Peercoin, The First Proof of Stake Cryptocurrency
This article was originally published on The Daily Chain, 2nd December 2020.
“Having six nodes does not qualify as a decentralized blockchain. At least not for me. Everyone should be able to produce blocks.”
Peerchemist, Peercoin project lead, November 2020
The Peercoin network launched on August 19th 2012 at 18:00 UTC, and a new chapter in cryptocurrency was opened. Peercoin is the fourth oldest cryptocurrency still active today, after Bitcoin, Namecoin and Litecoin. It is also the first Proof of Stake coin.
On December 1st 2020 Ethereum 2.0 went live, and the second biggest blockchain network moved from Proof of Work to Proof of Stake.
This article was inspired by that move, and focuses on PoS technology and Peercoin. In this first part we speak with project lead Peerchemist, and in the second we talk with Peercoin founder and co-creator of Proof of Stake, Sunny King.
Proof-of-Stake (PoS) is a mechanism for blockchains to reach decentralized consensus. It secures the network like Bitcoin’s Proof-of-Work (PoW), but without huge power consumption since no cryptographic puzzles are being solved. PoS was introduced in 2012 by Sunny King and Scott Nadal in a paper titled PPCoin: Peer-to-Peer Crypto-Currency with Proof-of-Stake
“This design attempts to demonstrate the viability of future peer-to-peer crypto-currencies with no dependency on energy consumption.”
PPCoin: Peer-to-Peer Crypto-Currency with Proof-of-Stake, 2012
Proof of Stake is the second most popular consensus mechanism in use today. It has given rise to PoS v2 (Blackcoin), Delegated Proof-of-Stake (Bitshares), Liquid Proof-of-Stake (Tezos) The list is extensive.
Verge, Stratis (via Blackcoin), Qtum (via blackcoin), Reddcoin, Pivx (it’s a dash clone with PoS stack from Peercoin), Stakenet, Blocknet, Navcoin.
Proof of Stake
In Proof of Stake cryptocurrencies the creator of the next block is chosen by various combinations of (1) random selection, (2) wealth and (3) coin age. These three variables are balanced to create a fair rewards distribution while avoiding monopolies and 51% attacks.
Coin age refers to the length of time coins have been sitting in an address, and “coin days” to the number of coins multiplied by the number of days the coins have not moved for. The more coin days the more “minting power”, the PoS equivalent to PoW hashrate
In Peercoin coins start staking after 30 days, and reach maximum minting power after 90 days. After minting a block the coin age resets to zero, and the node must wait another 30 days. This was meant to reduce centralization of wealth and prevent malicious nodes accruing too much minting power.
Concerns that this strategy could weaken network security by discouraging nodes from staying online led to PoS V2 and Blackcoin, who kept rewards consistent regardless of coin age.
Their theory proved to be false as peercoin always has impressive number of nodes online. Blackcoin and their coinage-less algo is vulnerable to “stake grinding”
In a stake grinding an attacker can greatly amplify their minting power by exploiting some weakness in the protocol. It’s an issue Peercoin fixed in 2013.
The concept of coin age was known to Nakamoto as early as 2010 and was used to prioritize transactions in the mempool, but not for securing the network.
Since PoS networks aren’t hampered by solving cryptographic puzzles they often boast higher throughput, or transaction per second, than PoW networks.
Speed is further increased when only a subset of nodes are selected (usually at random) to form consensus on a block, as with Delegated Proof of Stake and other similar consensus mechanisms. Ethereum 2.0 will also use a random subset of validators.
Nothing At Stake
In addition to the considerations listed above there is another. Nothing At Stake describes a situation in which PoS nodes have nothing to lose by validating multiple forked chains simultaneously, thereby leading to a consensus breakdown.
In PoW, following a consensus split, miners must select which chain to validate at the cost of losing money. In PoS there are no electrical cost overheads and some argue miners (often referred to as “minters” in PoS) have nothing to lose by validating both chains in a network split.
Nothing at Stake is mostly a theoretical problem, and has never negatively impacted PoS-based networks in practice. Moreover, some including Sunny King, contend that PoS nodes are indeed incentivized to form consensus in a split so that the integrity of the network which they support is maintained.
Last year in an anonymous fireside interview Sunny King made his first-ever “public appearance” to speak with Brandon Chez, CEO and Founder of CoinMarketCap.
Others mention nothing-at-stake as a potential problem to proof-of-stake consensus, but I think this is highly debatable. This was the assumption that minters would want to mint on all the chain forks thus preventing the formation of consensus. However we must realize the thesis of proof-of-stake is that if one becomes a stake-holder, then one is incentivized to do good for the network. Would a rational minter value a chance for minor rewards over the potential damage that can be done to the whole network? The answer is obviously no in my opinion. In practice we don’t see people motivated to attack the network this way at all.
Sunny King, 2019
Methods for mitigating Nothing At Stake almost always involve punishments and the loss of funds. Ethereum has taken this approach, and made matters even more egregious by punishing nodes that go off-line.
Interestingly though, it is this same ability of PoS nodes who can validate multiple chains without extra cost that has made them so attractive to Ethereum. Sharding technology, the means by which ETH will scale, depends on it.
Staking allows for secure sharding. Shard chains allow Ethereum to create multiple blocks at the same time, increasing transaction throughput. Sharding the network in a proof-of-work system would simply lower the power needed to compromise a portion of the network.
The comparability of PoS, and Peercoin specifically, with Layer 2 solutions like Lightning Network is highlighted in the Peercoin University documentation.
One issue that remains to be explored is how the existence of layer 2 networks will impact miner profitability. Off-chain transactions on layer 2 networks do not provide any fees to Bitcoin miners. Only on-chain transactions do this. It would appear then that Bitcoin miners and layer 2 networks are in direct competition with each other when it concerns fees, maybe even incompatible.
[…]Peercoin and proof-of-stake were intentionally designed without this conflict over transaction fees. Peercoin by design is not dependent on transaction fees for security, therefore it is 100% compatible with layer 2 networks.
We can quickly understand how significant Proof of Stake has been for cryptocurrency, and its importance only increases with the adoption of its methods.
It all started eight years ago with Peercoin, and early reports surfaced in The New York Times.
“PeerCoin, Mr. Blankenship’s money of choice, also has a creator who refuses to be identified, going by the name Sunny King. In an Internet chat, Sunny King said one of the goals with PeerCoin was to create money that did not require the same computer resources to mine — making it more environmentally sustainable.”
New York Times, 2013
Peercoin does not punish bad behavior, nor is not concerned about Nothing at Stake. It has been running continuously since its genesis.
“Peercoin is reaching 1% for the first time in history, since RFC19."
Peercoin aims to reach 1% annual inflation. Following exchange hacks and the frequent loss of private keys this target was not being met and the community agreed on an RFC to increase inflation which was ultimately adopted by the entire network who installed the upgraded software.
The Peercoin Project (Github hosted) at its base, is an open-source code (MIT, BSD and GPL license agreements) from which the binaries for the nodes are compiled. All internet connected nodes make up the Peercoin Network, which collectively reaches consensus and forms the Peercoin Blockchain. The Peercoin Community is a loosely collected group of individuals and organizations who take interest in the Peercoin Project and the Peercoin Blockchain.. The Peercoin Foundation is the legal face for all the above.
“Who Governs Peercoin?“, Peercoin Blog
Peercoin predates the ICO and IPO by many years. So when the only way to make coins is to stake coins, how to fairly get them into circulation? Peercoin addresses this through PoW mining.
Peercoin is more than just proof-of-stake. It is also the world’s first hybrid blockchain, utilizing both proof-of-stake and proof-of-work. The hybrid nature of the Peercoin blockchain allows it to draw strength from both protocols while at the same time minimizing weaknesses.
In Peercoin, the blockchain is secured only through proof-of-stake minting. Proof-of-work mining also runs in the background however and provides the network with continual distribution of new coins. When the network was initially launched, the majority of blocks were created with proof-of-work in order to bootstrap the network, distribute coins and create new stakeholders. Security then transitioned to proof-of-stake as minters took over security of the blockchain.
So Peercoin’s proof-of-work does not directly secure the network, but it is designed to do so indirectly by strengthening the decentralization of the network through the creation of new potential minters over time.
By mixing PoS and PoW, Peercoin maximizes decentralization. But does the use of PoW raise concern over claims of Eco-friendliness? The answer to this lies in a dynamic proof-of-work block reward which is inversely proportional to hashing power, as the Peercoin project lead explains later in this article.
Peercoin is a fork of Bitcoin and shares much of the codebase. Notable exceptions include the consensus mechanism and dynamic proof-of-work block reward. But there are others too.
PeerAssets is a blockchain agnostic protocol which enables peers to issue and transact with assets. The PeerAssets paper was published in 2016.
PeerAsset protocol based assets can be utilized to represent any type of asset like bonds or equity. PeerAssets can also represent real life objects, and by doing so confirm their existence on the blockchain. PeerAssets is a light protocol, as it utilizes no extra layers over the underlying blockchain.
Perpera is a data audit protocol based on PeerAssets for embedding document revision histories and URI’s in a blockchain. It went live in 2018 and can be used by writers, academics, historians today.
The primary purpose of this protocol is to record cryptographic hashes of successive revisions of single-file documents in a public blockchain, in a manner which enables thin clients to easily query and verify document histories. Such histories inherit useful properties from the underlying blockchain, namely immutability and massive replication, and can therefore serve as proofs of existence.
The Daily Chain spoke with the Peercoin project lead, Peerchemist, to find out more about this veteran cryptocurrency.
Q. How does it feel to be project lead in the first Proof of Stake coin?
Have you heard of Sisyphus? (laughs)
It’s demanding job. Especially because I need to take care of the legacy and unscathed brand name.
Q. When and how did you become project lead?
I believe it was March or April, 2017. How it happened is hard to remember. Active community used to have these IRC meetings and I would sporadically join them. You see, I was not really into crypto a lot at the time, but I did just design PeerAssets and I was maintaining Peerbox project since 2014. My interest in crypto was always focused on exclusively Peercoin. The other cryptos could never get me hooked. I am too big of a purist I guess.
Anyway, on one such meeting they were discussing how they need someone to get things in order and organize the active community to be productive. A leader, because project was leaderless since inception and they’ve started noticing that it does not work like that anymore, it’s 2017. Someone proposed me and they all agreed.
They just put me at the wheel and said “god speed”. That’s how they do.
Q. Why does Peercoin continue to use PoW mining, and what happens to the Peercoin blockchain if PoW mining stops?
Without PoW there is no trickle of fresh coins outside of the PoS rewards. Thus, this is no way to acquire peercoins as an outsider but by acquiring them of the open market and buying them of someone who bought them earlier. We believe it’s important to provide a venue to acquire peercoins which does not depend on marketplace or the price. When PoW stops nothing happens, chain security is not dependent on PoW.
Q. Peercoin says it’s more Eco-friendly, yet many more coins have been generated through PoW mining than PoS minting. How are these facts reconciled?
Security of Peercoin blockchain does not depend on burning energy. That is why it’s considered eco-friendly. PoW is a distribution method.
Q. What if Peercoin were worth billions? Wouldn’t that attract mining operations and consume lots of electricity?
It’s self regulating, this is the beauty of Peercoin economic model.
You’ve asked when does PoW stop. It will approach zero sometime in the future but it will never reach zero
PoW reward is inversely proportional to hashrate, which means that more hashrate equals less PoW inflation.
Why is this considered brilliant? Because hashrate is a perfect measure of state of development of the network and the blockchain “industry” in general. It is presumed that ever-increasing hashrate will follow the (ever) increasing development of the scene. So, Peercoin block reward will reduce and reduce as scene evolves. But never reach zero.
Q. Peercoin argues that “Nothing At Stake” is not a problem in practice, and that node operators are adequately incentivized to reach consensus. Ethereum uses punishments to keep nodes validators in check. What’s your opinion on this?
Ethereum and many others are not building a coin, they are building databases. Ethereum must go for “slashing” in order to keep the nodes super-aligned and reach the finality as soon as possible. We don’t. It’s really as simple as that, that is why our algo is in production for 8y and theirs is 4y on the drawing board.
Q. Perpera is a Data Audit Protocol based on PeerAssets. The former is a protocol for embedding document revision histories and URI’s, the latter a blockchain agnostic protocol which enables peers to issue and transact with assets. Can you describe these technologies, and how they compare with competing solutions?
PeerAssets came out of early experiments to do colored tokens on Peercoin, you know like Counterparty or Omni. But it’s much more potent than those. Much more feature-full and more expandable. Already in early 2017 it supported non-fungible tokens, unmovable tokens, identity proofs, on-chain voting and other features.
Too bad it never took off. Colored coins in general kinda lost traction, now everyone wants to do smart contracts even though they largely do not even need them.
Perpera stared life as PeerAssets Data Audit Protocol. It came from a thought experiment where we’ve tried to imagine how to facilitate maritime trade where none of the parties trusts each other using the blockchain. Goal was to allow for verifiable revisions of some document, for example a contract.
The primary purpose of this protocol is to record cryptographic hashes of successive revisions of single-file documents (*.pdf) in a public blockchain, in a manner which enables thin clients to easily query and verify document histories. Such histories inherit useful properties from the underlying blockchain, namely immutability and massive replication, and can therefore serve as proofs of existence. I have not met any alternative to Perpera yet, but I imagine that there is something like it out there. Perpera is easy to use and is fully client side, it can interact with the chain using just a light client. There is even a next cloud plugin for the protocol. Next update should feature hardware wallet integration as well.
Q. What other technology has Peercoin developed?
I believe Peercoin did much more for the economics of public blockchains than it did about the technology aspect. It’s probably the only blockchain system which makes economic sense, especially in the long run. For example, placing “deflationary” and “currency” in a same sentence will get you laughed out of any conversation with a trained economist. We don’t do stuff like that over here
Q. What does the future hold for Peercoin and Proof of Stake in general?
Peercoin is an established and well-maintained open-source project. Peercoin enables participation in a sustainable Blockchain for a wide Community of individuals and 3rd party participants. Peercoin has maintained its legacy as the sustainable option for decentralized consensus throughout its lifetime, and we hope long into the future. I personally believe that Peercoin will be around long after me, just like it was there long before I’ve come around.
I hope some day someone will recognize the work done and sheer value of the brand and pour the needed resources into development of the project and the surrounding ecosystem.
About Proof-of-stake and it’s future. That’s a hard question. While Proof-of-Stake was never a movement or a coordinated group of projects, as a whole it kinda took the wrong turn somewhere along the way. Why do I say the wrong turn? Because people are no longer working on decentralized blockchains. Having six nodes does not qualify as a decentralized blockchain. At least not for me. Everyone should be able to produce blocks.
Concluding Part One
Proof of Stake is to Ethereum as Proof of Work is to Bitcoin. Literally and figuratively. Together they have changed cryptocurrency and opened new chapters, and new possibilities for blockchain technology.
PoS and its variants are rapidly reshaping the landscape of crypto, but not always for the better. Too few nodes cripple decentralization, as can the absence of PoW mining.
A pure proof-of-stake system on the other hand is designed to distribute new coins only to existing holders, which does nothing to further decentralization or improve security.
Peercoin started the Proof of Stake revolution eight years ago, and the network’s longevity is good evidence that PoS is sustainable and durable if implemented correctly.
As mentioned in a series of informative Peercoin Primer videos, the Lindy effect tells us that this persistence leads to an even longer life.
The Lindy effect is a theory that the future life expectancy of some non-perishable things like a technology or an idea is proportional to their current age, so that every additional period of survival implies a longer remaining life expectancy.
If Lindey is right, Peerchemist will be vindicated and Peercoin will keep minting coins long after he and his successors have gone. He, the team past and present, and the entire Peercoin community should be applauded for their outstanding commitment.
In part two, The Daily Chain catches up with Sunny King, the founder of Peercoin and co-creator of Proof of Stake.