Cointelegraph is following the development of an entirely new blockchain from the beginnings to the mainnet and beyond through its Inside the Blockchain Developer’s Mind series. In earlier parts, Andrew Levine of the Koinos Group some of the challenges The team that the team has faced since identifying the main issues it wants to solve and outlines three of the “crises” that are holding back blockchain adoption: Upgradeability, Scalability, and guide. This series focuses on the consensus algorithm: Part 1 is about proof-of-work, part 2 is about proof-of-stake and part 3 is about proof-of-burn.
In this article, I want to use my unique perspective to help the reader gain a deeper understanding of a popular concept in blockchain technology that is also regrettably misunderstood: the consensus algorithm.
In order to gain a deep understanding of this component of a blockchain, I always like to take a step back in these articles and look at the big picture, because the consensus algorithm is only a small part of a much larger system.
Blockchains are a game where players compete to validate transactions by grouping them into blocks that correspond to the transaction blocks created by other players. Cryptography is used to hide the data that would allow these people to cheat. A random process is used to distribute digital tokens to people who play by the rules and produce blocks that match blocks submitted by other people. These blocks are then chained together to create an auditable record of all transactions that have ever occurred on the network.
When people produce new blocks with different transactions we call this a “fork” because the chain now branches off in two different directions. That’s the exact opposite of what we want. The whole value of a blockchain stems from the fact that everyone agrees – and has agreed – which transactions took place and when. Consensus algorithms should therefore resolve forks.
Satoshi’s true innovation
At the end of the day, it boils down to how they will be punished for not doing it. The logs contain rules for the orderly arrangement of transactions, but if there are no consequences for violating these rules, they are ineffective. The real innovation that Satoshi Nakamoto delivered in the Bitcoin (BTC) whitepaper was its elegant use of economic incentives.
Satoshi Nakamoto did not invent the idea of the “electronic coin”. He created an elegant system of combining cryptography with economics to harness electronic coins, now called cryptocurrencies, to use incentives to solve problems that algorithms alone cannot solve. Its design forced people to sacrifice money to mine blocks of transactions. People would have to sacrifice that money over and over again, playing by the rules of the system and trying to organize transactions into blocks that would be accepted by everyone else on the network. If they did this long enough, they would receive a reward in the platform’s currency.
Of course, the blockchain cannot know that money was issued in the form of USD, Yen, or Euros, which is why it used a proxy in the form of pointless work. He made mining blocks unnecessarily difficult, so anyone who successfully mined a block must have spent the money on hardware and the energy to run that hardware. So every block successfully mined is covered by money that has not only been sacrificed for the hardware, but also for the energy required to run that hardware and produce that block. Whenever there are forks, Proof-of-Work (PoW) consensus algorithms are an automated system where the fork behind which most of the work is done is the “right” fork.
Related: Proof-of-stake vs. proof-of-work: differences explained
This means that anyone who continues to produce blocks on this fork will receive rewards and anyone who continues to produce blocks on the other fork will not receive any rewards. Since these people have already spent their money buying hardware and running it to produce blocks, the punishment is easy as they have already been fined monetarily. They’ve spent their money, so if they want to keep producing blocks in the wrong chain, that’s fine. They will not earn rewards and will not get their money back. You will have sacrificed that money for nothing. Your blocks are not accepted by the network and they will not earn tokens.
This proof-of-work system ensures that someone who does not want to abide by the rules, a malicious actor, procures and operates more hardware than everyone else combined, for example through a 51% attack.
That’s the elegance behind proof-of-work. The system cannot work without sacrificing more and more capital. Satoshi combined cryptography and economics to create a transaction book that is so trustworthy that it is trustworthy.
However, there are different consensus algorithms that work in slightly different ways. The most famous of these is the Proof-of-Stake (PoS), which I will discuss in the next article in this series. After that, I will discuss the algorithm that we will be using in koinos, which is unique to a general purpose blockchain.
The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect the views and opinions of Cointelegraph.
Andrew Levine is the CEO of Koinos Group, where he and the former development team behind the Steem blockchain develop blockchain-based solutions that enable people to take ownership and control of their digital selves. Their fundamental product is Koinos, a high performance blockchain built on an entirely new framework and designed to give developers the functionality they need to provide the user experiences necessary to spread blockchain adoption.