Tag: proof of work

Merge Mining and Auxiliary Proof of Work

merge mining
Figure 1: Mining on two blockchains at once

Merge mining or merged mining is the process of mining more than one blockchain simultaneously. This is possible for some proof-of-work (POW) chains, where a miner puts the same hash power to work creating blocks on multiple chains and earns the associated rewards on each of them, without having to pay separate energy costs for each. Here, I explain the ideas behind merge mining.

For a blockchain incorporating the proof-of-work protocol, miners use hash power in order to win the chance of appending their block. For leading chains such as Bitcoin, this is an energy intensive process where each individual hash has a minuscule chance of winning. They need to perform a huge number of hashes to be in with any chance. Where there are multiple proof-of-work chains available, the miner needs to choose which one to contribute his hash rate towards. So long as his hardware is compatible with the specific hashing algorithms used (such as SHA256), he is free to mine on either chain, and switch between them as desired. Usually, it is not possible employ the same hash power simultaneously on both chains. This is because each hash is applied to the block header for the chain in question, so can only be used for solving the POW problem for that specific blockchain. However, if the protocol for all (or, all but one) of the blockchains in question have been designed to specifically to allow for it, then it can be possible for each hash function application to contribute to the proof of work on each chain simultaneously. This is known as auxiliary proof-of-work (AuxPOW).

There are several blockchains that can be merge mined along with Bitcoin. The first such case was Namecoin (NMC), which was created in April 2011 and upgraded in October 2011 to support merge mining. Another example is Rootstock (RSK), which was created in January 2018 and is a sidechain of Bitcoin supporting smart contracts. According to the article The Growth of Bitcoin Merge Mining from October 2020, over 90% of the Bitcoin hashrate is involved in merge mining. This is shown in figure 2 below, borrowed from the same article and showing the proportion of Bitcoin blocks which contain an auxiliary proof-of-work in the coinbase transaction, indicating that it was merge mined along with another blockchain. One notable example not involving Bitcoin is Dogecoin, which is merge mined along with Litecoin, using the scrypt hash function.

merge proportion
Figure 2: Proportion of Bitcoin blocks with auxiliary POW (source: BitMEX Research).

Continue reading “Merge Mining and Auxiliary Proof of Work” →

Proof of Transfer

PoX chain

I will discuss an interesting blockchain protocol — or consensus mechanism — in which blocks are constructed on one blockchain by transferring assets on an entirely separate one. This is used by Stacks, where bitcoin needs to be spent in order to add blocks to the Stacks chain. Benefits include recycling the considerable proof-of-work of Bitcoin to secure additional chains, and can extend its functionality by introducing features such as smart contracts closely linked with Bitcoin.

As described in previous posts, decentralized cryptocurrencies such as Bitcoin require a protocol in order to regulate construction of the blockchain and to ensure immutability. Blocks of transactions are appended, one by one, to the end of the chain. The protocol helps decide who gets to assemble each block and receive the associated reward, as well as ensure immutability so that confirmed blocks remain unchanged in the chain for perpetuity. The focus of this post will be on the consensus mechanism itself, rather than any additional features of the blockchain in question such as support of smart contracts.

Most well-known is the proof-of-work (PoW) protocol used by Bitcoin as well as by many other leading cryptocurrencies. This requires miners to compete by expending computational power in order to gain the chance to create a block. Currently, the main competitor to proof-of-work is proof-of-stake (PoS), which requires validators to lock up units of the underlying chain asset in order to be selected to create blocks. Examples include Cardano and Solana. Both kinds of consensus mechanism function by requiring the prospective block-builders to spend some resource in order to win the chance of building a block, and receiving a block reward paid on-chain. These approaches gain their security from the idea that an attacker would need to gain control of more than half of the global resource in order to be able to control the network, known as a 51% attack.

For proof-of-work, the resource in question is hash rate or computational work, which boils down to using sufficient energy. This is external to the blockchain since the energy exists independently of the blockchain. For proof-of-stake, the resource is the blockchain asset itself or, more precisely, its opportunity cost because it is only required to lock up the asset for a period of time. This is internal to the blockchain. Since the resource used for security itself depends on the security of the network, it can introduce some circularities or difficulties when trying to analyse properties of the blockchain such as immutability and possible attack vectors.

There is a third kind of protocol, which is the focus of this post. Specifically, a blockchain can be secured by requiring validators to spend a resource existing on a separate blockchain. Since this approach gains its security from a ‘base’ blockchain to which it refers, it makes sense to use what is considered the most secure and decentralized chain. Namely, Bitcoin. The idea is quite general, and other chains such as Ethereum could be used be used in exactly the same way. As of writing this article, there is one blockchain using such a consensus mechansim. This is Stacks, which gains its security by validators spending bitcoin in order to build Stacks blocks. As such, I will use this as the canonical example demonstrating the approach. The name ‘proof-of-transfer’ (PoX) is used by the Stacks team. This makes sense, since validators are effectively transferring bitcoin in exchange for native Stacks coins when constructing blocks. The important point, though, is that they are spending a resource on the Bitcoin blockchain in order to build blocks on the Stacks one.

stacks blockchain
Figure 1: Stacks chain secured on the Bitcoin blockchain.

Continue reading “Proof of Transfer” →

Proof of Stake

I previously described how Bitcoin is secured by a Proof of Work (PoW) protocol. Now, I describe an alternative method of achieving the same goal — Proof of Stake (PoS). This is currently being used for some blockchains, such as Cardano, and there are also plans for Ethereum to move from its current PoW incarnation to a PoS system. Both methods have their benefits and drawbacks, with PoS requiring much less energy but, on the other hand, is more complex with more possible attack vectors. Opinion is divided on which is the better,with defenders of either system having very strong convictions. In this post, I concentrate on describing how proof of stake works and only briefly touch on the possible benefits of one method over another. There are many different implementations of proof of stake so, here, I give an overview of the methods used without concentrating on any one particular utilization.

As explained in an earlier post, whichever method is used to secure a blockchain, it should require miners to spend some resource in order to build blocks. For PoW chains like Bitcoin, this resource is computing power or hashrate. For PoS chains, the resource is the underlying tokens or cryptocurrency represented by the blockchain itself. More precisely, as it just requires miners to lock up coins for a period, it is the opportunity cost of these coins that they spend. This is an internal resource of the blockchain rather than an external one as with PoW. Before going any further, there is a slight matter of terminology. The people who build blocks for a proof of work chain are called miners whereas, in proof of stake, they are called validators. Other terms, such as forgers, are also in use. Personally, I think it would have been simpler to use the same word regardless of the protocol but, to be consistent with the common usage, I will refer to block builders as validators.

Let’s just refresh our understanding of what a protocol needs to do. It should;

  • allow anyone with the necessary resources to participate in building the blockchain.
  • allow the network to reach agreement on a single global blockchain state at each time.
  • (immutability) ensure that, once a block is added and considered to be confirmed, then it will remain in the chain indefinitely.

Furthermore, these properties should continue to hold even in the event that a minority of validators are acting dishonestly or, even, are collaborating to attack the network.

In proof of stake, individuals register to become a validator by locking up a quantity of the blockchain asset. The protocol then divides up time into a sequence of successive slots, one for each block. It needs to assign one validator per slot, and do this in a way such that, on average, the number of slots assigned to each validator is in proportion to their stake size. Then, when their time slot is reached, it is the job of the validator to collect together transactions from the mempool, and construct a valid block to append to the chain. In return, they receive a reward which can be one of, or a combination of, the transaction fees in the block and the block reward.

building a blockchain
Figure 1: Validators building a blockchain.

Each block is appended to the one constructed in the previous time slot so that, as time progresses, the validators continually add blocks on top of blocks, building the chain. Figure 1 shows this procedure with the cryptopunks acting as validators. Unlike with PoW where anyone who is able to create a valid block can submit it for inclusion, here the protocol needs to verify that the block used in each time slot has indeed been created by the validator assigned to it. This can be achieved with public key cryptography where, when they purchase a stake, each validator has to supply a public key. They then sign their blocks using the associated private key, proving that they were created by or, at least, approved by the assigned validator. Continue reading “Proof of Stake” →

Consensus Mechanisms and Blockchain Immutability

As discussed previously on this blog, the proof of work (PoW) mechanism is used by Bitcoin and some other cryptocurrencies to enable network nodes to arrive at a consensus as to the valid public blockchain, and to ensure its immutability. There are, however, many other blockchains making use of alternative protocols. Examples include proof of stake (PoS), delegated proof of stake (DPoS), proof of burn (PoB), proof of authority (PoA), proof of exchange, proof of space, and others. There is considerable debate and strong feelings surrounding these issues, with many people arguing that one or other of these protocols is better than the alternatives. Often though, the specific implementation is as important as which category a particular chain’s mechanism fits into. So, here, I take a high-level approach and consider what we should be looking for in a consensus mechanism.

The following are required of a consensus mechanism:

  1. enable users to have their transactions included in blocks that are added to the blockchain.
  2. enable the network to come to a consensus as to the valid state of the blockchain.
  3. ensure immutability, so that once transactions have been confirmed on the blockchain, they are never altered or removed.

In addition, we can consider how efficiently the protocol achieves these goals. For example, how quick and how cheaply can transactions be made? Also, what is the cost of maintaining the network, both financially and environmentally? These are separate points though, which will also likely factor into the choice of a preferred protocol, but which I will not pursue here. Continue reading “Consensus Mechanisms and Blockchain Immutability” →

Proof of Work

bitcoin miners
A bitcoin mining farm.

Here’s an interesting experiment. Go to any Bitcoin block explorer, and look at some blocks. I chose the recent block numbers (or heights) 686710 through 686719. Next, look at their hashes. These are 256 bit numbers, usually expressed as length 64 hexadecimal strings and, for the heights I selected, they are:
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One thing immediately stands out. All of the hashes start with a lot of zeros. Statistically, this should be virtually impossible unless the blocks have been chosen specifically to have such unlikely hash values. Interpreting the 256 bit strings as binary integers and dividing through by 2256 gives a number between 0 and 1 (which I will denote by p). For the hash of an arbitrary block of data, the p values will be uniformly distributed on the unit interval but, for the blocks above, they are:

height p
686710 3.56e-24
686711 1.81e-24
686712 3.77e-25
686713 5.40e-24
686714 3.86e-24
686715 1.06e-23
686716 9.18e-24
686717 5.24e-24
686718 8.63e-24
686719 9.67e-26

All of these values are miniscule, being less than about 10-23. By chance, this can only happen with probability 10-23 independently for each block. In fact, due to the pseudorandom properties of the SHA256 hash function, there is really only one way that this can happen. Many many different blocks must have been produced each time — of the order of 1023 of them — with only those having small hash values being transmitted to the network and accepted as valid.

This is, of course, the proof of work (POW) protocol, or consensus mechanism. It ensures that miners who create new Bitcoin blocks have to perform significant work, regulating the rate of block production and, vitally, ensuring immutability of the blockchain. Once a block has been added to the chain, and is already underneath several others (i.e., has several confirmations), then it is virtually impossible for it to be altered. This would require redoing all of the proof of work for the block in question and for all blocks above it, and doing this quickly enough to catch up with the main chain. Continue reading “Proof of Work” →