Every blockchain has something called a “consensus protocol.” This phrase is handy for making peoples’ eyes glaze over in casual conversation! However, the concept is really important.
We are all accustomed to the workings of centralized institutions - like banks, universities, or Twitter - where these authorities determine what is true and what happens next. How much money is in your account? What credits do you need to earn your degree? Whose tweets will appear in your feed? In each case, there is a set of “if-then” type business logic that governs the flow of money, academic achievement, and viral tweets. The rules might be spelled out in a banking user agreement, or buried in a proprietary Twitter algorithm. Either way, these rules govern our interactions with these entities.
Blockchains are inherently decentralized. They may start with one person’s big idea, but when the idea comes alive, there is no longer a central actor running the show and confirming that business logic is being followed and events are legitimate. Thus the need for a set of rules that allow the whole network to check each other’s work and agree that transactions are correct. This important set of rules is called a consensus protocol.
Different blockchain’s have different consensus protocols. Broadly, they tend to be one of two main types: Proof-of-Work(POW) or Proof-of-Stake(POS). Cardano is in the Proof-of-Stake camp, and the name of its particular POS protocol is “Ouroboros.” This chapter of the book is all about Ouroboros and all the pieces that comprise it.
Proof of Stake Explained
A good consensus protocol allows diverse, decentralized network nodes to take turns validating and corroborating network transactions, without allowing any single actor or small group to ever control more than 50% of the network. This validating action is called “minting a block”, but it really just means processing and sealing a set of recent network transactions and adding it to the ledger - the blockchain.
Most Proof-of-Work blockchains distribute the work by pitting supercomputers against each other to solve math puzzles, awarding validating rights (and monetary rewards) to the first node to solve the puzzle.
Proof-of-Stake protocols mete out validating rights according to how much currency is pledged/staked to a particular node. Nodes with more currency staked will get picked more often, and will get rewarded for their work. The money put up by a node operator is called their “Pledge.” Individuals who don’t want to set up and run a node themselves can participate and get rewarded too by designating a node to represent their money - called a “Stake”. A node operator can run a private node with only his own money, but since this system of combining assets is so typical, these nodes are called “Pools,” or “Stake Pools.” A pool owner’s pledge plus the combined stake of any delegators equals the total pool size.
Bigger pools will get more chances to participate and more rewards for the owner and the delegators – but only to a certain point. When a pool exceeds the “Saturation” point, the rewards start to diminish. Thus, everyone is incentivized to participate in a way that serves the overall goals of spreading out the power. Blockchain ledgers are considered secure when it is impossible for any single bad actor or cohort to “control” the network.
The Case for POS
Bitcoin is known as the blockchain that started it all, using a “Proof-of-Work” consensus protocol. More than a decade later, this mechanism still works well for its core function: providing secure consensus. However, certain downsides have emerged. The book focuses on one of the most compelling of these: resource consumption.
Proof-of-Work networks require intensive resources both in terms of energy consumption and physical equipment, which must be frequently upgraded and replaced. Bitcoin’s energy demands are famously compared to that of a moderate-sized country, and network processing (mining) equipment fills vast data warehouses.
By comparison, because of the low energy demands of its Proof-of-Stake mechanism, Cardano’s energy consumption is estimated to be .01% of Bitcoin’s. In addition, the equipment needs are vastly less: a Cardano node can fit in your hand.
Check out these links to help visualize these differences:
The Case for Cardano
Due to these and other advantages, Cardano is not alone in choosing to use a Proof-of-Stake consensus protocol. Ethereum made big headlines last year by actually switching from POW to POS, launching what they call “Ethereum 2.0.” However, the author points out that Cardano is still a leader in terms of how easy and appealing its POS model really is.
Some staking protocols require participants to put up large amounts of money to participate. In Cardano, even the thinnest wallets can participate in staking and earn rewards.
In other POS networks, staked assets may be “locked” for anywhere from a month to an undetermined period of time, meaning that if you want to sell or use your own money, you simply can’t - or at least not without a long wait. In Cardano, staking is liquid, meaning you can move, withdraw, or spend your money any time you want, at the speed of a transaction (usually a few seconds).
Proof-of-Stake: Under the hood
After setting the stage and making the pitch for why Cardano’s Proof-of-Stake design is compelling, the rest of the chapter is dedicated to detailing all the elements of the system. These include:
- Setting up a Stake Pool
- Selecting a Stake Pool
- Staking Pledge
- Stake Pool Delegation
- Pool performance and ranking
- Rewards Distribution
- Network Address Types
- Network Keys
Each of these topics had its own set of sub-headings and fat margins full of footnotes. It becomes clear that each of these topics could be an entire chapter of its own. Not everything is explained in detail, and the curious reader will have to march along despite recurring questions of “But why” and “But how?” and “But what does that part mean?”. However, we recognize that the purpose of this chapter is to assemble the pieces from a high level, and the TRULY curious reader is invited to dive into the many, many linked resources for continued learning.
Skeptics Welcome
The author of the book, like many dedicated Cardano fans, makes frequent reference to the research-first approach taken by the network’s founding team. The footnotes are chock-a-block with links to academic papers and presentations that provide a solid, seemingly trustworthy foundation for why someone might put Cardano on their list of favorite blockchain projects. In light of this, we appreciate the author’s suggestion of maintaining a balanced view:
“IOG is committed to the scientific approach and that their architecture will result in a decentralized, stable, and secure blockchain – yet science and mathematics can only take you so far. Modeling assumptions must always be made, and no model will ever be as complex and colorful as what happens in practice.”
So the conclusion is not “In Cardano We Trust!” Instead, we are encouraged to stay curious. Skeptics are welcome. Question the status quo. To quote another respected author:
“The whole problem of the world is that fools and fanatics are always so certain of themselves and wiser people so full of doubts.” -Bertrand Russel
Read along with us, and post your doubts in the comments!
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