Blockstack || Proof of Transfer and Stacking

Pre-requisite to understand the post:- Basic knowledge of how Cryptocurrencies work ( Don’t Worry, I will try to cover it in some other post )

What makes Blockstack stand-out from the crypto crowd?

Through its vision it wants to design a decentralized internet where data privacy is in hand of its users.

But when you dig deep, you find that they’re trying to innovate the way the consensus algorithms are implemented as well.

Blockstack uses a new consensus algorithm, called Stacking, that uses the proof-of-work(PoX) cryptocurrency of an established blockchain( In this case, Bitcoin)to secure a new blockchain. An economic benefit of the Stacking consensus algorithm is that the holders of the new cryptocurrency can earn a reward in a base cryptocurrency by actively participating in the consensus algorithm. (Overall, This actually strengthens the bitcoin ecosystem as it increases its validity as the crypto-gold.)

Most crypto-currencies choose Proof-of-Burn as their mechanism for testifying the transactions and issuing new units of currency but after a point, it doesn’t make sense and leads to heavy consumption of electricity as well.

So if we already have a currency that everyone trusts, is already being mined, and has a trusted community around it, Why not build the new currency as a new layer over it, That’s where Proof of Transfer(PoX) comes in, For the mining mechanism of Stacks Blockchain, PoX was finalized.

Comparison of Proof-of-Work with other mechanisms

With proof-of-transfer, instead of destroying the base cryptocurrency, miners are required to distribute the base cryptocurrency to existing holders of the new cryptocurrency who participate in the consensus algorithm. Therefore, existing holders of the new cryptocurrency have an economic incentive to participate, do useful work for the network, and receive rewards.

So in a way, to implement PoX, we create a marketplace of STX Miners and Stackers.

STX Miners spend their BTC to earn STX tokens while Stackers ‘Hold and Lock STX’ to earn BTC.The statement is a little deeper than it seems.

The best way to understand would be use an imperfect analogy of an offline setup, Imagine an old kingdom where an accountant ratifies the transactions of all spending done by the king and gets paid in the state currency and then can use that currency to go in the market and buy gold from the jeweller.

Similarly the jeweller can come to accountant to exchange his gold for the state currency as it will allow him to buy other things.

I want to end this using a Drake meme because “we started on the dollar now we here”

Footnotes:-

1. https://uploads-ssl.webflow.com/5e7b1a27d160ce49af1c24e1/5f1596b12bcc0800f3dcadcd_pox.pdf
2. https://github.com/blockstack/stacks-blockchain/blob/develop/sip/sip-007-stacking-consensus.md
3. https://preview.redd.it/wp01oc1e9my01.png?width=503&auto=webp&s=7ee93f44b02fb2da73ac564aa7c9fb85fa4d272e
4. https://www.youtube.com/watch?v=L6U2npZwv84
5. https://www.geeksforgeeks.org/consensus-algorithms-in-blockchain/
6. https://www.waivingentropy.com/wp-content/uploads/2014/05/David-and-Goliath-feature-image.jpg
7. Consensus Algorithms —The consensus algorithm is a procedure through which all peers of the blockchain network reach a consensus on the present state of the ledger.