Why Proof of Capacity should be taken seriously

by Matthew Czarnek (2015) 

Before I get into discussing Proof of Capacity, I would like to discuss the core principle behind cryptocurrency. The thing that makes cryptocurrency both amazing but also a little tricky to initially understand is that the transactions are processed by a network of many computers, to ensure the currency cannot be controlled by a single entity.  The idea of decentralization requires some algorithms that are a lot more complicated than your average transaction processor.  Each algorithm in this field has its pros and cons. Most of the debate has been regarding whether Proof of Work or Proof of Stake are the better algorithm and which weaknesses are more acceptable.

Surprisingly though, most people haven’t heard of Proof of Capacity, which actually has the pros of both other algorithms, some pros neither one of them has, without any significant cons. This algorithm enables a better customer experience and helps us attract more customers to try this coin in the first place.

The critical difference between Proof of Work and Proof of Capacity is that instead of needing ever more expensive, power hungry processors, it uses inexpensive, low-power hard drives.  And the biggest difference between Proof of Stake and Proof of Capacity is that Proof of Capacity is inherently more secure and trimmed versions of the blockchain are easier and more secure as well. In fact, I’d go so far as to say that it might be impossible to securely trim the Proof of Stake blockchain, as shown in this paper.

The one other thing and biggest advantage that Proof of Capacity has going for it that Proof of Work and Proof of Stake are missing and that could very likely be the tipping point to help it’s viral spread is that it has a built in coin faucet in the form of hard drives that allow anyone to earn free coins in exchange for providing extra security for the network.

The first and currently only coin to implement this algorithm is Burst.

What does Proof of Capacity have going for it?

   ASIC Proof – maintains a level technology playing field

   More decentralized – ubiquitous hard drives mean more people can contribute

   More secure than Proof of Stake or Proof of Work – due to increased decentralization and no potential history key attacks

   Energy Efficient – hard drives use ~30 times less power than an ASIC-based miner and only 1.23 times as much power as a Proof of Stake coin. See calculations in paper.

– Block chain trimming is much more secure and efficient than Proof of Stake.

– Easier new customer acquisition than Proof of Work or Proof of Stake – everyone can earn them using their extra hard drive space

Description of Proof of Capacity Algorithm

(This section contains lots of technical information.. note that most sections are less technical)

First of all, a brief description of how Burst implements Proof of Capacity, or at least will implement it in the soon to be released next version of the Proof of Capacity algorithm, then I’ll address the above issues in more detail. For those who have not studied Proof of Work, a brief summary is that a Proof of Work is a calculation done that proves that an immense number of calculations (aka work) went into creating it.  In Proof of Work systems, miners continuously run numbers through a hash function looking for inputs which produces outputs that satisfy some set of constraints. In Proof of Capacity, miners do this work once up-front, and save the results which they can continue to use each block without needing to continuously do work.

Though the general idea of delaying Proofs of Work has been previously proposed, it wasn’t until recently, with the introduction of Burst’s algorithm, that it has become viable without leaving open an easy way to cheat the system. Many people who’ve heard of it, haven’t fully thought through the implications of a Proof of Capacity coin and see it as a toy algorithm.  However, I am of the belief that Proof of Capacity could prove to be the most successful cryptocurrency algorithm in the long run. This could very well play out a little bit like Google’s invention of PageRank. Sure, there were other search engines, even some big ones, but all of them had issues when it came to finding the information you needed. Google came out with the algorithm that fixed this. I believe people will similarly soon realize the power of Burst in the near future.

Mining is the act of using these plotted hard drives to power the network.  While mining, miners package all transactions they see on the network that have not yet been submitted into ‘blocks’. Then miners pull those Proofs off of the hard drive using a predetermined set of rules and submit them to the network. The end result is that the more hard drive space you contribute to the network, the more power you have over the network.

A little bit more detailed and technical explanation for those who are interested is that Burst splits your hard drive into thousands of segments and when plotting it calculates a qualifying hash to determine whether a given nonce is valid. If it is valid, then it randomizes this number again with another hash to determine which ‘bucket’ to place this result into.

In other words:

qualifyingHash = hash((public account number) concat (drive Id) concat (nonce))

If(qualifyingHash < target)
  bucketNum = hash(qualifyingHash) % (number of buckets)}

Then if it is valid, write the nonce to that bucket on your hard drive. Then you choose a new nonce and repeat until your plot is full. Most of the nonces will not be valid but this continual checking of new nonces is the Proof of Work that proves that many calculations went into finding the correct nonces.

While mining, the miners find the strongest block they can to build off of and cryptographically sign the previous generation signature with the public key of the miner whose block they are building off of. This produces a random number that is reproducible by the rest of the network and is the current blocks generation signature.

While mining, the generation signature is hashed with each valid nonce of each miner. 8 bytes are taken from the hash, then divided by a scaling factor which is related to the inverse difficulty. Where difficulty is the measure of how hard it is to find a block for a miner on the network, the more miners the higher the difficulty.   The resulting number is a number of seconds. As soon as that many seconds have passed since the last block without a new one having been announced, the address/nonce combination used to generate that plot/scoop is eligible to announce a new block.

Now, let’s go into the advantages of Proof of Capacity one at a time.

Proof of Capacity is ASIC Proof

One of the reasons that Litecoin gained fame was because it was believed to be ASIC Proof and while Litecoin ASIC’s aren’t quite as efficient as Bitcoin miners, it is not true to the extent that Litecoin can be mined from a normal PC because it’d be similar odds as playing the lottery.. you would basically never mine a block because the ASICs are hundreds of thousands of times more efficient. While there are some complicated schemes that claim to get around it, the problem is that no matter how you do Proof of Work, as long as you are doing it in real time, once the coin becomes large enough, someone will make an ASIC that gets around whatever ASIC protections you come up with.

Because Proof of Capacity is based off of Proof of Work, theoretically you could compute the Proofs in real time, however, it is possible to require enough work be done during these initial calculations that even the most cost efficient ASIC cannot mine efficiently enough to make it cheaper to use than a hard drive.  This is because the initial calculations used to plot the hard drives can take place over the course of a day, a few days or even a week, while an ASIC would only have a couple minutes or less since an ASIC would have to perform these calculations during the time of a block.

This has some very good effects for the coin including improving the decentralization, and security as well as the energy efficiency of the miners. This will be further covered in the following sections.

Proof of Capacity is More Decentralized

Being decentralized is a key feature for these cryptocurrencies. Being decentralized means that when a cryptocurrency such as Burst becomes a major currency used worldwide, no  person or company will be able to control or manipulate the network. Having this system makes it harder to attack or manipulate the network. Additionally you don’t have to worry about the person, company, or government controlling your money to manipulating your money or excessively inflate it. And even if the entity controlling the money is honest, it is much easier to hack or compromise a centralized controller of your money.

The problem with ASICs is that not everyone can own an ASIC. The most efficient ones are private, or so expensive, that they are not an option for the casual user. This favors large mining operations controlling large farms of ASICs, which is less decentralized. However, hard drives are affordable and available to all. In fact, the majority of people already own all the equipment necessary to mine a Proof of Capacity cryptocurrency.  Because the coin is ASIC-proof, the profit per-dollar of mining equipment should be approximately the same for either large data centers or smaller casual users. Large data centers also suffer from larger overheads, like staff, building costs, etc. which tips the profit balance more in the favour of the smaller miner. Individuals can mine using their existing computer with no extra outlay which encourages more smaller users to contribute to the network, hence improved decentralization.

Additionally, ASICs tend to be noisy and hot and cost a lot in terms of electricity, which are not very customer friendly for your average person who wants to invest a little bit of money into mining from home. An excellent video that demonstrates just how noisy and hot a Bitcoin farm can be is here: Life Inside a Secret Chinese Bitcoin Mine.  Extra hard drives don’t have that issue. Extra hard drives also have much higher resale value than ASICs since they are reusable, and also they have more uses and can be used for storing data, meaning they are less of a risk for miners to buy. Additionally the mining equipment is easily available worldwide and with less hassle than ASIC miners are.

Proof of Stake tends to naturally flow towards being more centralized as the miners earn money from mining, the bigger miners earn more money, which increasing their mining power. This in turn increases the amount of money they make and becomes a circular cycle.

Along these same lines, people tend to prefer coins that are more evenly distributed and being more decentralized means that they are more evenly distributed.

To be continued in Part 2.


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