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Types of Consensus Algorithms

The main feature of distributed ledger technology is that it lacks a central authority. This means that at the core of the technology, the participants need to agree on the ledger’s state. This is the fundamental piece of any distributed system, and how it is implemented defines the rest of the architecture. This is called […]

The post Types of Consensus Algorithms appeared first on The Daily Hodl.




The main feature of distributed ledger technology is that it lacks a central authority. This means that at the core of the technology, the participants need to agree on the ledger’s state. This is the fundamental piece of any distributed system, and how it is implemented defines the rest of the architecture. This is called the consensus algorithm.

Due to its overwhelming nature, the consensus algorithm is the heart of a distributed system. It is the central part, and its design and implementation have to be carefully considered for those looking to create a protocol. A good consensus algorithm needs to give the following results:

1. Agreement: All nodes in the network must reach the result regarding the state of the network.

2. Fault-Tolerant: The algorithm should have the capacity to work properly, even with the presence of faulty or dishonest nodes.

3. Termination: The consensus process has to have a clear stop after which all nodes arrive at a decision.

4. Integrity: All nodes should achieve finality within one consensus cycle.

These are the basic characteristics of a working consensus mechanism. Specific algorithms may have more or different versions of the concepts presented, but in some ways, all of these are shared by any decentralized protocol. Additionally, consensus algorithms have an essential layer of properties they need to have in order to work.

These are:

1. Consistency: This property means that all honest nodes produce the same value that is considered the correct one.

2. Tolerance: The ability to endure some faulty or dishonest nodes and the network’s capacity to recover.

3. Liveness: As long as the number of compromised nodes is below the tolerance limit, these cannot stop or delay the network from reaching consensus.

4. Authentication: This property assures that there is a mechanism to verify the identity of the participant nodes.

5. Quorum Structure: In a distributed system, only the minimum number of votes is necessary to operate.

6. Non-repudiation: A way to verify the sender account’s identity so it may have the capacity to dispute the transaction.

7. Equal Authority: All nodes in the network must have the same capacity, with no central authority capable of overriding a decision.

Again, this is a basic set of properties for an ideal decentralized consensus algorithm. Not all of the real mechanisms out there conform to these set of rules. One example is IOTA, which has a central observer capable of modifying the decisions of the nodes. For a purist, such an inclusion means that IOTA is not truly a decentralized network even though it has some other properties.

Before reviewing the most common consensus algorithms in use, we need to note something. The ones we will discuss work, for the most part, with blockchains. That is to say, the data structure known as blockchain is where these are meant to work. Other data structures can be used in a decentralized network such as directed acyclic graph (DAG), Hashgraph, etc. These have their consensus algorithms.

That being said, blockchain remains the most popular data structure. It was first implemented with Bitcoin; Ethereum adopted it, and even now, new third-generation protocols such as Cardano use it. It seems that for the foreseeable future, blockchain will remain the dominant technology.

China is at the forefront of blockchain integration. Check out their entire blockchain strategy and why they are so quick to integrate blockchain technology in their economy.

Types of consensus algorithms

Here we will give a general overview of the most popular ones in the blockchain.

Proof of Work

Proof of work is the first viable consensus algorithm and still the most widely used. In it, individual nodes compete to find a hash function that represents the list of transactions inside the block and a nonce added on top of it. A nonce is a number that requires that the hash function is preceded by a number of zeros to be valid. The process of finding this hash function is known as mining.

Click here to read all about the complete guide to the architecture of Bitcoin.

All the network nodes compete in the very hardware demanding process of mining to gain Bitcoin as a reward. Many have criticized that the energy intensity of proof of work is wasteful and harmful to the environment. Additionally, the mining’s electricity and hardware costs have led to the centralization of the network in a handful of countries.

This has resulted in new consensus algorithms being designed.

Proof of Stake

The main alternative to proof of work (PoW), proof of stake (PoS), has gained traction quickly in the world of blockchain. In it, the nodes in the network deposit the protocol’s main currency and lock for some time. This allows them to enter a semi-random lottery to validate the next block of transactions.

The possibility of being selected depends on the quantity of the coins staked. A node with a deposit of 1,000 coins is more likely to be chosen than one with 500. This can lead to centralization since those nodes with bigger pools of money can dominate the network. Even with this possibility, proponents claim that PoS is cheaper to run than PoW since no expensive hardware is needed to validate transactions.

Delegated Proof of Stake

This is a variation of PoS. Here the stakeholders use their coins to select which node will validate the next block of transactions. The nodes allotted money by the participant become validators and are in charge of propagating the blocks to the network. They can be voted out by the stakeholders if they are slow or behave dishonestly. There is a greater level of centralization in this model since the nodes that can become validators are of limited number and are selected prior to the vote by some other means.

Proof of Elapsed Time

This is a preferred consensus algorithm of few blockchains. Here each node generates a random waiting period in which a node goes to sleep. The node that wakes up first becomes the next validator. The disadvantage is that the nodes’ identity has to be known by the system since the waiting period needs to be random. Otherwise, dishonest nodes can cheat the system.

The consensus algorithm is at the heart of a blockchain. It is the main design decision that determines what is possible and how fast the rest of the system will perform. For those looking to develop in a given protocol or for investors trying to determine which protocol will be the best one in the future, it is crucial to understand the basics.

This content is sponsored and should be regarded as promotional material. Opinions and statements expressed herein are those of the author and do not reflect the opinions of The Daily Hodl. The Daily Hodl is not a subsidiary of or owned by any ICOs, blockchain startups or companies that advertise on our platform. Investors should do their due diligence before making any high-risk investments in any ICOs, blockchain startups or cryptocurrencies. Please be advised that your investments are at your own risk, and any losses you may incur are your responsibility.



What does a positive Coinbase premium mean for Bitcoin’s price?

Republished by Plato



Bitcoin’s price action on Coinbase has stood the test of time, especially since the crypto-exchange’s user statistics have often highlighted institutional participation in the market. The current Bitcoin bull run is largely influenced by institutional demand and buying. By extension, price action on Coinbase and other metrics can be deemed to signal traders’ sentiment too.

In that regard, one key metric is the Coinbase premium. With Bitcoin’s price strictly rangebound under $50,000 at press time, the Coinbase premium has turned positive, based on data from CryptoQuant.

Coinbase premium turned positive, Bitcoin bull run is on?

Source: Twitter

Since the Coinbase premium turned positive, a positive change in Bitcoin’s price in the short run can be projected. Here, it is worth mentioning that for a while, the same metric was in the negative.

Further, another metric that was looking extremely bullish at the time of writing was the Spent Output Profit Ratio.

Coinbase premium turned positive, Bitcoin bull run is on?

Source: Twitter

Based on the SOPR chart from Glassnode, the bull run may make a comeback in phases. The highlighted regions in the attached chart signal the points where the bottom and top were reset. This happened in mid-January, the last week of January, and on 26 February 2021. For the same, there are a few signs to look out for and each would further support the Bitcoin narrative.

One of the top signs is consistently positive Coinbase premium. Other signs from miners include increased inflows from miners on top exchanges, with the same fueling selling pressure on Bitcoin. When selling pressure hits a peak, the price drops as it did from the $58,640- level.

The complete reset of the Bitcoin Futures funding rates is yet another sign. The funding rate was reset, based on the SOPR chart from CryptoQuant, with the same underlining that Bitcoin lows and tops had been reset too. It is common for traders to bet high on leverage, long credit, and consequently, short volume. However, the cycle is complete when the volume increases and the price of Bitcoin pushes the leverage even higher.

Finally, there are other metrics like the Grayscale Bitcoin premium that has turned negative and signaled a drop in institutional demand. What does this entail? That’s a tricky question to answer. What’s evident, however, is that the two metrics are offering contrasting views on Bitcoin’s price performance.

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While Washington dithers, Wyoming and other US states mine for crypto gold

Republished by Plato



The United States is divided politically these days into red states and blue states, and increasingly, it seems to be fracturing into cryptocurrency-friendly and crypto-wary locales, too. On Feb. 21, it was revealed that San Francisco-based Ripple Labs had registered as a Wyoming business. Wyoming is arguably the most blockchain and cryptocurrency-welcoming state in the United States. 

Meanwhile, several days later, New York State’s attorney general announced a settlement of the office’s long-standing investigation into crypto trading platform Bitfinex for illegal activities. As a result, Bitfinex and affiliated Tether must pay $18.5 million for damages to the state of New York and submit to periodic reporting of their reserves.

Wyoming and New York — poles apart on the crypto regulatory spectrum — were both making industry headlines in the same week in other words. The irony wasn’t lost on Timothy Massad, former chairman of the U.S. Commodity Futures Trading Commission and now a senior fellow at Harvard University at Kennedy School, who told Cointelegraph:

“Federal regulation of crypto assets is like swiss cheese — full of holes — and that has meant a smorgasbord at the state level, with Wyoming actively luring crypto businesses and the New York attorney general bringing aggressive enforcement actions as we saw this week with Tether and Bitfinex.”

Whether this “smorgasbord” is a good thing is a matter of some debate. Crypto havens like Wyoming can be centers of innovation, pushing a potentially revolutionary technology further forward, as Wyoming’s recently elected U.S. Senator Cynthia Lummis emphasized this week in a Chamber of Digital Commerce panel discussion with Miami’s Mayor Francis Suarez, another crypto enthusiast.

A complex fabric

But it also leads to regulatory uncertainty that gives entrepreneurs a case of hypertension. As Stephen McKeon, an associate professor of finance at the University of Oregon, told Cointelegraph: “Our regulatory system is a complex fabric of multiple agencies at both the state and federal level.” He further emphasized that “they need to coordinate on the topic of crypto assets because this asset class doesn’t map cleanly to the existing regulatory structure.”

Asked if, from a business standpoint, Ripple and others were making a smart business move registering in crypto-warm states like Wyoming with a higher degree of regulatory certainty and freedom — as well as lower taxes — McKeon added: “Businesses strive to reduce regulatory uncertainty. If moving to Wyoming helps to achieve that objective, then it’s a smart move.”

Others could follow Ripple. Zachary Kelman, managing partner at Kelman Law, told Cointelegraph: “Many crypto projects fled New York after the introduction of the onerous BitLicense back in 2015. I expect more projects to relocate in Wyoming, as well as other crypto-friendly states like New Hampshire.”

Wyoming created a stir in 2019 when its legislature authorized the chartering of special purpose depository institutions, or SPDIs, that can receive both deposits and custody assets, including cryptocurrency. The state’s banking division itself acknowledged that “it is likely that many SPDIs will focus heavily on digital assets, such as virtual currencies, digital securities and utility tokens,” though they could also deal with traditional assets. SPDIs can’t make loans like traditional banks, however.

Kraken Bank was the first business to receive a Wyoming SPDI bank charter in September 2020, followed by Avanti Bank and Trust in October, and there are “three more [SPDIs] in the pipeline” said Lummis at the Chamber of Digital Commerce’s Feb. 25 event. Avanti founder and CEO Caitlin Long had earlier suggested that Wyoming’s SPDIs potentially were “a solution to the #BitLicense problem” faced by crypto companies because “New York law exempts national banks from the BitLicense.”

But even though the Wyoming SPDI’s are state-chartered institutions, not national banks, “federal law protects parity of national banks and state-chartered banks,” continued Long, and following that logic, she concluded that SPDIs represented “a passport into some 42 U.S. states without the need for additional state [crypto] licenses.”

An accident waiting to happen?

Not all are enthralled by Wyoming’s new special-purpose banks, though. The Bank Policy Institute suggested that Wyoming’s SPDIs could be an “accident waiting to happen.” The BPI noted in September that Kraken was “the first digital asset company in U.S. history to receive a bank charter recognized under federal and state law” but warned that its business model “is inherently unstable under stress” because the new bank is funded by uninsured, demandable retail deposits “and relies on a pool of assets such as corporate bonds, munis and longer-term Treasuries to fund redemptions under stress.”

David Kinitsky, CEO of Kraken Bank, in a conversation with Cointelegraph, said that he believes the BPI blog post “comes from a lobbyist group funded by, and working on behalf of, the world’s biggest banks” and rests “on a slew of faulty assumptions,” adding further:

“[It’s] comical and hypocritical that they think their fractional reserve model along with its total reliance on asset exposure and interest rate environment is somehow less risky than a full reserve custodian bank that won’t do any lending and has a diverse set of adjacent revenue streams.”

Others have opined that innovation centers like Wyoming were merely filling the void left by the federal government, which has yet to take a coherent stance vis-a-vis the burgeoning crypto market. Benjamin Sauter, a lawyer at Kobre & Kim LLP, told Cointelegraph: “Wyoming is showing that individual states can play a meaningful role in crafting a coherent legal framework for the crypto/blockchain industry — particularly when it comes to state taxation as well as commercial and some banking issues.”

By comparison, according to him, the U.S. federal government “hasn’t really made an effort to create such a framework, and this has led to a lot of regulatory inefficiencies and general confusion.”

Innovator or loophole?

So, what about the notion that Wyoming merely created a means for its new banks to lure firms and investors based in more regulated states like New York? Kelman told Cointelegraph on the matter: “Many institutions operate entities all over the world, not just the United States. New York has jurisdiction over New Yorkers — but not any company related to a company that has had operations there.”

“Wyoming can and is becoming a center for crypto business and innovation,” Kinitsky told Cointelegraph, adding: “Certainly, there are ready similar examples within financial services like the credit card industry in South Dakota and ILC banks in Utah….SPDI banks have similar frameworks for being able to operate across the country and indeed internationally.”

McKeon agreed that Wyoming was following the South Dakota playbook: “South Dakota created favorable legislation for banks around interest rates and fees in the 1980s and now has one of the highest concentrations of bank assets in the U.S.,” adding further:

“By creating an environment that allows crypto projects to operate with a higher degree of regulatory certainty and freedom, Wyoming is likely to attract similar relocation within crypto.”

Will others join in?

Of course, other states could follow Wyoming’s lead. Kelman said: “I also expect larger states, like Florida, to follow suit with more crypto-friendly guidance, especially after Miami Mayor Francis Suarez’s overtures to the crypto community.” However, he further stressed that “given Wyoming’s small size and relative obscurity, I don’t know if it will remain a haven for an entire industry in the way Delaware has been for incorporations and corporate governance.”

As reported, Mayor Suarez is looking to develop some of “the most progressive crypto laws” and proposing within his jurisdiction innovations like paying city workers’ wages in Bitcoin (BTC) and purchasing BTC for the municipality’s treasury. Senator Lummis applauded the mayor’s initiatives at the Chamber of Digital Commerce’s panel, inviting him to “look at Wyoming’s legislative framework as a template and then build on it” by developing new Bitcoin “components,” including a pension plan for Miami workers that includes Bitcoin — something Suarez is looking into.

Multiple innovative centers like Miami and Wyoming, among others, could advance technological progress generally, she suggested. Suarez, for his part, said: “One of the things that we want to do is imitate Wyoming’s very successful integration of crypto into their community.”

Meanwhile, Avanti’s Long remains an ardent booster for her state: “Why should crypto companies redomicile to Wyoming?” she asked rhetorically on Feb. 21 following the news that Ripple Labs had registered as a Wyoming limited liability company, adding:

“No state corp tax, no franchise tax, crypto exempt from property & sales tax, our commercial laws clarify crypto legal status, crypto-friendly banks opening soon, access to crypto-open gov/legislators/US senator — all laws open-source.”

Is Wyoming good for BTC adoption?

What exactly do these tech-friendly states and cities mean for cryptocurrency adoption? Sauter was cautiously optimistic: “It’s possible that Wyoming’s efforts will have some trickle-up effects, should the federal government ever get its act together.” He stated further that there is also a major risk as businesses may be “lulled into a false sense of security and potentially conflating Wyoming’s regime for compliance at the federal level.”

Kinitsky told Cointelegraph that the convergence between crypto and banking, as is happening in Wyoming, “portends an important step toward mainstream adoption,” while McKeon added that crypto users “are primarily concerned with access to products and features. Better products translate to increased adoption.” Therefore, if Wyoming-type legislation enables crypto projects “to provide new and desirable features by mitigating regulatory risk for the providers, then it will be a positive force for general public adoption.”

Many, though, still seem to be treading water until the federal government acts to provide some legislative/regulatory structure to the nascent blockchain and cryptocurrency industry. According to Sauter, “as great and encouraging Wyoming’s recent actions are, there is only so much one state can do.” Massad also told Cointelegraph:

“This regulatory confusion creates higher costs and uncertainty. There’s still plenty of money and talent in this country flowing into crypto innovation, but we need greater regulatory clarity to ensure investor protection, financial stability and responsible innovation.”


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India: Are authorities really seizing crypto hardware wallets?

Republished by Plato



While the lack of regulations for cryptocurrencies has evolved into a problem in India, crypto-users in the country have not been discouraged yet, with many seeking ways to get on the same page as lawmakers. However, there is a very problematic lack of clarity among users, especially since such regulations (Or lack thereof) make compliance a very difficult job.

According to a recent post by Crypto Kanoon, a legal information portal for the country’s crypto-users on Twitter, Indian authorities have now turned their attention to crypto hardware wallets by making very deliberate attempts to seize them. The tweet in question read,

“Breaking: News of Crypto Hardware Wallets being ciezed by the Flag of India customs department is coming.”

While avenues to use cryptos have not been fully shut yet, their use has become increasingly difficult thanks to muddy rules. Given the fact that the bull run is in progress, India is seeing greater interest in crypto-investments. In light of the need to be in charge of one’s own cryptos, many new entrants to the crypto-market have been turning to crypto hardware wallets.

However, along with Crypto Kanoon, several prominent Indian crypto-influencers are also claiming that such purchases are being flagged by the Customs department of the country. For instance, Naimish Sanghvi, Founder of CoinCrunchIndia, shared the screenshot of a message shared by a “verified source.” It read,

Here, it must be stressed that the veracity of this claim was still in question at press time, especially since no customers had actually come forward to claim anything of this sort. In fact, no official notification or circular from any government agency asserting a ban on Bitcoin wallet imports had been found either.

It is also worth noting that crypto hardware wallets continue to be available online, on Amazon, as well as on Etherbit. The latter, a popular reseller that has Ledger, Trezos, SafePal wallets in stock, has lately been noting shipping delays on account of a “sudden spike” in global demand for wallets and “rumors of crypto-ban in India.”

Source: Amazon

While everything is up in smoke right now, what is evident is that reactions from the crypto-community have been furious. Despite the fact that such reports are yet to be confirmed, many in the crypto-community believe that this once again highlights the antagonistic attitude of the government towards digital assets. With rumors of a crypto-ban in India swirling about, speculations such as these are unlikely to win the government any crypto-fans.

AMBCrypto has reached out to Crypto Kanoon, Etherbit, officials of the RBI, and some users for clarity on the issue and will update the story accordingly. 

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