In centralized systems, an administrator manages the database and decides what files to store and how to update them. The administrator can delegate this power to others. With decentralized public ledgers, or blockchains, however, no administrators exist. Independent nodes in peer-to-peer networks must come to a consensus on the status of the ledger
A consensus mechanism needs to be implemented in order to confirm a new group of trustless transactions (so-called ‘blocks’) on a distributed ledger called a blockchain.
PoW
One of these mechanisms, Proof of Work (PoW) mining, makes use of high powered computer hardware to deduce a desired sequence of numbers, called a hash, in order to create consensuses on a given blockchain. By using a more efficient mining machine (in terms of energy consumption to computing output) to run calculations, a miner is able to maximise profitability in terms of cryptocurrency rewards.
Bitcoin is a classic example of a cryptocurrency which achieves consensus using PoW mining. Bitcoin implements a key feature in its mechanism — asymmetry; The work must be difficult on the miner’s side, but easy to check for the rest of the network. Miners compete to be the first to find a hash regarding a particular block, which can only be solved using sheer computing power to make the largest number of guesses as quickly as possible.When a miner finally finds the right solution, they ‘announce’ it to the whole network, receiving a reward in cryptocurrency, provided by the protocol.
From a technical standpoint, the mining process operates by means of inverse hashing; it determines an arbitrary number with a specific length, or a ‘nonce’, by which the difficulty of mining can be regulated, and creates competition in that it rewards only one miner who can find the nonce in the least amount of time. This incentivises more computing power to be added to the network, which results in the difficulty of finding a nonce being increased, pushing miners to improve the efficiency of their mining systems to maintain a positive economic balance. With this, inflation can also be controlled.
There are differing opinions regarding the utility of PoW mining — some are avid supporters, while others claim it is a waste of physical resources. There are also concerns regarding security when it comes to PoW; it is vulnerable to a “51% Attack”, meaning, theoretically, whoever holds 51% of the entire network’s computing power can manipulate the blockchain to their advantage, preventing new transactions from being confirmed, and having the ability to double-spend currency.
The recent hardfork issue between Bitcoin and Bitcoin Cash revealed another drawback of the PoW mechanism. Bitcoin holders cannot participate in any decision making, and only a minority of miners have authority, which is inverse to the philosophy of decentralisation.
PoS
The second mechanism, Proof of Stake (PoS) allows users to mine for rewards using very minimal resources in terms of hardware and software. The creator of a new block is chosen in a deterministic way; stakeholders with larger amounts and more mature tokens (tokens having been held longer) being more likely to receive a reward.
A positive aspect of a PoS consensus mechanism is that there are more people ‘mining’, however, there is another benefit concentration problem; Individuals who own more cryptocurrencies, or a higher stake, will receive more dividends. This creates a situation where those who can afford to hold the most tokens receive the most rewards, and those who can only afford few tokens may even be wasting resources in the form of electricity, by keeping devices on in order to mine.
PoW+PoS
By adopting the Hybrid PoW+PoS censuses mechanism, Hcash can maximise user engagement, benefiting both parties. Hcash holders and miners can participate in decision making by voting, allowing users to determine the direction of Hcash as a company and as a technology, for example, implementing certain technologies or protocols, determining whether the development team should apply certain functionalities, whether existing code should be activated, and how to spend allocated budgets. If the updates are approved, the fork will be automatically conducted without a need for intervention by developers. In short, this means Hcash can truly embody the meaning of decentralisation.
To ensure fairness, voting weight is based on stake, both in the number of tokens held and mining work produced, however any holders of tokens can participate in voting. Both experienced developers and members without any technical knowledge can propose improvements or new features, and the collective community can decide on whether the change should be made or not. By allowing voting through the Hybrid PoW+PoS mechanism, Hcash can act as a Decentralised Autonomous Organisation (DAO). In terms of technology, Hcash implements a ticket voting mechanism (a practical and flexible PoS scheme) from Decred (and Bitcoin-NG), (using keyblocks and microblocks) to improve the efficient and flexible hybrid consensus scheme. Therefore, the PoW and PoS have an equal importance in the consensus mechanism.
The PoS mechanism also implements a check and balance system. If there is a consensus mismatch in the network, and a miner is suspected of being fraudulent, then the majority of the Hcash holders can vote their mining to be deemed invalid. The PoS mechanism then also encourages Hcash holders keep their tokens in wallet rather than on an exchange where it is ready to be traded, and also has a positive impact on Hcash ecosystem as people will focus on the application of Hcash technology rather than short term price fluctuations.
The adoption of Hybrid PoW+PoS guarantees the price of Hcash from the PoW side, due to the relatively stable cost of mining. This is because miners will not sell the Hcash tokens earned at a lower price than what it cost them to mine. Additionally, the increasing cost of computing power will support the price of Hcash, alleviating the centralisation problem of a purely PoS mechanism.
Regarding security, PoW progress needs to be approved by PoS, therefore, PoW miners cannot change the rule by themselves which prevent the chance of 51% attack. This helps the network remain secure, however, this is a short-term solution. In order to ensure the integrity of the network in the long term, quantum resistance must be implemented, and the development of which is progressing successfully. This will enhance the security of Hcash and prevent against future attacks which could severely undermine the network. Additionally, Hcash supports the Segwit feature, the post-quantum digital signature and flash network.
A purely PoS system is unstable, and shareholders can easily generate fake timestamp history for fake blocks. A two-layer chain structure, (keyblocks and microblocks), has been applied to the PoW system. This prevents an overwhelmingly large amount of microBlocks to be released from keyBlocks, which might trigger convergence problems, and result in the system being undermined by aggressive mining in a short period of time.
There are two mining levels in the Hcash blockchain, meaning, the PoW difficulty will be divided into two levels, being: keyblocks and microblocks. Miners who have large amounts of computing power are able to generate keyblocks, whereas less powerful miners will be able to generate microblocks. This mechanism, that prevents microblocks from being released, will be controlled by a certain group of miners. This aims to increase the system efficiency without affecting the security of consensus.
The Hcash main chain will launch in December. Additionally, during this time the Hybrid PoW+PoS consensus mechanism will be published as an academic paper.
With these developments and more to come, Hcash aims to continuously contribute to the diversified Blockchain ecosystem.