A Story to Explain Proof of Stake
Today we look at how "proof-of-stake" can feel.
TL;DR: Proof-of-Stake illustrated as a Las Vegas Betting Example.
Hello Curious One!
ETH 2.0 is here, and we’re now on this “Proof-of-Stake” thing. In my crusade to understand the technical things, I have found that many written pieces are technical in nature, or try very hard to maintain the engineering jargon.
So in true ethos of this newsletter, I am explaining Proof-of-Stake to you - what a Validator in Proof Of Stake does - but this time you’ll have to imagine you are gambling.
Unusually, you will not find helpful TL;DRs for this piece.
Good Reading!
In Case You Missed It
Sections You Can Skim To
You can’t.
The Prelude
TL;DR: Welcome to Las Vegas. Where every gamble is your next chance to win.
The Prelude
Imagine going to a Las Vegas Conference. There are thousands of people there.
You walk around the floor, seeing different exhibits.
You finally make it to the other side of the conference center where there you find a room.
You notice the room is labeled with a sign that says “VIP Money Makers Only”.
You ask the attendant how you can be a VIP Money Maker.
They indicate that you can enter, but the person inside will not call on you unless you meet the number they are looking for.
He mentions that there is a minimum balance that is looked for before being able to participate. The attendant said that you basically have to “bet your money on a chance to win”.
You nod, understanding it, and walk in.
The Game
TL;DR: Everyone loves a little game right? What if we raise the stakes?
The Game
While in the room, an auctioneer-style gambit is going on. The person in the front with a microphone, a person whom you have designated as “The Auctioneer” is proposing calculus looking formulas to be solved. The first one to solve the proposed problem gets a prize.
Now you’ve done this kind of game in the past.
You’ve participated in past events where everyone saw the prompt, and everyone raced to prove each other last by submitting the most accurate answer first. You were occasionally first, and you always got a nice reward for it.
For you, you’ve experience pretty chaotic events, similar to Black Friday shopping, where everyone races to the front of the line.
But today, today you notice something different.
No one is taking out pieces of paper and solving the problem that the auctioneer has proposed all at once.
In fact, it’s much more orderly.
It looks like the game has changed.
Instead, people are raising their hand, accompanied by a small sign. The sign has some numbers. Are these answers?
They are not.
You notice that on one person’s sign, they put $16k on it.
The auctioneer calls on the $16k and says “Sorry kid, your stake is too low”.
Another person puts up $32k. The auctioneer flags them, says they are in.
Another person put up $80k. The auctioneer flags them too, says they are in.
Another person put up $50k. The auctioneer also flags them, says they are in.
The auctioneer announces there are 3 people who are eligible to take on the problem, but only one can be it.
The auctioneer randomly chooses from the eligible participants, and chose the person with $50k.
The $50k person walks up, gets the prompt, and begins to solve the problem.
The rest watch.
Shortly thereafter, the $50k person announces they have finished solving the problem, and provides their proof of their work on the board. The other two people in the audience, the one with $32k and the other with $80k, are seen working out the proof in front of them.
The two agree on the $50k’s proof.
“Thanks for playing kid, here’s your reward”. The auctioneer pays the $50k person $2.5k prize for completing the transaction.
The auctioneer proceeds to announce another problem.
You think this could be you.
Buying In
TL;DR: To play the game, you have to be in the game.
Buying In
Seeing an opportunity you decide to get in on the action.
You put on your whiteboard $60k.
Someone else put $50k. Another in the audience announces $100k.
You cross your fingers, and hope you get selected.
You don’t.
The auctioneer chooses the $100k, gives them the problem.
They solve it, then you solve it to see if they got it right.
For some time, the auctioneer goes about announcing problems and randomly chooses people who at least have the minimum balance met on their signs.
You think maybe you don’t have enough? What’s the issue here?
Further observation leads you to believe that there isn’t a noticeable selection pattern.
But you know you at least meet the minimum.
Your Time to Shine
TL;DR: Waiting for your moment.
Your Time to Shine
Finally, after constantly raising your sign with $60k written on it, you suddenly get picked by the auctioneer.
Excited, you begin to solve the problem.
You rush to get the answer right and then announce that you have finished it. You write on the board.
The other eligible participants begin solving the problem too.
The first one to do so (besides you) raises their hand and says that they can’t get the same answers that you did. Others begin to confirm the difference in answers.
It turns out, in your excitement, you didn’t double check your work. When you had shared your answers on the board, you actually were broadcasting the wrong answers.
“Sorry kid. We’ll have to penalize you for giving faulty answers. If you want to participate, you’ll need to pay the penalty fee first of 1.66% what your sign ($60k) says, so $1000. You win some, lose some.”
“Don’t look so down kid, that gentleman in the back, he lost all of his stake. Why? He was being a dick about it..
“Relax kid, if you play by the rules and accept the outcomes as they are, you’ll be fine.”
You agree to pay, knowing next time you’ll be more diligent.
Next Time
TL;DR: One step away from greatness.
Next Time
You are pretty let down by paying a penalty fee off the bat.
You murmur, “I suppose, that’s just the way the game is played.”
A few more moments have passed, and you decide to raise your hand again for each problem proposed.
You write $59k on your sign.
Eventually you get selected once again.
This time you are extra aware. You solve the problem and broadcast it for everyone in the room.
8 different people are able to confirm your answers.
“Congrats kid, here’s $2950. Come back next time?”
Debrief
TL;DR: Got you to learn.
Debrief
Thanks for reading. Using the lovely world of Las Vegas, I went about explaining how Proof-of-Stake works. Well, how it works with your crypto that is. At core, its a set of computational problems being solved for crypto. So a math competition.
The only fundamental different is that in order to even be allowed to solve a problem, you have to put your pot stake into it. Similar to gambling - how much do you want to bet that you are right?
At a behavior level, that’s how Proof-of-Stake works. Albeit, infinitely faster, and with more complexity.
Hope you enjoyed this read.
p.s. did you catch the Proof-of-Work to Proof-of-Stake transition in this piece? ;)