Consensus Mechanisms and Staking PDF

Consensus mechanisms and the relevance of staking in the token economy May 2024 Agenda 1. What is a consensus mechanism? 2. The byzantine generals problem 3. Recap blockchain basics and Proof of Work (PoW) 4. Proof of Stake, Delegated Proof of Stake and liquid st...

Consensus mechanisms and the relevance of staking in the token economy May 2024 Agenda 1. What is a consensus mechanism? 2. The byzantine generals problem 3. Recap blockchain basics and Proof of Work (PoW) 4. Proof of Stake, Delegated Proof of Stake and liquid staking 5. Open discussion & Q&A May 2024 About me Studied European Studies in Passau Spent some time at the European Parliament Started to dive in Crypto around 2016 Co-Founder and CEO @Staking Facilities Leading PoS Working group in the EBA @schmidtjulius1 linkedin.com/in/julius-schmidt-532718164 https://stakingfacilities.com/ Consensus Anti sybil vs. mechanism mechanism Consensus mechanism Consensus mechanism Consensus mechanism Consensus Anti sybil mechanism mechanism Defines the agreement… Defines the rules… …we agree that the winner is the one …who is allowed to vote? with 50+ % percent of the votes. …how often can they vote? …where do they have to vote? Byzantine generals/fault problem Byzantine generals/fault problem Byzantine generals/fault problem Attack! Attack! Retreat! Retreat! Attack! Byzantine generals/fault problem Attack? Attack? Retreat? Retreat? Attack? Byzantine generals/fault problem Tamper-proof communication in a potentially fraudulent/malicious environment Why do we need these mechanisms? Used to come to an agreement in a network where parties don’t necessarily trust or know each other Come to an agreement without the need for a centralized watchdog Blockchain basics and Proof of Work Consensus mechanism Anti sybil mechanism Blockchain basics and Proof of Work Monolithic chain Modular stack MODULAR BLOCKCHAIN EXECUTION EXECUTION SETTLEMENT CONSENSUS SETTLEMENT DATA AVAILABILITY CONSENSUS Independent component Monolithic Architecture Modular Architecture Blockchain basics and Proof of Work https://andersbrownworth.com/blockchain/hash Blockchain basics and Proof of Work Game theory behind Proof of Work Invest resources Put in work Reward Blockchain basics and Proof of Work Game theory behind Proof of Work Invest resources Put in work Reward Blockchain basics and Proof of Work - High energy usage to keep network safe - High security, 51% of mining power needed to - Geographical advantages/disadvantages create malicious yet valid blocks - High entrance barriers (hardware investments) - Tested for many years - Centralization through increased needed - Easy to implement computation power -Scalability Questions? Proof of Stake Proof of Stake - some terms Miner Validator Mining Validating Proof of Stake Game theory behind Proof of Stake Invest resources Put in work Reward Stake Put in work Reward Proof of Stake - carrot & stick Game theory behind Proof of Stake Stake Put in work Reward If a validator acts maliciously, its’ stake can get slashed! Proof of Stake - dynamics Validator Size of stake determines who gets to add the next block Proof of Stake - dynamics Chance 10 Blocks 10 000€ 1 Block 1 000 € Stake Proof of Stake - wait, what? Proof of Stake Economies of scale in PoW vs. PoS PoW PoS Resources don’t scale linearly → favor the rich Price to acquire stake doesn’t favor the rich Proof of Stake - tokens Right to validate Right to participate Right to add blocks transactions in governance Proof of Stake - pro’s & con’s - Energy efficiency - Complexity - Accessibility - Centralization through stake - Node decentralization - Initial coin distribution - Incentive alignment -Security - Scalability Proof of Stake - key takeaways …and key differences to Proof of Work Validators need significantly less Validators optimize for uptime & energy availability Validators need native currency Stake has to be “locked”, of the network comparable to a security deposit Validators get chosen randomly If a validator misbehaves, its’ based on their stake stake can get slashed Questions? Delegated Proof of Stake Delegated Proof of Stake Runs & maintains infrastructure No infrastructure Owns PoS token Owns PoS token Validation key Wallet key Alice Bob Proof of Stake blockchain Delegated Proof of Stake Validates transactions No infrastructure Composes & adds new block Owns PoS token Receives block rewards & tx fees Wallet key Alice Bob Delegated Proof of Stake Delegates his tokens Accepts delegations Gets share of rewards & Charges commission fee fees (‘pro rata’) Alice Bob Delegated Proof of Stake Delegates his tokens Gets share of rewards & fees (‘pro rata’) Bob Delegated Proof of Stake Key differences to Proof of Stake Any token holder can participate in Token holders can delegate their financially securing the blockchain voting power without physically transferring their assets Validators provide Infrastructure Validators compete for stake and set a fee for their services through their fee, set up & values Theoretically more efficient, less validators, but therefore more qualified Liquid Staking Source: https://medium.com/dia-community-hub/the-ultimate-cross-chain-liquid-staking-map-71f8307ff01d Liquid Staking - pro’s & con’s - Liquid token instead of locked token - Potential custody or smart contract risk - Composability of staked assets - Depegging risk from native currency - Stake distribution across multiple validators - Liquidity risk for the LST (liquid staking token) - Encourage staking -> increase security of the - Centralized liquid staking network Thank you for your attention  for more, visit: stakingfacilities.com Wormhole X Staking Facilities: Guardians of the Multichain Berlin Blockchain Week 23.05.24 W3 Hub Workshops, talks, panels, games for more, visit: https://lu.ma/guardians