How Proof Of Stake (PoS) Algorithms 'Create Decentralized & Open Networks'

Hendrik Hofstadt, a Berlin-based software developer who has co-founded Certus One, Inc., a company focused on building “validator infrastructure” for proof-of-stake (PoS)-based blockchain networks, recently shared his views regarding the recently launched Cosmos platform with CryptoGlobe.

Cosmos, a highly-anticipated PoS-based network that primarily aims to facilitate blockchain interoperability (communication between separate and independent chains), was released recently - after many long months of development. Commenting on the initiative and his company, Certus One’s role or involvement with Cosmos, Hofstadt remarked:

At Certus One, we host [proprietary] validator infrastructure [by] applying enterprise-grade security practices to help secure the Cosmos network (plus we share a lot of the best practices for free in our knowledge base).

Certus One Fixes Several Vulnerabilities In Cosmos’ Codebase

Hofstadt, who’s also the co-founder and CEO of nexantic GmbH, a Germany-based firm specializing in developing “infrastructure software for enterprises,” told CryptoGlobe:

So far, we’ve provided open-source contributions to the [Cosmos codebase] and identified and fixed 6+ critical vulnerabilities. The growth of the ecosystem is one of our key goals, and we think we can achieve that by sharing our tools with the public and continuously contributing to the core software.

When questioned about whether PoS-based consensus is better than proof-of-work (PoW), Hofstadt said: “This is a controversial point where I’m not inclined to side with either or. However, I will articulate the benefits of PoS as I see them.”

Advantages Of Using Proof Of Stake Algorithms

According to Hofstadt, some of the main benefits of using PoS to manage blockchain-based networks include:

  • “Decentralized and open - everyone can easily participate in a meaningful way just by bonding the owned tokens (while mining with a small rig has almost no meaningful impact and a high entry cost),”
  • “Energy efficiency - PoS wastes almost no energy - the safety property is based on economic assumptions and economic incentives rather than waste of energy.”
  • “Attacks are hard to perform: With BPoS (bonded proof of stake) you need 2/3+ of all bonded tokens to double spend while in PoS you can temporarily rent hashpower to fork the chain meaning that in PoS you would hurt yourself as you have skin in the game.”

When asked about what can be done to ensure maximum security on the Cosmos chain which is already staking $300 million, the former software developer for Telegram Messenger said:

It is important at this stage to invest in infrastructure and security and apply and push frontiers on best practices. That's what we primarily do at Certus to both increase the resilience of the network and maintain safe staking for our customers.

“Creating Different Tiers Of Validators”

He added:

Different tiers of validators are being created at this stage. Ultimately, delegators will decide how secure the network is by delegating to stronger validators. Consequently, delegators will be responsible for maintaining decentralization by spreading delegations out as much as possible.

In order to help institutional investors store their funds securely on distributed ledger technology (DLT)-based systems, Hofstadt noted:

Institutional investors/funds play a big role in validator selection. Realistically, they should pick enterprise-grade validators to ensure the highest security for both their investment and for the sake of the network.

Main Use Cases For Cosmos

Although Hofstadt did not want to share his views regarding what he thinks are the main use cases for Cosmos, he pointed out that the project’s website states:

[The main use case for Cosmos] is to allow cross chain transfers and create the Internet of Blockchains while delivering an extremely solid building block with Tendermint/Cosmos-SDK (software development kit).

Elaborating on the potential impact the Cosmos network will have on crypto in the foreseeable future, Hofstadt remarked: “[Cosmos] will allow easy transfers of value between currently siloed off ecosystems and allow the creation of a new economy (being shaped by chains like the Binance DEX). It will also bring the safety properties and fast finality (instant tx confirmation) to traditional PoW chains using Peg-Zones and Hard spoons.”

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Trans-Fee Mining Crypto Exchange 'FCoin' Insolvent After Mistakenly Being Too Generous

One of the first cryptocurrency exchanges to adopt the controversial trans-fee mining (TFM) model, which has been called a “disguised ICO” has paused trading and withdrawals over a shortage of crypto worth up to $130 million.

According to a statement published by FCoin’s founder Zhang Jian, a former Huobi CTO, the exchange is now unable to process withdrawals as its reserves are down by between 7,000 to 13,000 bitcoin, worth over $130 million at press time, over an issue that’s “a little too complicated to be explained in a single sentence.”

Zhang’s statement details the cryptocurrency exchange wasn’t hacked, nor is it pulling an exit scam on its users. He detailed that an internal system error gave users more mining rewards than they should have received, noting the error wasn’t detected for a long period of time.

The transaction-fee mining model, which saw FCoin’s trading volume surpass $5 billion per 24 hours numerous times, sees the cryptocurrency exchange incentivize trading via its own token, FT. FCoin reimbursed users for transaction fees paid in BTC or ETH with FTs until 51% of the coin’s supply was distributed, and redistributed 80% of the BTC and ETH it collected to those holding FT tokens.

The controversial model drew criticism and saw Zhang defend it, claiming it was a misunderstood invention. At the time, he said:

If you look back at history, all new things were not recognized at the beginning. Many were believed to be fraud. Jack Ma was recognized as a fraud when he first promoted the internet in China.

Various cryptocurrency exchanges started adopting the TFM model shortly after, with research showing these platforms had unusually thin order books and low traffic taking into account the trading volumes they had.

According to Zhang, the errors in FCoin’s system gave away too many tokens in mining rewards from mid-2018 to mid-2019, when a complete back-end auditing system was implemented. As throughout 2019 the price of FT kept on dropping, Zhang and his team reportedly used their own funds to buy back tokens and drive up demand, a decision he claims was an error.

This, as it gave users a chance to sell their FT tokens and withdraw as much as possible from their accounts, while FCoin bought up tokens that kept on losing value. Zhang’s announcement came shortly after FCoin suspended its platform over a risk-control issue.

Zhang is now reportedly manually processing users’ withdrawal requests sent via email. The founder of the exchange claimed he will “switch tracks” to start again, and noted he hopes he can use the profits made from new ventures to “compensate everyone for their losses.”

Featured image via Unsplash.