Rerun: 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.
Pay there and welcome to tech Stuff. I'm your host,
Jonathan Strickland. I'm an executive producer with iHeart Radio. And
how the tech are you? As you can probably tell,
I'm still very much under the weather right now, and

(00:24):
as such I'm not quite in the great condition to
record a full episode, So instead I thought I would
bring you this episode from last year for it's called
proof of steak versus Proof of Work. It's all about
cryptocurrency and blockchain and different ways to verify transactions and
to add blocks to the chain. And I thought it

(00:45):
was a good thing to cover because one of the
big stories for crypto is that you know, ethereum making
this transition from proof of work to proof of steak,
but also just the fact that crypto in general has
had a very bad a year. I mean, you know, economically,
everyone's having a pretty bad year, and crypto is no exception.

(01:06):
It has had massive drops in value already multiple times.
It's always in the tech headlines. So I thought it
would be good to go back over this talk about
the two different approaches and UH and how they work,
and the pros and cons of each, so I hope
you enjoy proof of steake versus proof of work. One

(01:30):
thing that I have covered in the past on this
show is cryptocurrency and blockchain, but I pretty much always
talk about blockchain in terms of proof of work. Cryptocurrencies
and proof of work block chains 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

(01:50):
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 about how bitcoin mining, you know, is really
equivalent to a computer solving a really hard math problem,

(02:11):
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 to that. However, the actual concept of proof
of work predates that of blockchain, or at least of

(02:32):
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 new format.
So the proof of work concept was first described in

(02:52):
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, you know, how do we create a system
of which people can mine a digital currency and validate transactions.

(03:16):
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 it doesn't cost very much to send it out
at a massive scale. If you had to hire people

(03:38):
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 there are a lot of different metrics that are
used in a lot of different time periods we can

(03:59):
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 act on it
in some way. That response rate is abysmally low. According
to a study from the University of California, Berkeley, and
you see San Diego. Back in two thousand and eight,

(04:20):
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 early nineties when the researchers were working
on this concept to discourage spam. But when you've got

(04:43):
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 that is that low. Well, the secret
is to operate on an enormous scale. So, yeah, you're

(05:04):
only getting one hit out of twelve and a half
million people, but you're sending out emails to 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, 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

(05:27):
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 Robocolors style email program that
can plug addresses in and and attach it to this
boiler plate. You can really churn those suckers out. If

(05:51):
you get a bit over zealous, then you might make
authorities upset and they might come at you and want
you to answer some questions. That can be a problem.
We've seen that happen where spam operations got shut down
because you know, local politicians got fed up with it
and started looking into it. But you know, you can

(06:11):
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 of operation go up.
Even if it only went up bild tiny little bit,
that could be enough to wipe out the return on

(06:32):
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 would cost more money
to send out spam. Then you would recoup whenever you
got those rare successful responses, and that would definitely bring

(06:55):
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 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,

(07:20):
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 operating a computer. So let's
say that you decide that all emails will cost a
fraction of assent to spend to to send one. So
if you're gonna send an email, you're gonna get charged,

(07:41):
you know, a fraction of one penny for normal folks
just sending on emails. It would be such a small
charge that you probably 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 of
any That would not be a big deal, right, But

(08:03):
for organizations they are trying to blast out hundreds of
millions of messages, it quickly becomes cost prohibitive. But this
approach comes with 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

(08:24):
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 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

(08:46):
of the paper suggested an alternative. Instead of charging money
outright to send an email, why not build into email
systems a processing requirement, as in a computer process or requirement.
Time someone wants to send an email, their computer must
first solve a mathematical problem. Uh. And in order to

(09:07):
solve a mathematical problem, the computer must expend resources. It's
got to send, spend some of its processing capability on
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,

(09:28):
you technically you're still charging folks to use email, but
the cost is in effort and time, not directly in money,
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

(09:51):
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 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 cannot send us email
until whatever system is handling it verifies that you did

(10:16):
solve the problem. It's kind of like you're not allowed
to go to bed without your parents checking 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

(10:37):
see that it works. So you can think of something
like an algebraic equation and it has an 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

(10:59):
prove that it works well. Their approach was sort of
the same thing, only much more complicated than that. Moreover,
they pointed out that if after you implemented 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

(11:22):
just adjust the difficulty of the problems that they have
to solve before they can send out more emails. You
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.

(11:43):
And once you get to that tipping point, then spammers
will see that the amount of time and 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. Response is this was a
really interesting proposal. Now let's skip ahead to the two thousand's,

(12:06):
like two thousand seven, two thousand eight. It was in
two thousand eight that we first got a 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

(12:29):
another one that again predated bitcoin, and that was blockchain.
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

(12:52):
for a second. In our experience, there is no way
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.

(13:12):
It's that dumb thing where sometimes when you're just trying
to fall asleep, your brain digs up this dumb thing
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.

(13:34):
And really everything that's happened to you afterward in your
life has that dumb thing factored into it at least
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.

(13:56):
The idea is that with a blockchain, you have of
a timeline of processes, and this timeline is also unalterable.
Someone 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.

(14:19):
Because the chain preserves the timeline, everything is built on
what has come before, So changing something from before would
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,

(14:40):
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
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 trans actions are

(15:00):
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 protects the order of processes that once you start
to validate a block of transactions, it is cemented effectively. Now,

(15:23):
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
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

(15:45):
time becomes the true chain. Alright, So blockchains this digital
method of establishing a series of unalterable processes. Where does
proof of work come in? All right, So one thing
that's used a lot in computer science are hash functions.

(16:05):
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
where you have some data and you perform a mathematical
process on that data, and you transform it into different data,

(16:28):
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
and read whatever it was you wrote. That is reversible.
That is encryption and decryption. Hashing is not reversible. You've

(16:52):
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
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

(17:13):
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
an eighty character hash once you apply the function to
the incoming data. That means your result will have eighty characters.

(17:33):
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
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

(17:56):
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
the chain. But it doesn't just involve the hash of
that block or the hashing of that block. The hash
also incorporates the hash from the previous block of verified transactions,

(18:21):
the one that came right before. This is where we
have that link that ultimately goes all the way back
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

(18:42):
number one all the way down to the last block
in the chain. All right, so the bitcoin system generates
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

(19:05):
to figure out how the system generated this specific hash.
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

(19:26):
the hash function of the algorithm. You're you're trying to
figure out what number was it that made this happen, Essentially,
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

(19:48):
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
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

(20:10):
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 it doesn't
necessarily 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

(20:32):
within a proof of work blockchain system like Bitcoin, and
the first computer to guess it correctly wins. Essentially, other
computers in the system can verify that the guests is
correct because once you have a guess, then you can
plug that into the hashing formula and find out if

(20:55):
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 units for bitcoin. Right now, that amount is
six point to five bitcoins per block. Now, as I
record this episode, the value of bitcoin is almost fifty

(21:18):
seven thousand dollars so a six point to five reward
is equal to nearly three hundred fifty five thousand bucks,
and there are 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

(21:39):
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 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

(22:00):
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, 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

(22:21):
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 how bitcoin mining leads to

(22:42):
the 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 getting back is greater than

(23:05):
the investment you've put forward to try and get the bitcoin,
it's profit. 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. If I'm if I spend half a

(23:26):
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 making profit. So that's

(23:49):
why it's so um tempting to get into the bitcoin
mining is that? Yeah? At this point, being a serious
mining operation means you to put in a huge amount
of money because there are huge players out there already
that are running ridiculously powerful computer networks, sometimes co located

(24:11):
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 that you can get

(24:31):
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.

(24:53):
And it also means that you 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 send to these systems

(25:18):
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 an enormous

(25:40):
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 and
those renewable sources as easily, for example, solar at night,

(26:04):
or that you 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 the chain, so

(26:26):
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 gonna come down. Right for
a given difficulty of mathematical problem, if you're throwing more

(26:50):
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 odd aumatic
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, thus increasing

(27:15):
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 as the return

(27:37):
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 their networks.

(27:58):
But if it ever gets you know, more expensive to
operate to mine than 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 and

(28:20):
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

(28:41):
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.
It However, one of the downsides of this is that

(29:03):
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,
the the algorithm is just concerned with trying to keep

(29:24):
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
Bitcoin really was responsible for putting cryptocurrency on the map.

(29:47):
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 debuted. 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
short while, and also doge coin does coin is another

(30:08):
proof of work cryptocurrency, 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 Ethereum's blockchain allows for other innovations to exist on
top of it. In addition to Ethereum, cryptocurrency, which is

(30:31):
called ether does 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 dog coin. I'm saying that a
lot of people made money off doge coin by convincing
other people to get into doge coin, thus potentially artificially

(30:53):
driving up the value of the cryptocurrency. That's another thing
I should really address very quickly. A lot of this
off 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
value is dictated by the market, like the system itself.

(31:17):
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
of bitcoin, you know, we saw it nearly at sixty
dollars per bitcoin, then down to around twenty thousand dollars.

(31:40):
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
anything to do with the tech. So now we're gonna
talk about proof of steak, and in order to understand that,

(32:01):
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 equaling
z amount. Right, You've gotta have some record of this. Otherwise,

(32:23):
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,
or else the system just doesn't work. So there has
to be a process by which you verify and publish

(32:46):
these transactions. Uh. In the case of cryptocurrencies and block chains,
that's in a centralized ledger, not a central a decentralized
ledger actually, because every node has access to seeing the ledger. Um.
You also need to have some means of circulating new
units of currency into the system. You have to have

(33:06):
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
not release all twenty one million units of bitcoin into
circulation at once. Instead, bitcoin stands as a reward for

(33:31):
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
usefulness of bitcoin. So every time a computer solves a block,
it gets a bitcoin reward, but the amount of that

(33:53):
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
two thousand twelve that came down to twenty five bitcoin.
By two thousand sixteen we got down to twelve and
a half bitcoin. Now we're at six point to five bitcoin.

(34:17):
In twenty 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,
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

(34:41):
bitcoin are already out in circulation, some of which are
just lost forever because they got stored in you know,
like a hard drive that got inaccessible. So not all
that those nearly nineteen million bitcoin are still valid these days.
They I mean they exist, is they still have value,

(35:01):
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
all twenty one million bitcoins inter circulation. There will be
a small amount, a very very small amount that just

(35:23):
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, and so it means that
ultimately nobody really knows. But one thing that we, you know,
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

(35:44):
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
because folks were getting fifty bitcoin per block UDT four

(36:04):
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 of all bitcoins already, we

(36:24):
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,

(36:46):
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 a bitcoin, and if it costs more
to operate your computer, then you're getting back in bitcoins
thence and that loss you're gonna stop. And once all

(37:09):
the bitcoin or in circulation, there are no more coins
to mine, so verifying a block of transactions could generate
payouts in 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 modest compared to what we're seeing in mining,

(37:33):
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 a way to release more cryptocurrency into circulation. You

(37:53):
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 the phrase gives you a bit of a

(38:15):
hint about what's going on. The people, or rather, you know,
the nodes, the computer systems that are participating within this
cryptocurrency blockchain. Uh, the ones that are responsible for verifying
a block of transactions have to post a stake of
cryptocurrency that they possess within that system, Something of that

(38:37):
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. In proof of steak systems, we

(38:57):
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 the chain. In
other words, they're checking the work of the primary validator.
They're saying, is this a valid block in the blockchain?

(39:20):
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 this proof of steak approach where in
order to participate, you have to put up a steak

(39:43):
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 is getting too vague, will use
Ethereum two point oh. So you remember I said ethereum

(40:04):
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 to be a validator in ethereum two's ecosystem,

(40:25):
you have to put up a stake of at least
thirty two 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 have to have at least thirty two of them,

(40:46):
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 to stake whatever that minimum amount is, you know,

(41:06):
like the thirty two ether. The system then selects a
winning validator from the pool of people who have placed
a steak 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,

(41:27):
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

(41:49):
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 going to 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

(42:09):
the solution. 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.

(42:31):
So in the ethereum case, 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

(42:52):
winner to get a reward, you just have to participate
in the process. You have to be an active node
in the ethereum system in this as 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

(43:15):
rewards the people who already have 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

(43:37):
become a validator. It becomes a bit of 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.

(43:58):
This is something that is sometimes 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

(44:18):
focal point for all this. Everyone 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,

(44:42):
it's the same thing 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.

(45:04):
While cryptocurrencies are decentralized and that they don't rely on
a single financial authority, they can somewhat functionally become centralized,
kind of like by a caball that has 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

(45:26):
you 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 aid to station
phase they test your solution and they realize this, there's
something wrong here. Well, you can get dinged for that,
and you can see the system actually take away part

(45:48):
of your steak that 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 validators are

(46:10):
necessary to 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 steak get dinged as a result. Now
that being said, proof of steak does have some pretty
big advantages as well. One of those is that proof

(46:30):
of steak approach, generally speaking, has a lower resource requirement
than 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,

(46:51):
so the overall computational power in that system goes up,
as do the resource requirements to run those systems. But
proof 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 this need for increased amounts of processing power

(47:13):
being thrown at the system. Now, does this mean that
a proof of stake system will always be less resource
hungry 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

(47:37):
because it means they've spend more on the electricity they
were 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,

(47:59):
and so the resource demand could be greater. So really,
like I said, it just depends upon the situation. But
it's pretty safe to say that if you had two
more or less 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

(48:20):
proof of steak one would likely require less processing power
and 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

(48:41):
not so. Proof of burn was proposed as a way
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,

(49:04):
or for that matter, finance. All right, So, in a
proof of burned system, participants 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

(49:28):
of the system itself, or it might be some 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

(49:49):
address that is verified to be an unspindable account. In
other words, it can accept currency, but currency is never
gonna leave it. It will never a 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,

(50:12):
you will be considered for the job of writing the
next block on the block chain 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

(50:35):
would never want to spend more money than you would
potentially earn back by writing more blocks to the chain.
But you could be playing the long game. You could
be making a big investment and thus burning a lot
of virtual currency early on, hoping that this will eventually
pay out over the long run, assuming that the currency

(50:56):
continues to hold its value or increase its value, and
that you you get picked multiple times to build the
next block in the blockchain. But when I read up
on how the proof of burn 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,

(51:18):
despite having read multiple articles, I 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, we've talked about

(51:46):
proof of work, proof of steak, and proof of burn,
but there's also proof of capacity. Now. In this system,
participants vi 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 get the reward.

(52:09):
The 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 mind the next block. So again, providing more
hard drive space gives you more opportunity to house plots.

(52:33):
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 instrumental to a
successful bitcoin mining operation, and it made it really hard

(52:56):
to get hold of graphics cards as they came out
because bitcoin miners are 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 on to other systems. Uh,
graphics cards can still be hard to get sometimes though,

(53:17):
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 company known for making processors
and such that Intel like Intel inside Intel, Well, they

(53:41):
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 are that you will win. Right Like,
It's like one of those sweepstakes where they say what

(54:01):
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 are 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 of time for each node in the system.

(54:22):
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 might get the equivalent of you have

(54:44):
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 winds. But this is again randomly generated,

(55:07):
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, and that means that

(55:32):
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 of their their resources
towards solving difficult math problems. So it does have a

(55:56):
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 and

(56:18):
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 at attack.

(56:41):
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 my aiming capability in bitcoin to coordinate,

(57:03):
you could potentially manipulate the system. You could potentially create
verifications of transactions 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 you would once

(57:25):
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 that has happened,

(57:48):
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 too too
involved in their own self interest to be able to
do that, but it has happened before with some of
the smaller cryptocurrency markets, you know. It's It's also something

(58:11):
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 leverage is so

(58:32):
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 left wondering what's

(58:53):
for dinner because it's the only thought I can even
manage to deal with at that point. I hope you
found this interesting and that you learned a bit about
proof of stake, the big alternative to proof of work.
We will have to see how these various philosophies play
out over time and whether or not they are successful.

(59:14):
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, maybe that
will happen. It would be scary to see in many ways,

(59:39):
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 their enthusiasm, or
a great deal of their enthusiasm, is that if they

(01:00:00):
get more people on board with cryptocurrency, cryptocurrency values generally
start to increase. There there becomes this sort of speculation
where more people start to invest and that drives the
value of the cryptocurrency up. So if you already have
a steak in cryptocurrency, it looks like there's kind of

(01:00:22):
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 ikey, because when
I look at the proof of steak approach, for example,
I know I am never going to have a sufficient

(01:00:44):
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 a signal nificant investment
sees that investment increase. I'm essentially helping someone else get

(01:01:05):
even more wealthy. And while I don't mind helping other people, um,
I'd rather help the people who aren't wealthy at all
rather than help people who are wealthy get wealthier. I
would just like to direct that that sort of humanitarian
impulse towards folks where it would make a bigger difference

(01:01:26):
in their lives. But that's just me, and that was
proof of state versus proof of work. If you're curious,
that episode originally published October eleventh, two thousand twenty one,
so just last year. If you have suggestions for topics
actually cover in future episodes of Text Stuff, you just
want to reach out, you can do that in a
couple different ways. One way is to go to the

(01:01:47):
I Heart radio app, which is free to download and use,
and you navigate over to the tech Stuff page there's
little microphone icon that you can click on and leave
a voice message up to thirty seconds in length. That's
one way you can reach out to me. Another is
you can leave me a message on Twitter. The handle
is text stuff H s W and I'll talk to
you again really soon Y. Text Stuff is an I

(01:02:16):
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