A Mixed Cocktail of Blockchain Consensus Rewards

A Mixed Cocktail of Blockchain Consensus Rewards


Have Your Stake & Mine It Too

This article originally appeared on The Capital and yes, in case you were wondering, I gave myself permission to repost it here. :-)


Today we’ll examine critical strengths and weaknesses of the blockchain industry’s most common blockchain consensus mechanisms — Proof-of-Stake (PoS) & Proof-of-Work (PoW).

Each method rewards network supporters with digital assets, but on different terms.

We’ll then discuss a project experimenting with a private, best-of-both-worlds approach to network administration.


Sharing similarities with politicians, creators of blockchain networks must declare their operational philosophy in advance of campaigning for votes. After all, votes are what put people and networks into positions of power.

Although we’re talking politics — thankfully, not at the holiday dinner table — we’re still referring to code. A network’s internal structure influences its growth rate, often pushed along by external support.

While blockchain politicians take a digital form, their puppet masters are real people behind keyboards and touchscreens.

Blockchain consensus is how any given network agrees on the validity of transactions. Like presidential candidates, they represent only one side of a double-edged sword, each with distinct pros and cons.

Today’s blockchain consensus models prefer to ally with one of two parties: Proof-of-Work (Bitcoin Network) and Proof-of-Stake — a mechanism that Cardano and the Ethereum Network aim to implement in 2020.

Plenty of alternative projects run separate models, including Komodo Platform’s Proof-of-Gameplay and IOST’s Proof-of-Believability. But for the sake of this article, we’ll stick with the top dogs: PoS and PoW.

Miners vs. Stakers

Community contributions define the strength and security of any blockchain network. By participating in network activities, individuals are essentially casting votes of support in the hopes of turning a profit.

Now, it’s important to distinguish between what I loosely refer to as “voting” and on-chain governance structures in which coin holders vote to implement network upgrades. That’s another topic for a separate article.

Whether adding computational power to the network as a whole — mining — or operating a transaction-validating wallet — staking — participants vote with resources.

Network supporters spend their time, brainpower, electricity, money, or a combination of everything. Although enthusiastic do-it-alls exist, it’s safe to assume that interest in a specific blockchain project puts you into one of two camps.

Let’s define both so that you can get a better idea of how you align with each model’s specific activities.

Hardware Mining

Bitcoin’s PoW consensus has miners competing to win the right to mint the next block. Miners wielding the strongest, sharpest tools have a better chance to win the block and claim the booty.

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Image courtesy of Reina Kousaka via Unsplash

Like mining for precious metals in the physical world, blockchain miners wade through unwanted material to unearth coveted resources. Specialized hardware frantically solves puzzles, trying to earn the right to validate the next block in a chain.

Performance is measured by hashrate. Blockchain networks using PoW consensus become more resilient to attack as their overall hashrate increases.

But with all that hash power comes both light and dark sides.

PoW Pros

  • Bolsters network security

The Bitcoin Network, for example, is virtually impossible to hack. Because of its global composition and enormous overall hashrate, hack attempts are highly cost-prohibitive.

  • Encourages decentralization

By definition, a blockchain network is a group of distributed nodes. When one node or more nodes fail, others pick up the slack. Plus, there’s no central point of attack for bad actors to exploit.

Mining attracts a certain technophile, and massive profits lie in wait for those with the right strategy.

PoW Cons

  • Power pig

Last I heard, the Bitcoin Network consumes one Sweden’s worth of energy to operate every year. While that’s an astronomical amount of juice, imagine the central banking system’s carbon footprint for a moment.

Think of all those banks and vaults and printing presses and ATMs and vehicles transporting both employees and cash. And let’s not forget the junk mail bombardment. The very system most cryptocurrencies aim to disrupt burns exponentially more power than BTC.

  • Rough starts

To mine is to code. If you’re not comfortable popping open a DOS window and executing commands, stay away from the flames. While this is a boon to those who dream in ones and zeros, the technical barrier is too high for us commoners.

Factor in the long-term cost of electricity and the upfront prices of hardware, and you’ve got a complex operation at work.

Staking (software mining)

While hardware miners claim their rewards by solving complex equations, stakers earn compensation by simply storing digital assets in specific wallets.

You see, crypto held in the proper location converts the wallet into an active node on the network. It’s still a form of mining — and also a vote of confidence in the network’s vision. Why else would anyone put funds into a custom piece of software?

Stakers claim rewards in the form of the network’s native currency, the same funds used to fill the staking wallet. Staking is similar to an interest-bearing bank account. But in this scenario, you’re the bank.

And, like its digital pickaxe-wielding cousin, staking is far from perfect.

PoS Pros

  • Easy setup

Because staking involves running (mostly) user-friendly software, the barrier to entry is far lower than that of hardware operation. In most cases, users merely download a wallet then deposit coins.

  • Universal appeal

If the blockchain industry’s coveted “mass adoption” event is to see the light of day, projects need to step out of the digital shadows. In other words, consumer-friendly products are catalysts for the widespread use of emerging technologies.

While hardware miners are hard at work, software stakers are hardly working.

Everyone loves passive income. It’s only a matter of time before the word on simplistic staking hits the streets. Most people on the face of the planet will agree that a stable, passive source of income is a big win in their world.

PoS Cons

  • Security risks

While staking wallets are transactional validators, they don’t provide the same level of hashrate-powered security as dedicated mining rigs.

But as blockchain developers continue to experiment, staking security continues to evolve. Cold-wallet staking — one of the most secure forms — is growing in popularity.

Cold staking — aka the future of staking — occurs when tiny, third-party storage hardware controls user funds — Ledger and Trezor are two popular examples.

These physical devices — like every other cryptocurrency wallet in existence — don’t actually store your digital assets. Instead, they act as gatekeepers with maps to identify fund locations within blockchain networks.

  • Discourages decentralization

Because stakeholders can buy their way into power, PoS networks are susceptible to bad actors controlling the majority of coins.

Especially within coin-holder voting scenarios, nobody wants those with malicious intent to simply purchase control over a network.

Commingling Rewards

Experimentation lies at the heart of emerging tech. How can we know what’s possible until one of us gets out there and does it? Success is nothing more than the end of a long chain of failures.

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Image courtesy of Michael Olsen via Unsplash

In January of 2019, blockchain project Veil launched with the intent to create an encrypted alternative to the cash economy. After succumbing to a Zerocoin protocol exploit, the project shifted gears and adjusted the network’s reward distribution strategy.

The project still has its sights set on replacing physical cash with a private, programmable equivalent. But how it rewards network participants is getting a makeover.

Although these are near-future iterations, let’s evaluate the project’s strategy of minting new blocks by using a 50/50 blend of PoS and PoW.

Veil Staking

Half of the network’s new blocks will originate within staking wallets. Here’s the reasoning, in the project’s own words:

Staking ensures the Veil network is supported by a high number of active nodes, rewarding those users who are unable or choose not to mine.”

More info is forthcoming, but RingCT tech allows for anonymous staking, which shields crypto transactions from those out to steal your data.

Check how veil staking stacks up against other crypto assets at StakingRewards.com

At the time of writing, Staking Rewards tracks 82 yield-bearing crypto assets. While the site’s ranking system is the opinion of its owners, its staking calculator is especially useful.

Veil Mining

Network founders choose among selections of algorithms to make their blockchains grow. Bitcoin, for example, uses the “SHA-256” hash algorithm. On the other side of the coin is Ethereum.

The industry’s 2nd-largest crypto uses the “SHA-3 “hash algorithm, which means it’s resistant to the same hardware miners deploy on the Bitcoin network.

To mix things up for miners, 50% of new veil coins are PoW mineable through a multi-algorithm menu:

  • GPU — ProgPOW (35%)

ProgPoW is an iteration of PoW that gives a bias to miners using GPU hardware — high-end graphics cards — to dig into the network.

  • CPU — RandomX (10%)

RandomX is a PoW algorithm optimized for general-purpose CPUs.

  • ASIC — SHA-256D (5%)

ASICs — Application Specific Integrated Circuits — offer the smallest percentage because they’re the #1 choice in network takeover hardware.

By limiting their functionality, an attacker can’t secure enough hashrate to overtake the Veil network using ASICs alone.

Left unchecked, ASICs also tend to produce the highest volume of blocks. Hamstringing their potential is a strategic method to keep reward distribution fair for current and future miners.

Summing Up

The 50/50 approach serves enthusiasts from both sides of the block reward spectrum. Those willing to buy and hold are welcome — as are miners hoping to score even higher profit margins.

Hybridization can potentially draw in the type of person who wants to do it all — 3 types of mining while staking in the background. And that level of staunch support is most welcome within any project’s constituency.

Veil’s efforts to strike a balance among its community rewards are interesting, to say the least. However, like all other blockchain ventures before it, only time can reveal how well the network performs.

But the ability to iterate and improve and test is what brings wonder and excitement to blockchain and other emerging technologies, including AI and robotics. Flying taxis are coming sooner than you might expect!

As the sentient beings in the equation, it’s up to humans to program the digital and physical bots ushering us into an age of abundance.

Protecting nascent blockchain networks from attacks while maintaining an equitable reward structure is a difficult balance. By combining the security of PoW with the effortlessness of PoS, Veil caters to anyone interested in privatized digital assets offering passive and active rewards.

And in the blockchain industry, unlike politics, it’s sometimes perfectly acceptable to vote for everyone.

Disclaimer: These words are not intended to be investment or financial advice. Information within this article is opinionated, and for entertainment purposes only. Always conduct your own research before involving yourself with any project — in or out of crypto markets. The author holds 0 $VEIL.

Thanks for reading!

Peace and love,

~BlockchainAuthor


BlockchainAuthor
BlockchainAuthor

Writing for the love of technology.


Blockchain, Crypto, & AI
Blockchain, Crypto, & AI

Emerging tech is poised to disrupt modern society for the better -- the blockchain uprising has only begun. I love tech, and sometimes the feeling is mutual.

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