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Against the IFP

Centralizing control over a currency’s infrastructure is a seemingly obvious mistake.

One would think any Austro-libertarian worth their salt would be able to see thru such a charade. Yet here we are, again. Face to face with economic illiteracy. Not garden variety lefist economic illiteracy, but one far more stinging and painful - one which comes from within our own community, rather than from without. 

First, Bitcoiners faced the economic illiteracy of maximalism and small blockers. Attempts to masquerade money’s primary function as value storage (Ammous) or rejecting Menger’s Regression Theorem altogether (Szabo) are luckily demonstrably false. Nevertheless, the shock of our fellow Bitcoiners illiteracy was like an unexpected slap in the face. Suddenly, we were forced to confront the fact that the ignorance of our allies in the fight for sound money, had led them astray. Yet, thru BCH we were thankfully able to keep Satoshi’s dream of peer to peer cash intact. 
Well, crypto anarch…

Blockchain Trends

I recently had the chance to sit down with Tom McLaughlin, CEO of Blockstake, a NYC-based mining company, to discuss master nodes, proof of stake vs. proof of work networks, and other trends in the blockchain. 

Sal: Thanks for taking the time to chat

Tom McLaughlin: Thanks for having me Sal. It’s great to be here. I love this whole notion of disrupting legacy markets, whether it’s governmental oversight boards, or companies like Goldman Sachs & Wall St. Putting that to the side for a second, I’m the CEO of Blockstake, we’re a blockchain mining company based out of New York. We mine cryptocurrencies that run on a proof of stake consensus mechanism. Another term that’s thrown around with that as well, is masternode. We’re talking about the next generation blockchain that runs on a process that is a little bit more fair to everyone in the network.

Sal: What’s the difference between a proof of stake network and a proof of work network?

Tom: What a blockchain does, is allow a lot of different parties to keep track of transactions so each of them can verify these transactions against other points in the network. That enables a trustless process for other network participants. The people who are providing that infrastructure are doing so because they want to receive some award. We call those block rewards & they’re commonly new cryptocurrencies. You’re paid for doing that by constantly monitoring & processing transactions on the network with the hopes that you add the next block to the blockchain & then you’re compensated in coins. Now, the earlier networks - the proof of work, they brought this innovative solution to kind of, pick the winner - the person who can put that next block on. They developed a process to do that which involves a lot of mining & hardware. Basically churning out strings of numbers trying to find a lucky ticket to be the next person to put a block on the blockchain. That whole process had nothing to do with necessarily keeping the network up and running so there are a lot of inefficiencies there. If your think about it, the people mining bitcoin in some parts of the world are mining it for $2000 and selling it for $8000. That whole value difference is money sucked out of the network. And so, proof of stake, is a new consensus mechanism which came out a couple years ago. The flagship blockchain was called DASH, most projects are using it now. The way they decide who adds the next block and how they get compensated is in direct proportion to how many tokens you own in the network as well as if you’re willing to run the software for this program. So to unpack that a little, what that means is that if there are 100 tokens in the network and you own 1 out of those 100 you’re going to get 1 out of every 100 new tokens that are minted. So it’s a lot more straightforward and provides a fairer mechanism for everyone to mine the new block.

Sal: Do you think there's a trend away from proof of work to proof of stake networks?

Tom: Yes. That is 100% the case. Since late 2016, every big new project that has come out in the blockchain space has used a proof of stake mechanism and the reason for that is because, the developers of new projects realized how hard it was to get the mining base necessary to keep the network stable. When you’re building a proof of work coin you need to go to people who have set-up these facilities all around the world and convince them that they need to put they’re electricity towards this coin as opposed to bitcoin. It ends up being a very hard sell.

Sal: I remember reading ETH was going to make the switch, is that still the plan?

Tom: Yeah, they’ve been talking about this thing called the Casper protocol which would allow the network to shift from a proof of work mechanism to proof of stake. From my understanding it would be a gradual change. I’m very pessimistic about the outcome of this because ultimately there are a lot of people mining this with very specialized hardware. When ETH says we’re going to go to proof of stake all of those miners are going to be very pissed and leave the network. I’m envisioning a sort of split between proof of work ETH and proof of stake ETH.

Sal: What about the difference in transaction time between proof of stake and proof of work?

Tom: There are so many different variables & intricacies, but just on the base level - with proof of stake, you can process transactions much, much quicker. Bitcoin can process between 8-15 transactions per second, & that has gone up significantly with the lightning network. On a contrary basis, something like Steemit, which runs on a delegated proof of stake system, you’re looking at a couple hundred thousand transactions per second.

Sal: That’s huge.

Tom: Yeah, that’s the root of a lot of the problems I see with ETH. You’re building these applications and people don’t care if there’s a blockchain behind it. Yeah it’s nice, but they expect fast & clean user interface, & you can’t do that if you can only process 15 transactions a second.

Sal: Which is safer: proof of stake or proof of work networks? If you were going to launch an attack on one, which would it be?

Tom: I would attack a proof of work network and the reason why is because it comes down to financial incentives. I could short the underlying asset. Let's use BCH. I can rent electricity or hash power, and gain a significant chunk of BCH mining power. I could completely screw up that blockchain if I’m able to get 51% of the hash power. When you look at the numbers to rent hash power on a short term basis, it’s really not that expensive. So more of these 51% attacks happen on the proof of work blockchain. On the opposite side of that, with a proof of stake network, there isn’t that financial incentive because to gain part of the control or ownership. You need to own the underlying token, your stake. So are you going to attack a network when you own all the tokens? You’d be killing the value of your own tokens. There’s no incentive to do that.

Sal: Are proof of stake networks more environmentally friendly?

Tom: They definitely are. With all of those mining facilities that look like massive data centers with computers giving off huge amounts of heat, you need to pump in A/C. So it’s obviously terrible for the environment. In proof of stake, electricity isn’t the key input into the consensus mechanism. So, running a node in a proof of stake network looks like running an application on your computer. I don’t need a facility & all that electricity. So that's BTC, ETH, XMR - the proof of work coins. On a grand scale maybe it’s not all that terrible, but you don’t have this concern in the newer systems.

Sal: Those are the three main differences I see, which give an advantage to proof stake networks. Transactions times, safety & environmental consciousness. Those factors will play a bigger role in the future as governments and corporations adopt blockchain technology.

Tom: Yeah I agree. And I’d add a number four. If you’re building a network and the end goal is to make it as stable and quick as possible, you need more nodes and more people involved in the network, mining and running software. In proof of stake it’s very easy. People can run the software, you’ve got a token, get set-up and you’re good to go, it runs in the background.

Sal: What are some of the more familiar proof of stake coins?

Tom: DASH, PIVX, & NEO have a staking mechanism. Those are some of the most well known.

Sal: Are there any downsides to using a proof of stake network?

Tom: It really depends on the architecture of the application you’re trying to build. I’m a person who looks at BTC as a global store of value, & censorship is of the utmost importance. So for that kind of network, I can see proof of work being better suited for the end goal there. The other long term concern with proof of stake networks is the idea that there can be people that own 20% of the coin, they invested into a stake or masternode, & they continue to gain more of the network. What I say to that is - that’s exactly what happened to bitcoin! There are 3 big mining companies in the world. But this is all a big experiment and none of us know the outcome.

Sal: What is a master node and how is it different from a normal node?

Tom: Good question. When they designed these master node networks, the idea was that you want people to do two things. You wanted to incentivize people to lend server space to the network. That allows you to have a node in the network up and running. And they wanted people who had long term incentives in the network, owning the token. A masternode is just a special kind of stake that requires a certain amount of collateral in the form of tokens. You lock those tokens into a wallet which you have full access to. Then you run a software program, the wallet, in the background. When you do those two things, the masternode will be able to participate in the block rewards process. What that means is you buy these tokens, lock them up, run the program, and every so often you’re kicked back a number of tokens which you can do whatever you want with.

Sal: Is this something anyone can do or do you need technical expertise to setup a master node?

Tom: There’s definitely technical expertise involved. You need to learn a lot and be deep into crypto to get into this. But if anyone is willing to learn, and it’s something they want to do, they’re definitely capable of doing it. One of the trends in the masternode space is that a lot of great technical solutions make it extremely easy to setup a master node. You don't’ necessarily need programming experience or technical experience, but it does take a little time. Still a lot easier than the predecessor where you had to rent a facility, get mining setup, etc...

Sal: That’ll be interesting to see it streamlined and made more available to everyone.

Tom: One of the resources I would recommend checking out is a platform called GIN. It’s a one-click masternode setup & streamlines that process a lot. You pay for the server space with their coin and then you mine the new coin. Kind of like a self-sustaining ecosystem.

Sal: So what do you look for in a coin before getting involved. There must be some vetting process, right?

Tom: Absolutely, the four of us on the accounting team have been studying these coins for a while. We’re all pretty savvy, well versed investors. We look at things like the inflation or block schedule, how many will exist, price history, volume, what exchange are they on... Then there’s the aspect of angel investing where we’re looking at early stage products. We like to invest in projects where there’s a product up and running and people are using a network. And also community. We’re trying to get a sense of, is there a real community behind this project and an actual use case for the token?

Sal: You’re doing work with MeVu, right?

Tom: Yes! MeVu is a platform that allows two people to enter into an agreement, a bet - without any other third party. You can enter into a smart contract. So if I want to bet on the Yankees and you want to bet on the Royals, rather than each placing a $100 bet through a casino and paying a 10%-15% fee to do that. Why not go to the MeVu platform, we each put in a $100 and the smart contract will pay out to the winner. You only pay a 2%-3% fee. I think sports betting is one of the best use cases of the blockchain. The traditional gatekeepers are just absolute fraudsters. From the casinos to the offshore bookies - if you come in and you’re transparent and offering lower fees, this is an application people will use, and not just crypto people.

Me: And there’s been a rash of betting companies adopting the blockchain. Jez San & FunFair, MeVu, FansUnite - it’s sort of taking over the industry. One of the things I like is that it’s super lucrative and should help funnel money into the blockchain community, which'll in turn help fund innovation.

Tom: Absolutely. And the winner is the customer. They’re getting better products at better prices.

Me: How can people learn more and get involved with Blockstake?

Tom: Reach out to our team. There’s 4 founding members - we’re very accessible on all the social messaging sites. We’re happy to talk. We raise capital and sell shares to investors and I’d be happy to talk to folks about that. There’s also a great Youtube interview I did with our lawyer a couple weeks back on master nodes. We have a great blog on medium as well.

Sal: Any final thoughts?

Tom: If you’ve been in crypto for a while and you haven’t looked at your investment portfolio in a while, look into masternodes and staking as an asset class. I think it’s the most compelling area of crypto right now.


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