Hot Cryptocurrency Trends: Delegated Proof of Stake
This is a guest post by Max Wright
Disclaimer: Max Wright owns both Bitcoin and BitSharesX. Wright’s critique of the security concerns of DPOS can be found athttp://www.SuccessCouncil.com
In August of 2014, in front of a small crowd at a regional Bitcoin event in Raleigh, North Carolina, a panel of arguably 6 of the brightest minds in Crypto were asked, “What is the most pressing issue facing Bitcoin today?”
The unanimous answer: A more efficient consensus algorithm.
For those of you who do not know, Bitcoin is secured by a consensus of “who owns what” by what is called a Proof of Work consensus algorithm.
Satoshi understood that decentralization is the key to a disruptive technology in the field of payments and currency. By creating a system that used many individuals, but relied on none, the system would be sufficiently decentralized so that it could never be thwarted, much like Bitorrent.
It was genius.
Without going into the technical details, every single day 3600 Bitcoins (approx $2 million worth) are created and given to the many individuals (called miners) who secure and run the Bitcoin network.
Said another way… The people who own Bitcoins are paying a security force (miners) via the mechanism of inflation, $2 million per day for that security service.
In return, Bitcoiners can participate in a trustworthy, frictionless, pseudonymous, instant payment system without the interference of third parties.
Obviously those who participate find this a to be a great deal, myself included.
Lets take a deeper look to make that $2 million in inflation a little more tangible. Because most of the individuals who are providing that security service have electricity, hardware and time costs, they must sell most of the Bitcoins they receive to cover their cost.
For the sake of round numbers lets say that 25% of that $2million is kept in Bitcoin by the miners as profits and 75% are sold to pay for the hardware and electricity costs.
That means that every single day, at least $1.5 Million of new money must enter the Bitcoin eco-system to hold prices stable.
That means, if there was a more efficient way to provide security and consensus for Bitcoin, then rather than just keep prices stable, the first $1.5 million per day or half a billion dollars per year would drive Bitcoin prices up significantly.
It is easy to see why the Bitcoin brains trust in North Carolina said the most pressing issue is to find a more efficient consensus algorithm.
The challenge for any algorithm is to create efficiencies without sacrificing security.
This is why I think the altcoin space is so important. With over 700 altcoins, I see it as a huge lab experiment to test out different consensus algorithms. Survival of the fittest, if you will.
Whichever altcoin and underlying consensus algorithm proves worthy, can be “stolen” by Bitcoin. That is the great thing about Bitcoin. It is software that can be updated.
So has a superior algorithm to Satoshi’s original Proof of Stake been invented yet? Well only time will tell, but I suspect the answer is Yes.
Dan Larimar published a whitepaper on a concept he called Delegated Proof of Stake (DPOS) in April of 2014. Among the Bitcoin intellectual elite, opinions were divided. Some loved it. Some hated it.
There is no question it is vastly more efficient, easier to use and can safely confirm transactions in 10 seconds compared to Bitcoin’s 1 hour.
But the Billion dollar question is: Will a security weakness be discovered?
I have been watching Larimar and his coding team with keen interest since April as they worked around the clock until the first altcoin based on DPOS, BitsharesX, was released in late June.
Within 30 days BitSharesX had gone from nothing to the 3rd biggest altcoin with a market cap of over $100 million, as of the time of printing this article, and rising fast. Really fast.
But will BitSharesX stand the test of time? And if so, What and when will the Bitcoin community do?
If Bitcoin were to adopt a DPOS consensus algorithm too soon, then there may be a security flaw discovered afterwards which would be devastating.
However if DPOS is superior and the Bitcoin community adopts it too late, then they could miss the boat and be displaced as the number one Cryptocurrency out there.
But its very early days. I don’t think anyone would suggest DPOS has earned its stripes just yet. It will, however, will be very interesting to watch this Crypto soap opera play out. Especially if BitSharesX keeps climbing in value like it has.