increases, as I
said earlier, it incentivizes people to mind the cryptocurrency, so
the overall computational power in that system goes up, as
do the resource requirements to run those systems. But proof

(45:49):
of stake doesn't rely on computer systems racing against each
other to come up with the right answers, so you
don't see this cycle of escalation, and thus you don't
see the need for increased amounts of processing power being
thrown at the system. Now, does this mean that a
proof of stake system will always be less resource hungry

(46:10):
than a proof of work Not exactly, because it actually depends.
Like if you have a proof of work cryptocurrency, but
the cryptocurrency is practically worthless, like it's fractions of a
penny per unit, chances are there won't actually be that
many people who are bothering to mine that cryptocurrency, because
it means they'd spend more on the electricity they were

(46:31):
using than they were making as a minor. So that
leads to fewer people participating, and the resource demand for
that particular system remains relatively low. If you have a
really healthy proof of stake system, you might have lots
of validators who are actively participating in that system, and
so the resource demand could be greater. So really, like

(46:53):
I said, it just depends upon the situation. But it's
pretty safe to say that if you had two more
or us equal systems, like the cryptocurrency was more or
less the same value, and one of them was running
on a proof of work system and the other one
was running on a proof of steak system. The proof
of steak one would likely require less processing power and

(47:15):
fewer resources to run. So proof of steak is arguably
the best known alternative to proof of work cryptocurrency systems.
But there are others. For example, there's proof of burn.
And it sounds like I'm making that up, but I'm
not so. Proof of burn was proposed as a way

(47:36):
of achieving the same thing as proof of work, but
without the escalating increase of resources and energy requirements. But
this one makes my head hurt, and it makes me
realize that I'm never truly going to understand cryptocurrency, blockchain,
or for that matter, finance. All right, So, in a

(47:58):
proof of burn system are diticipants who wish to have
the opportunity to verify the next block. In other words,
they want to be the one to mine the next
block and get the reward for it. They must first
burn virtual currency. That virtual currency might be the native
cryptocurrency of the system itself, or it might be some

(48:22):
other virtual currency, depending on the system. Some systems allow
for either. So what does burning actually mean? I mean,
these are all bits of digital information. What is there
to burn? Well, in this case, burning means sending virtual
currency to an address that is verified to be an
unspindable account. In other words, it can accept currency, but

(48:47):
currency is never gonna leave it. It will never release
that currency again. So it's kind of like walking up
to a bottomless pit and just chucking some cash into
that bottomless pit, and in return for doing that, the
system says, all right, you will be considered for the
job of writing the next block on the block chain

(49:07):
and thus getting a reward. The more money you chuck
into the bottomless pit, the greater the chance that the
system is going to choose you. You could. You know,
system is saying, hey, look how dedicated this person is.
They're dumping their entire life savings into a bottomless pit.
Let's pick them now. Obviously, you would never want to
spend more money than you would potentially earn back by

(49:30):
writing more blocks to the chain. But you could be
playing the long game. You could be making a big
investment in thus burning a lot of virtual currency early on,
hoping that this will eventually pay out over the long run,
assuming that the currency continues to hold its value or
increase its value, and that you you get picked multiple

(49:51):
times to build the next block in the blockchain. But
when I read up on how the proof of burned
concept creates a system that's more agile, that just confuses me.
I had a wall that represents the limit of my understanding,
and trust me, guys, despite having read multiple articles, I

(50:12):
have not found a crack in that wall of ignorance.
Yet my ignorance has more than met the challenge of
my research. I've got a couple more alternatives to proof
of work and proof of steak to talk about. Before
I get to those, let's take one last break. All right,

(50:36):
We've talked about proof of work, proof of steak, and
proof of burn but there's also proof of capacity. Now.
In this system, participants vie to be the ones to
mind the next block by providing hard drive space to
the system. So the more hard drive space you provide,
the better the chances are that you're going to be
the one picked to mind the next block and thus

(50:58):
get the reward. This system stores data in bunches called plots,
which get deposited on the hard drive space that participants
are volunteering to the system. So the more plots that
you have on your hard drive, the better the chances
you'll get selected to mine the next block. So again,

(51:18):
providing more hard drive space gives you more opportunity to
house plots. The more plots you have, the better chance
you have to get the next round of rewards. But
this approach kind of does with hard drive space what
bitcoin used to do with graphics cards. You know, back
in the day, graphics cards were seen as being absolutely

(51:41):
instrumental to a successful bitcoin mining operation, and it made
it really hard to get hold of graphics cards as
they came out because bitcoin miners were buying them up
and driving the prices way way way up. These days,
graphics cards don't measure up to the requirements of bitcoin
miners really, at least not serious bitcoin miners. They've moved

(52:03):
on to other systems. Uh. Graphics cards can still be
hard to get sometimes though, and occasionally you do have
some bitcoin miners who are still depending on them. They
just have very little chance of winning in a proof
of work system. All right, then we've got proof of
elapsed time. This one comes courtesy of Intel, as the

(52:23):
company known for making processors and such that Intel like
Intel inside Intel, well, they created this algorithm which uses
kind of a lottery based system. So all participating nodes
within this blockchain system have an equal chance of winning.
So the more nodes that participate, the lower your odds

(52:46):
are that you will win. Right Like, it's like one
of those sweepstakes where they say, what are the odds
of winning? Well, the odds of winning depend upon how
many entries we get. If we get two entries, your
odds of winning. But if we get a billion entries,
it's going to be a different story, kind of similar.
So the algorithm in this case creates a random amount

(53:09):
of time for each node in the system. So each
node is assigned a random amount of time to quote
unquote go to sleep. Essentially, it's saying, this is how
long you have to wait before you indicate that you're
ready to validate a block of transactions. And like I said,
it's randomly generated for every single node. So one node

(53:33):
might get the equivalent of you have to wait five minutes,
and another node might be told you have to wait
ten minutes, and the next node might be told you
need to wait two minutes, and then all the nodes
go to sleep, and then the first node that wakes up,
So essentially the first node that gets the node that
gets the shortest amount of time to wait wins. But

(53:55):
this is again randomly generated, so it is like a lottery.
It's essentially the same thing as being given a random
number and then you have a drawing from a bunch
of random numbers and if yours matches, then you win.
Our processors go into sleep mode, so that means that
they're not actually actively processing on behalf of this system,

(54:20):
and that means that they're actually consuming slightly less power
than a proof of work system. That was the whole
reason behind the creation of proof of elapsed time algorithms.
It's that it does something similar to proof of work,
but you don't actually have all these processors dedicating all
their their resources towards solving difficult math problems. So it

(54:45):
does have a lower energy requirement than proof of work systems.
And um, yeah, I'm just giving you an overview of
all these concepts. Like I'm not diving into super deep detail.
Even as long as this episode is and I get it,
it's a long one. This is still scratching just the
barest of surfaces as far as these algorithms and UH

(55:08):
and financial systems go. And again, like once I started
diving down a little bit further, I get well beyond
my understanding, including how different approaches handle stuff like if
a bad actor is determined to try and leverage the
system for their own financial gain. So, for example, on
that with proof of work, you can have something called

(55:29):
at attack. This is when you get a group of
cryptocurrency investors who represent more than fifty of all hash
mining capability. You can think of it as more than
of all computational power dedicated to mining. If you were
to get or more of the mining capability in bitcoin

(55:52):
to coordinate, you could potentially manipulate the system. You could
potentially create verifications of trans actions that break that that
last block. You couldn't go back in time and change
stuff that's still immutable, but for a current block of transactions,
you could erase a transaction that you did so that

(56:14):
you would once again have the bitcoin that you've already spent.
You could also monopolize the mining of the blocks, like
you could prevent anyone who's outside of that from successfully
mining a block and thus end up getting all of
the reward bitcoin for your group. This is a threat

(56:37):
that has happened, like we've actually seen these play out
in some smaller cryptocurrency markets. Uh. Once it gets to
a certain size, It's very hard to coordinate on that
kind of level. There's just there are too many players
that are too too involved in their own self interests
to be able to do that. But it has happened
before with some of the smaller cryptocurrency markets, you know.

(56:59):
It's It's also something that's even harder to do if
you've got a proof of steak model, because in order
to have that kind of level of influence with proof
of steak, you have to put forward an even larger steak.
Same with like the proof of burn model, right, it
means that your initial expense in order to have that

(57:21):
leverage is so high that it's not worth the payout.
So there are different ways to go about trying to
stop bad actors from tipping the system. But again, once
you get beyond these early explanations, it starts to get
to a level where I'm like scratching my head and

(57:42):
left wondering what's for dinner because it's the only thought
I can even manage to deal with at that point.
I hope you've found this interesting and that you learned
a bit about proof of steak, the big alternative to
proof of work. We will have to see how these
various philosophies play out over time and whether or not

(58:03):
they are successful. It's still early days. Honestly, I'm still
really curious what happens in the long term with bitcoin,
Like we might see the value of bitcoin continue to
go up. There are those who argue that it might
be you know, two dollars per bitcoin before too long. Um,

(58:24):
maybe that will happen. It would be scary to see
in many ways, because again, that volatility is something that
worries me in the long run. Also, I should point
out that a lot of people who are real evangelists
for cryptocurrency, I get the sense, and maybe this isn't
even conscious, but I get the sense that part of

(58:46):
their enthusiasm, or a great deal of their enthusiasm, is
that if they get more people on board with cryptocurrency,
cryptocurrency values generally start to increase. They're they're becomes this
sort of speculation where more people start to invest and
that drives the value of the cryptocurrency up. So if

(59:08):
you already have a steak in cryptocurrency, it looks like
there's kind of an incentive to get more people on board,
and that feeds into this sort of evangelical approach to
talking about cryptocurrency, and that strikes me as a bit
i key, because when I look at the proof of

(59:29):
steak approach, for example, I know I am never going
to have a sufficient number of cryptocurrency units in whatever
system to be able to participate in proof of steak.
But what I might be doing is by getting involved
in one of these I might help drive the value
of the currency up, and so someone who already has

(59:49):
a significant investment sees that investment increase. I'm essentially helping
someone else get even more wealthy. And while I don't
mind helping other p bowld um, I'd rather help the
people who aren't wealthy at all rather than help people
who are wealthy get wealthier. I I would just like

(01:00:10):
to direct that that sort of humanitarian impulse towards folks
where it would make a bigger difference in their lives.
But that's just me. If you have suggestions for topics
I should cover in future episodes of tech Stuff, I
welcome you to reach out to me on Twitter and
let me know about them. The handle we use there
is text stuff h s W and I'll talk to

(01:00:33):
you again really soon. Tex Stuff is an I heart
radio production. For more podcasts from My heart Radio, visit
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listen to your favorite shows.