Proof of Stake represents a fundamental change in the underlying model of blockchain design. Bitcoin introduced the Proof of Work model wherein excessive computing power, and money, was invested in finding a hash above a certain threshold; a miner who met that requirement was granted the right to create a new block on the chain. While this is a time tested method to secure a network and maintain a global consensus, it is also tremendously wasteful in terms of electricity usage. EMURGO, as the official and commercial venture arm of Cardano — the first third generation blockchain to evolve out of a research-driven approach — is helping market a novel blockchain consensus model, named Ouroboros.
All blockchains have an inherent governance model embedded in their design. Researchers at IOHK have determined that, over time, Bitcoin converges into a dictatorship model due to centralization of miners and the underlying reward sharing mechanism, which causes stakeholders to, myopically, choose pools that have minimized their operational costs as there are more rewards available to stakeholders from those pools. This is demonstrated by the Bitcoin convergence simulation image below, which is based on tests run by IOHK.
Source: Kiayias, Aggelos. Stake Pools in Cardano .
As you can see in the image, over time, in the simulation, the number of pools converge into a single pool.
Logically, one might surmise that geothermal, or government subsidized, pools would win in the long run. Doing a little research shows that this assumption is correct. Eva Xiao states that, “In 2016, for instance, overcapacity from hydropower stations in Sichuan and Yunnan amounted to a whopping 45.6 terawatt hours [of Bitcoin electricity usage]. To put that into perspective, the entire US generated 4,100 terawatt hours of electricity in the same year.” As of 2019, 81% of Bitcoin miners are from China. To the visionaries of a novel cryptocurrency based future, that number should sound very troubling.
Cardano’s underlying governance model will be significantly more distributed. So how exactly does the Cardano Proof of Stake model work?
