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It’s certainly the algorithm delegators in the Cardano ecosystem will be using the most, but unfortunately, it’s also one of the least known. Here is everything you need to know about Ouroboros, Cardano’s proof of stake algorithm.
Before talking about Ouroboros, and everything about it, let’s begin by covering the problem Bitcoin solves and the problems with how it does that.
This article has been made in a way to allow everyone to understand how Ouroboros works. Some parts of the protocol have been intentionally left out, the reason why is because these parts are just too complicated to explain in a simple way. Thank you for your understanding.
Bitcoin is powered by a proof of work algorithm . You can see proof of work, as a system where you need to have infrastructure, in this case computers, to be able to participate in the process of securing the network .
What these computers do, is that they solve mathematical problems to secure Bitcoin’s network from attackers wishing to double spend .
The core idea behind it, is that, the more computers start to mine Bitcoin , the more advanced these computers , the more secure Bitcoin will be .
Actually, you can’t even compare these computers to “everyday” types of computers, because, these are what we call “asics”.
Asics are computers which have been designed to mine one specific cryptocurrency . You can’t do something else with it, only that. The problem is that it’s definitely not ideal in terms of security, because there are only a handful of companies producing Asics , which means that they basically have a certain monopoly. On top of that, these Asics are extremely expensive, with miners having to pay at least more than 1000$ to acquire one device.
Besides, Bitcoin is not as decentralized as it should be , because, people are literally creating mining farms with dozens of these devices, which wasn’t the original idea behind mining . The original idea behind mining, was that, everyone, from their “normal” computer, could participate by securing the Bitcoin network .
On top of that, there is the monopoly of mining pools. A mining pool is a group of people who decide to pool together to be more profitable. Basically, together, you are stronger than alone. The problem with that, is that there are currently 5 mining pools literally controlling the whole network .
And the last problem, which is perhaps the biggest one, is the energy consumption of Bitcoin. Bitcoin currently uses nearly as much electricity as Austria .
To summarize the problems with Bitcoin:
- Bitcoin is extremely centralized in terms of mining pools.
- Bitcoin doesn’t allow the “people” to participate in the process of securing the network.
- Bitcoin currently uses as much electricity as Austria.
Now we can talk about proof of stake, and more specifically Ouroboros.
The main difference between proof of stake, and proof of work, is that in proof of work, miners invest computing power to compete to be chosen as the leader . The leader is then allowed to make the next block and win a reward for doing so. In proof of stake, the stakeholder who will form the next block is randomly selected , proportionally to the size of the stake that they have.
Simply put, in PoW, the more computers you have, and more advanced these computers, the more chance you have of winning a reward .
In PoS, the bigger the size of your stake, the more chance you have of wining a reward .
In other words:
- Proof of Work requires physical assets.
- Proof of Stake requires virtual assets.
Now to illustrate another difference between PoW and PoS, here is a little example:
Charles has 50 ADA. Duncan has 30 ADA. Sebastien has 120 ADA.
In PoW, this doesn’t matter. Because, PoW requires computers to solve mathematical problems, puzzles, not virtual assets .
In PoS, with every block, a lottery is organized . The more ADA you have, the more chance you have of winning that lottery.
So in this case, Sebastian has theoretically speaking 4 times more chance of winning the lottery than Duncan, and 2.4 times than Charles.
Now let’s speak about the system itself, the system behind Cardano’s proof of stake, Ouroboros.
In contrast with other “similar” systems, Ouroboros does not only use blocks , it also uses epochs and slots .
So , a block is basically a box in which you store all your transactions. A slot is a box which is just a little bit bigger than the first box , and you put that first box in it . And , an epoch, is a box where you store all these “a-little-bit-bigger boxes” .
Speaking about slots, depending of the size of the stakepool’s stake, it will have more or less chance of becoming a slot leader.
The protocol requires that stakeholders are available 24/7 so that in case they are elected slot leaders they can produce the corresponding block. This is unlikely to happen, this is why stakeholders can group together to create stakepools that will act on behalf of other stakeholders who have delegated their right (and obligation) to participate in the protocol. A stakepool commits to be online and with all the needed resources available close to 100% of time, securing with this that the protocol is always running smoothly. — Carlos Lopez de Lara
Something important to keep in mind, is that delegators will only receive the staking rewards after the end of each epoch . So it’s not like with Bitcoin, where at the end of each block miners directly receive the rewards.
Like with Bitcoin, or Ethereum, when you start a node (stakepool), you will have to synchronize with the blockchain . It’s what Daedalus, IOHK’s Cardano wallet, does every time you start it.
To conclude, Ouroboros is an incredible piece of technology .
The most interesting part, is that other projects are starting to implement it. Coda Protocol, a project backed by the biggest, including Coinbase, Polychain, Naval Ravikant and Fred Ehrsam is an example ( proof ).
A special thank you to Carlos Lopez de Lara , his feedback and videos were really helpful. You can take a look at his YouTube channel here.
- Bitcoin is powered by a proof of work algorithm. You can see proof of work, as a system where you need to have infrastructure, in this case computers, to be able to participate in the process of securing the network.
- Bitcoin is extremely centralized in terms of mining pools. Bitcoin doesn’t allow the “people” to participate in the process of securing the network. Bitcoin currently uses as much electricity as Austria.
- In PoW, the more computers you have, and more advanced these computers, the more chance you have of winning a reward. In PoS, the bigger the size of your stake, the more chance you have of wining a reward.
- Delegators will only receive the staking rewards after the end of each epoch. So it’s not like with Bitcoin, where at the end of each block miners directly receive the rewards.
- Other projects are starting to implement Ouroboros. Coda Protocol, a project backed by the biggest, including Coinbases, Polychain, Naval Ravikant and Fred Ehrsam is an example.
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