Crypto Report You Have To See! PoS vs. PoW & Potential Risks!

As ethereum’s merge approaches more and More people are asking the obvious Questions what exactly are the Differences between proof-of-work and Proof-of-stake and which of the two is Better As it so happens kraken recently Released an incredible report which Compares these two consensus mechanisms And answers almost all the questions That crypto holders are asking about Them That’s why today i’m going to give you a Bit of background about the report Summarize what it says in simple terms And tell you what it could mean for eth Once the merge is complete [Music] Before we hit the books i need to make Sure i stay off the hook giving you any Financial advice would make me a crook Education and entertainment are the only Things i cook so please contact a Financial advisor if you don’t like how Your portfolio looks Note that i hold eth as part of my Portfolio but i’ll keep my bias on the Download now if this is the first time We see each other my name is guy and you Can call me your crypto brother my Mission is to create quality crypto Content that’s better than any other Coins tokens news and reviews are just a Few of the topics i cover so if this is

The kind of content you want to discover The subscribe button and notification Bell are where you should hover And with that out of the way let’s see Which is better proof of work or proof Of stake The report i’ll be summarizing today was Written by the kraken cryptocurrency Exchange Kraken is based in the united states and It was founded by entrepreneur jesse Powell in 2011. kraken has since become One of the top 10 largest cryptocurrency Exchanges by trading volume and has come To support over 110 coins and tokens and Counting Fun fact in 2020 kraken became the first Cryptocurrency exchange to receive a Crypto banking license from the state of Wyoming making it possible for the Exchange to offer traditional fiat Services alongside its crypto services All in-house Shortly afterwards the first kraken bank Branch was established in wyoming’s Capital of cheyenne and kraken is Working towards extending its crypto Banking services to the rest of the Country in accordance with the Exchange’s explicit goal of accelerating Crypto adoption Kraken’s focus on crypto adoption is Also why the exchange has put a huge Emphasis on crypto education and in

Addition to having some of the best Articles about crypto projects the Exchange also has some of the best Crypto reports the industry has to offer Now today’s report is titled quote proof Of work versus proof of stake securing The chain and i’ll leave a link to the Full document in the description along With a link to my kraken tutorial if You’re interested in learning more about The exchange Now the report begins with a brief Introduction and the first sentence is Too good not to repeat quote At the heart of every blockchain lies a Protocol that defines how pseudonymous Individuals reach consensus in a Globally distributed network now if you Watched our video about crypto consensus Mechanisms you’ll know that consensus in Crypto is no different from consensus Say between you and a group of friends Deciding where to go for dinner the only Difference is that crypto consensus is Digital and you’re deciding on which Transactions are valid The authors then explain the importance Of civil resistance in cryptocurrency This is a fancy term for potential Attacks on a cryptocurrency blockchain Such as convincing consensus Participants that an invalid transaction Is valid or spamming transactions so That no real transactions can be

Processed Civil resistance is why proof of work And proof of stake exist at all they are Fundamentally a means of making it very Difficult to corrupt a cryptocurrency Blockchain by incentivizing miners or Validators to process transactions Correctly and in some cases punishing Them for not doing so The authors go on to make it clear that Neither of these two consensus Mechanisms is perfect Each one comes with its own trade-offs Regarding decentralization scalability Security and of course sustainability Which has been an especially hot topic Among proof-of-work critics the authors Argue that the correct consensus Mechanism ultimately depends on what the Cryptocurrency in question is trying to Do as this will determine which Trade-offs need to be made naturally These trade-offs are what the report Examines in detail The second part of the report gives a Bird’s-eye view of the quote anatomy of Blockchain protocols This includes things like how miners or Validators are selected how frequently Blocks are produced And when transaction finality is Achieved the authors reiterate that the Purpose of a crypto consensus mechanism Is to deter civil attacks and they

Provide a detailed definition of this Term quote A sybil attack is an exploit against an Online network whereby a small number of Entities as few as one attempt to take Control of the whole network by Leveraging multiple accounts nodes or Computers The authors point to one of the most Popular civil attacks in cryptocurrency And that’s a 51 attack Without getting too technical a 51 Percent attack involves contributing 50 Percent or more of the computing power To a proof-of-work cryptocurrency so That transactions on its blockchain can Be manipulated The authors then explain that every Crypto consensus mechanism requires some Sort of skin in the game from miners or Validators to ensure they remain honest I.e processed transactions correctly and That this honesty is typically achieved In three ways The first way is by quote encouraging Participants to reach a consensus on the State of the blockchain through a Competitive process such as mining or Staking the second way is by quote Punishing bad actors that try to stall The network from reaching a consensus And the third way is by quote rewarding Some or all participants for behaving Honestly and coming to a consensus be it

Through transaction fees blog rewards or Both The authors go on to provide this Incredible infographic which shows you Half a dozen different crypto consensus Mechanisms and how they ensure network Participants process transactions Correctly i definitely suggest pulling Up this page and having a closer read if You have the time What’s awesome is the authors provide a Breakdown of how much of the crypto Market cap is being secured by each Consensus mechanism for those who can’t See or are just listening around sixty Percent of the crypto market is secured By proof of work twelve percent by proof Of stake and thirty percent by other Consensus mechanisms This will obviously change once ethereum Transitions to proof of stake as the Authors count tokens as part of this Calculation and most of the largest Tokens by market cap are erc20 tokens Circulating primarily on ethereum namely Stablecoins You can find out more about what Ethereum will look like post-merge using The link in the description Next the authors turn to consensus Methods which are slightly different From consensus mechanisms Whereas consensus mechanisms describe All ways to prevent attacks on

Transactions consensus methods refer to How miners validators or nodes actually Agree on the accuracy of transactions Cryptocurrencies like bitcoin and Cardano used the longest chain consensus Method meaning that miners and Validators assume the longest version of The blockchain is the most accurate In the case of proof-of-work this is Because the longest blockchain took the Most energy to create and in the case of Proof of stake this is because the Longest blockchain received the most Votes Meanwhile cryptocurrencies like ethereum And conflux use the heaviest chain Consensus method which is like the Longest chain consensus method except That it includes orphaned blocks valid Blocks which were rejected because they Were proposed at the same time as Another valid block The authors underscore the significance Of these so-called nakamoto-style Consensus methods because they make it Possible to increase the threshold of Corruption for a distributed system from 33 percent to 50 While simultaneously removing the trust That’s often required for a distributed System to function The trade-off of nakamoto style Consensus methods is that transactions Are never truly final instead

Transactions are probabilistic meaning The likelihood of a transaction being Final increases with every block that’s Added to the blockchain but that Likelihood never actually reaches 100 If you watched our video about the Fastest cryptocurrencies you’ll know That what counts as a final transaction Varies from coin to coin and depends on The number of confirmations which can be Simply understood as the number of Blocks that have been added to the chain Since the transaction occurred For reference a btc transaction on Bitcoin is considered final after six Confirmations i.e six blocks Since it takes around 10 minutes to add A block to the bitcoin blockchain this Means it takes around one hour for the Average btc transaction to be considered Final i.e irreversible even though it’s Technically not The authors then provide another Incredible infographic which breaks down All the different types of crypto Consensus methods and even gives an Overview of the consensus methods and Consensus mechanisms used by cardano Ethereum ethereum’s beacon chain and Solana The authors end the section by Emphasizing the importance of knowing The difference between a consensus Method and a consensus mechanism when

Discussing proof of work versus proof of Stake This ties into the third part of the Report and that’s the trade-offs of Proof of work and proof of stake The authors start by giving one of the Best explanations of proof of work that I’ve ever read so quote In proof-of-work blockchains miners must Gather information and try to guess a Solution to a cryptographic puzzle Once miners solve the puzzle they share Their results with other nodes to verify Their work before adding the block to The chain Because miners must consume energy in The proof of work process and nodes can Easily verify any blocks validity Malicious miners who try to add an Invalid block waste time energy and Resources conversely the protocol Rewards honest miners that successfully Mine a valid block And for some extra clarity i’ll add that Each block contains btc transactions now As far as benefits go the authors note That proof of work cryptocurrencies have Been battle tested at scale though they Acknowledge that there have been a few 51 attacks on smaller proof-of-work Cryptos notably ethereum classic you can Learn more about ethereum classic using The link in the description i digress Now the authors add that at this point

In time purchasing the computing power Required to conduct a 51 attack against A cryptocurrency like bitcoin would be So expensive that it would make no sense To do unless you’re a government trying To protect your national currency Against btc of course What’s crazy is that the authors Actually took the time to calculate how Much it would cost to corrupt bitcoin And other major proof-of-work Cryptocurrencies For bitcoin it would cost over 8.6 Billion dollars in hardware costs plus 20 million dollars in energy costs per Day The authors then touch on the infamous New york agreement of 2017 wherein 50 Companies including cryptocurrency Exchanges tried to convince the crypto Community to double bitcoin’s block size Their initiative failed because bitcoin Nodes refused to implement the change The institutions wanted to see Now the authors note that this Resistance to institutional influence Would have been difficult if not Impossible if bitcoin had been proof of Stake because the institutions would Have been able to simply buy up the Stake they needed to implement changes They wanted at the blockchain level Another pro proof-of-work argument the Authors identify is the huge incentive

For geographical decentralization due to Crypto miners trying to find the Cheapest electricity sources which are Often located in remote areas The authors acknowledged that this Geographical decentralization is less Apparent in practice as china did in Fact become a crypto mining hub However the authors also note that Bitcoin mining operations were beginning To migrate out of china even before the Country’s famous crypto ban last spring Today bitcoin’s hash power is much more Decentralized though if you ask me it Looks like the united states could soon Become the new point of centralization And something tells me that the us Government will be more thorough in its Surveillance of the crypto mining sector Than the ccp The last two advantages of proof of work The authors cover are the natural Resistance to blockchain forks due to The high costs of forking and the fact That it’s much harder to bribe miners Than it is validators at least on paper As far as drawbacks to proof-of-work go The authors note that there are many Concerns about the carbon footprint Associated with proof-of-work Cryptocurrencies but if you watched our Video about coinshare’s crypto mining Report you’ll know that bitcoin mining Accounts for less than 0.1 percent of

Global carbon emissions The second drawback is similarly Straightforward and that’s the inability Of smaller proof-of-work Cryptocurrencies to effectively protect Themselves from 51 attacks The third drawback is one that i alluded To earlier and that’s the possibility That mining could become centralized Among the most well-capitalized entities Who could then work together to change The blockchain to their benefit Note that the three largest bitcoin Mining pools have 52 percent of the hash Power The fourth drawback is a little bit Funny and that’s that quote since nodes Can operate anonymously blocking a Malicious miner from participating in The network is impossible and there’s no Way to confiscate their mining equipment For misbehaving This is obviously meant to be in Contrast to proof of stake where Misbehaving validators stand to lose Some of their stake but it’s still funny To imply that it would be ideal if Malicious miners could have their mining Equipment confiscated The fifth drawback is the possibility of A so-called selfish mining attack which Was apparently discovered by avalanche Founder emin gunsire and another cornell University professor back in 2013. a

Selfish mining attack involves secretly Creating a longer chain and introducing It late to steal crypto The final drawback is also peculiar as It has to do with transaction fees which Are often higher for proof-of-work Cryptocurrencies The authors point out that higher fees Aren’t always a bad thing as they Protect against spam something that’s Plagued low-cost cryptocurrencies like Nano and solana on that note you can Find out what solana has been up to Using the link in the description Anyways when it comes to proof of stake The authors don’t provide an elaborate Explanation of how this consensus Mechanism works because it really is Quite simple validators must lock up a Certain amount of a cryptocurrency coin For a certain amount of time to get Selected to produce a block This selection is pseudorandom based on Stake and if the validator tries to Cheat the selection or try and Manipulate transactions some or all of Their stake is slashed i.e destroyed Note that not all proof-of-stake Cryptocurrencies have slashing enabled Nor do they all have lock-up times for Validators As far as benefits go the authors note That proof-of-stake consensus mechanisms Require next to no energy to protect

Against civil attacks with ethereum’s Post-merge energy use estimated to be 99.9 Less than what it is now The second benefit is that validators do Not need to constantly upgrade their Hardware as miners often do The third benefit is that misbehaving Validators can be punished via slashing The fourth benefit is that proof of Stake cryptocurrencies are much faster And the fifth benefit is that Participating as a validator on a Proof-of-stake cryptocurrency is much Easier than becoming a miner as it Requires less capital and less Specialized hardware though it’s Important to note that this is not the Case for all proof-of-stake Cryptocurrencies As far as drawbacks go the authors note That proof-of-stake cryptocurrencies are Not nearly as battle-tested as Proof-of-work cryptos and are also not Secured with nearly the same amount of Capital The second drawback is one that’s Unfortunately quite common among Proof-of-stake cryptocurrencies and That’s that the initial distribution of The crypto coin can cause the Concentration of stake among a handful Of participants The third drawback relates to the crypto

Consensus methods i mentioned earlier And that’s that many proof-of-stake Cryptocurrencies do not use Nakamoto-style consensus mechanisms and Can therefore be corrupted if malicious Validators control a third of the total Stake a much lower threshold than 50 Percent The fourth drawback relates to the Second and that’s that proof of state Cryptocurrencies are more vulnerable to Centralization because quote Those with large amounts of coins such As early adopters exchanges and Custodians can overwhelmingly influence The rules of the network Moreover quote they can also accumulate More of the coin via staking causing a Positive feedback loop that can increase Centralization Now it’s safe to say that this is Becoming a bigger and bigger concern as Large asset managers like blackrock Enter the crypto space The fifth drawback is that validators Could easily process incorrect Transactions particularly for Proof-of-stake cryptocurrencies that Don’t have strong deterrence mechanisms Like slashing enabled The sixth drawback is something that i Mentioned a few moments ago and that’s That staking requirements can still be Prohibitively high particularly on the

Hardware side To accompany their point the authors Give an infographic about the hardware Requirements to run a validator node on Popular proof of state cryptocurrencies And you can see that solana is an Outlier extremely difficult to run a Validator node there The seventh drawback is a bit odd and That’s that staking presents an Opportunity cost for validators because Their money is locked up and can’t be Used This is odd because there are many Liquid staking protocols such as lido Finance that make it possible to freely Trade your staked coins Some crypto projects like phantom also Have liquid staking at the layer one Level meaning there’s no need to trust a Third-party protocol The eighth drawback is that Proof-of-stake doesn’t protect as well Against blockchain forks and Cryptocurrencies leveraging this Consensus mechanism without slashing Risks are again vulnerable I’m surprised the authors didn’t add Another evident drawback and that’s that It’s incredibly difficult to get a Proof-of-stake cryptocurrency off the Ground without lots of centralization That’s because any fairly launched proof Of state cryptocurrency would be easy to

Corrupt as the value of its coin would Be close to nothing and that would make It easy for a malicious actor to acquire A third of the stake and manipulate Transactions As such the only option would be to Conduct an ico to create a baseline Value for the coin potentially support Its price with the capital raised and Ensure that enough of its supply is held By and ideally staked by the team and Early investors so that it’s next to Impossible to acquire the stake required To corrupt it Besides the centralization this would Create it would also attract the Attention of regulators like the sec who Would almost certainly consider this Kind of cryptocurrency to be a security And you can find out what criteria the Sec is using to crack down on Cryptocurrencies using the link in the Description Anywho in terms of which of these two Consensus mechanisms is better the Authors frame their conclusion in the Context of the blockchain trilemma and State the following Quote It is our take that proof of work tends To offer better security and Decentralization guarantees sacrificing Scalability in the process On the other hand proof of stake

Typically offers better scalability in Exchange for security and Decentralization However the authors immediately repeat That quote the optimal choice ultimately Depends on a given blockchain’s use case And how developers implement its civil Resistance mechanism some blockchains Are better suited for proof of stake While others should use proof of work Naturally the authors argue that for Cryptocurrencies which are meant to be Hard money such as bitcoin’s btc proof Of work is preferable because security And decentralization are paramount for Such use cases By contrast cryptocurrencies that are Aiming to become the next generation of Payment rails such as solana are better Off using proof of stake since Scalability is paramount for such a use Case What’s interesting is that the authors Provide a few infographics showing the Number of daily transactions for popular Proof-of-stake cryptocurrencies and i Say it’s interesting because it reveals Just how much and how little use some of These cryptocurrencies are seeing not Naming names At the end of this section the authors Caution that quote every blockchain Still requires a deep understanding of The protocol’s measures to defend

Against civil attacks achieve a Consensus on the state of the network And how its measures balance the Trade-offs within the blockchain Trilemma Now the final part of the report is the Conclusion wherein the authors basically Repeat everything they wrote but with a Bit more punch For example quote Blockchains should adhere to a Proof-of-work mechanism if they want to Retain the ethos of crypto assets Decentralization and security Logically this implies that blockchains Which use proof-of-stake consensus Mechanisms will not retain the ethos of Cryptocurrency something the authors Tacitly confirm in the next paragraph Where they say proof-of-stake is most Appropriate for cryptocurrencies focused On payments and smart contracts This makes me wonder what consensus Mechanisms are appropriate for different Types of crypto niches and you can learn More about those using the link in the Description So This brings me to the big question and That’s what the findings of this report Mean for ethereum once it transitions to Proof of stake well i’ll start by saying That the authors hit the nail on the Head with their assessment that the

Appropriate consensus mechanism depends On a cryptocurrency’s use case This is where things get a bit Complicated because ethereum’s use case Is probably a bit different depending on Who you ask Ethereum was initially pitched as the World’s computer but following the Eip1559 upgrade last august Some have started referring to eth as Ultrasound money This and other developments have led Many to label ethereum as a payments Network which is objectively the case Even if you don’t buy the ultrasound Money narrative and that’s because Ethereum has become the de facto base Layer of the largest stable coins At the same time ethereum is home to not Only the largest d5 protocols but also Other decentralized applications the Largest nft projects and all the new Ecosystems that are being built on layer Twos that derive their security from the Ethereum blockchain this makes it Incredibly hard to say what the correct Consensus mechanism for ethereum should Be and though proof of stake seems like A no-brainer it’s important to remember That the reason why ethereum’s ecosystem Got so big is precisely because of the Security and decentralization that came From its proof-of-work consensus Mechanism

It’s certainly true that ethereum was Losing ground to competitors because of Its lack of scalability but this is Something that was and still is being Solved by scaling solutions and side Chains such as polygon It’s also clear that the obsession Around scalability coming from crypto Projects like solana has done serious Damage to their security and it’s only a Matter of time before what’s left of Their decentralization starts to suffer Too So in sum what made ethereum stand out From its competitors was its Decentralization and security and though This decentralization and security is Likely to carry over when it transitions To proof of stake i find it hard to see How these levels of decentralization can Be maintained indefinitely given the Nature of this consensus mechanism It’s also no secret that institutions Are itching to get their hands on eth so That they can stake it and with asset Managers like blackrock entering the Ring it’s only a matter of time before Institutions are staking enough eth to Have the power to decide what happens at The protocol level what happens at that Point is anyone’s guess but the recent Incident with tornado cache gives us Some insight into just how much it could Change ethereum’s ecosystem more about

That using the link in the description Now for what it’s worth i know that Vitalik and other ethereum ogs are hyper Aware of these risks and i have no doubt That they will do everything in their Power to ensure that ethereum remains Secure and decentralized after it Transitions to proof of stake Let’s just hope they succeed And that’s all for today’s video about Kraken’s take on proof of work versus Proof of stake If you found it informative smash that Like button to let me know if you want To make sure you don’t miss the next Video subscribe to the channel and ping That notification bell before you go While you wait for the flick head on Over to coin bureau eclipse to see more Crypto bits tune in to the coin bureau Podcast to hear myself and mad mike Shoot the and follow me on twitter Tiktok and instagram so there’s nothing You miss While you’re at it join my telegram Group to get that inside crypto scoop And subscribe to my weekly newsletter to Find out about the next crypto videos I’m going to shoot If you want to support the channel you Can do just that by heading over to the Coin bureau merch store and getting a Stylish crypto hoodie tea or hat links To all of these resources and more will

Be down in the description thank you all So much for watching and i will see you Next time [Music] You


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