Bitcoin/Cryptocurrencies – Digital Gold or Tulip Bulb?

388

I understand Proof of Work, but still trying to make sense of Proof of Stake. Some questions regarding Proof of Stake :

  1. Miners work to secure the blockchain. The greater computing power committed by miners, more secure the blockchain will be. However if the miner try to change the rules, for example by giving more block rewards to themselves, the nodes can reject the newly mined block. As mentioned, in Proof of work, mining a new block consumes a lot of energy, which will have huge economic costs for the miners. Therefore a rejected block will deal a significant economic loss to miners. However in Proof of Stake there is no such energy consumption, and hence not much economic loss for rejected block. A determined miner group can keep spamming the network with increased block reward until the nodes give up and accept the change. Is that not a serious drawback for Proof of Stake?

  2. One can argue that the acceptance of increased block reward by some node will lead to a fork. In proof of work, a miner can commit their computing power to only one chain. There is no such restriction in Proof of stake and miner can keep mining on both the chains, the original one and the newly forked one. So in the example of fork due to increased block reward, the miners can keep spamming the original chain making sure they can’t mine new blocks, while at the same time mine blocks on the newly forked chain and making money from the increased block reward. In short, under Proof of Stake, miners can come together and form the new monetary policy board. They can also sanction the transactions of any individual or group. Miners will never have such power under Proof of work.

  3. Bitcoin code is open source. Anybody can create a new fork with proof of stake. Why do they need to lobby?

389

Agreed. Cost of attack and cost of defense are at a 1:1 ratio, so there is no defender’s advantage. Proof of stake breaks this symmetry by relying not on rewards for security, but rather penalties.

Misbheaving nodes will get kicked off the network and their stake gets burned. There is a minimum threshold of tokens you need to lock up in order to become a Validator (32 ETH for Ethereum)

In proof of work, an evil miner can use the same hardware to make multiple attacks, but in proof of stake, the evil Validator would have to buy 32 ETH again and again because every time he causes a mess, his stake is burned.

Yes, Nothing at stake attacks are possible but they can be resolved.

This is also possible in proof of work. But why would anyone do that? Why leave easy block rewards for other miners/Validators?

This was an interesting debate

Their goal, I presume is to cause political stir rather than persuade the Bitcoin community.

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390

Thanks for answers.

In proof of work, each miner tries to compute the hash of the new block containing unconfirmed transactions. A successful miner gets the coinbase reward included in the block as the newly hashed block is propagated and verified by all Bitcoin nodes. The difficulty of the hashing problem is set so that one block is mined roughly every ten minutes. Still a race can sometimes result in fork, but a consensus is formed by the nodes by accepting chain containing more work (the longer chain).

How is the consensus formed in proof of stake about whether to penalize a validator or not? There are two kinds of attacks:

  1. A dishonest validator with mostly honest nodes.
  2. A honest validator but some dishonest nodes. I am assuming that penalty burns the coins of the validator. It is in self interest of nodes to penalize validator as it will lower supply.
    In Bitcoin, a node can decide not to propagate or accept a newly mined block, but they can’t actively penalize the miner of that block. Besides the total supply and inflation schedule of Bitcoin is fixed. Nodes have no way around it if they want new blocks to be produced.
    But there is no limit to burning coins, and if nodes can vote for burning someone else’s coins, won’t the answer be yes?

This attack vector still remains.
Almost all the mining power moved from Bitcoin cash to Bitcoin. So now we know that Bitcoin is the more secure winning chain.
But in proof of stake, the validator will have same number of coins on both forks, and can stake on both chains simultaneously. How will we know which chain is “real money”?

391

If any of the Validators is not playing fair like producing two conflicting blocks at the same slot [each slot can have either zero or one block] then the slashing/penalty conditions are triggered.
The protocol defines a set of slashing conditions, and honest validators follow a protocol that is guaranteed not to trigger any of the conditions. Think of slashing conditions as being like laws that you are not supposed to break.

In Proof of Stake (DPoS) lingo, Validators are the Nodes. The other participant is the Delegator.

Validators lock up tokens to vote on transactions and propose blocks. Delegators (tokenholders) can peg their stake to any of the validators to get a cut of the fee/block rewards proportional to the value they have on stake. 51% conensus is needed for the new block to get added to the chain. Thus the system becomes very democratic allowing everyone to be part of the consensus process, unlike proof of work where miners get the entire pie of rewards.

On one chain, the stake will be slashed and the other chain will be a zombie chain without 51% consensus.

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392

Is it 51% of the staked coins or total supply?
I believe it’s former.

It seems to me that fairness is decided by 51% consensus. If a group of validators together control more than half of the staked coins, it is in their self interest to mark outsider validators wrong, even if they were working honestly. Doing so will destroy the stake of outsider validator, thereby decreasing supply, and increasing the value of remaining coins.

Political justification for such an action can also be manufactured, for example targeting the validators of enemy state like Russia. We have done the same through sanctions and western people holding dollars are cheering it. It indeed violates the principles of sound money and undermines the long term value of dollars against the competing form of money like Bitcoin, but it is short term positive.

Lastly, if there is no competing money like fiat or proof of work, that is, there is nothing against which long term value of our proof of stake Bitcoin decreases in value, the colluding validators will have nothing to lose and everything to gain by penalizing outsider validators.

Yes, 51% attack are also possible in Bitcoin, but they can’t punish outsider miner or destroy someone’s coins. They can atmost try to double spend the recently transacted coins, and such result may not be worth the computing power needed for 51% attack.

393

Not convinced. I am talking about hard forks, whilst your solution is applicable for soft forks.

In the event of hard forks, validators will get same amount initially on both chains, which they can stake on both chains. In contrast, when Bitcoin cash was forked from Bitcoin, the miners had to divide their computation power among the two.

394

yes, you’re right.

Doing that would be akin to shooting their own foot. Why would they ever want to kill their Golden Goose? They cannot get away with censorship on a public blockchain.

There’s another issue though which has been a major pain point for ethereum.

https://medium.com/umbrella-network/miner-extractable-value-mev-101-why-what-and-how-4bec3bc3bb2a

Politics can hurt Proof of Work hashrate more than they can do with Proof of stake validators. We’ve already seen instances of China and Kazakhstan ban/curtail miner activity. Validators can always use VPNs of some sort to bypass sovereign risks. POS validtors can stay pseudonymous without disclosing their whereabouts, unlike POW where big players have no where to hide as they are tied to their mining site.

It won’t be able to gain similar Network effects. They can copy a token, but not a whole damn ecosystem.

Merge mining does exist for Dogecoin :wink:

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395

As Terra’s Algorithmic Stablecoin collapsed Crypto’s largest Stablecoin (Centralized) lost its peg for a day as investor worry about Tether reserves got spooked again.

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396

Sam Bankman-Fried, the founder of crypto exchange FTX, told The Financial Times that Bitcoin has no future as a payments network

397

Hi, I stopped investing in cryptocurrencies after the new bill. Do you think it would be a good time to get started again?

398

Not if you’re planning to cash out. I’m gonna keep my crypto as crypto and have mo plans to convert them to INR.

399

Money eventually converges to the cost of producing it. For fiat, that’s almost zero. Which is why, historically, all fiat experiments have ended in hyperinflation. We can expect the same end for dollar and rupee. But it won’t happen anytime soon. But as a prudent, we must prepare for this possibility.

The question is what will replace dollar as money? Maybe we will go back to gold standard. But there is another possibility, that of a censorship resistant digital money with a fixed amount of supply, which is Bitcoin. If that really happens, then a small allocation to Bitcoin can be worth a lot. And at the very least, you should hold your investment until nobody is willing to exchange their bitcoin for rupee or dollar or maybe vice-versa.

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400

This is such a positive for Bitcoin. Censorship Resistance going strong!

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401

After reading this, I felt how anti-crypto Indian regulators are compared to US.

FIVE KEY POINTS from the uponcoming US Crypto Bill Draft:

1/ There will be no taxes on crypto transactions under $200

This means that you’ll be able to walk into a 7-11 to buy a good ol’ Blue ICEE using Bitcoin and won’t get taxed for it.

This is good. One point for the good guys.

2/ People have the right to self-custody their digital assets

The bill proposes we get full control of our digital assets.

We’ve seen other valuable assets like Gold required to be stored in central banks. Not with crypto!

3/ Most crypto assets are viewed as commodities, rather than securities

We won’t bore you with the details, but it looks like the bill is proposing that most crypto assets like Bitcoin and Ether are commodities.

Because of this, the CFTC (Commodity Futures Trading Commission) would be overseeing the regulations, not the SEC.

This is being considered a big W for crypto since the SEC has been extremely anti-crypto and wants to regulate it as much as possible.

4/ Mining taxes

Mined bitcoin is currently taxed as income the moment it gets mined. This means miners are getting hit with hefty taxes.

This bill is proposing to switch it up. Miners will now be taxed after they sell.

5/ Stablecoins must maintain a 100% reserve

This means there would need to be enough liquid assets in their reserves to cover all the stablecoins. Projects would also need to disclose how much and which assets are in the reserve.

Source : Milk Road

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402

At this moment “Bitcoin as an alternative to gold” slogan is hurt

Many were saying with rising inflation Bitcoin will go up due to fixed supply (unlike fed printing money )and it will act as an hedge against recession and USD

But opposite has happened And it’s crashing like anything

So looks like bitcoins will not be helpful for hedging

So far gold is steady and holding the fort

Still gold acting as an asset class unlike Bitcoin

If I am right some of crypto money will move to gold

403

Wall Street is treating Bitcoin as a risk-on growth asset, no wonder Crypto markets have high correlation (0.9) with NASDAQ.

During monetary tightening, growth assets don’t perform well.

The fall is precipitated by over-leverage and panic-induced by LUNA meltdown, Celsius and 3AC insolvency. Remember, its forced selling that is driving the markets down. Big boys are getting margin called.

Once Fed is able to tame inflation, market conditions should improve.

“One of the more underrated bull cases for cryptocurrency that I have always believed is simply the fact that gold is lame, the younger generations realize that it’s lame, and that $9 trillion has to go somewhere.”

  • Vitalik Buterin
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405

I agree and disagree with you. Because right now inflation raises every day and problems do not go away. Nobody knows how everything will be tomorrow.

Personally, I started to change my cryptocurrency into real money using my crypto wallet as a “safe circle”. I do not trust to a prognosis of improving the situation in a month or two.

406

You could have to converted them to USD stablecoins and held them as crypto itself, cuz Rupee is depreciating anyway.

Coming to inflation, yes it won’t improve in a month or two. Crypto price action is a leading indicator. Bitcoin could sink lower than 17k if NASDAQ goes lower.

407

Tokyo-based Mt. Gox – once the world’s biggest Bitcoin exchange – suspended all trading and went offline in February 2014 after losing about 850,000 Bitcoin valued at about $500 million at the time. Some of its holdings have subsequently been found. The coins are currently valued at more than $2.9 billion, based on Bitcoin trading at close to $21,000.

Mt. Gox eventually recovered ~140,000 BTC. And for 8 looooong years the customers have been fighting to get some of it back. Then last week they received the email they’d been waiting for…

The funds are getting ready to be repaid by the end of August. That’s over $3b in BTC making a comeback which could create additional sell pressure to the already crashed crypto markets.

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408

“losing 850,000 Bitcoin” means? and how they recovered 140,000?