Welcome to VirtacoinPlus Documentation page. We hope to help you understand more about this coin, its philosophy and technologies that run behind. Before getting too technical, we invite you to dive a little bit into the history of VirtacoinPlus, learning why it was created and the purposes behind.
VirtacoinPlus (XVP) imagines a future world where people can send XVP crypto-currency from person to person (peer-to-peer) at insignificant costs throughout the ultimate blockchain technology, without the use of a middleman, like banks.
VirtacoinPlus is a Hybrid PoS/PoW Network Based Cryptocurrency which reduces the vulnerabilities and maximises the benefits of each pure Proof-of-Stake or Proof-of-Work network separately taken, that are predominantly used nowadays. VirtacoinPlus is the perfect environment where everyone brings their contribution and each receives rewards for his participation. Every individual is free to take part in this environment and free to decide how he will get his share: by mining, by staking or both.
VirtacoinPlus is a fairer game where nobody holds supremacy, both miners and stakeholders are empowered by the protocol to equally participate in the process of creating the blockchain and get rewarded for their participation. This hybrid protocol allows the network to keep running when there is a sudden drop in mining power.
VirtacoinPlus was the first crypto-currency to combine Proof-of-Work’s X11 algorithm and the Proof-of-Stake feature in a hybrid protocol.
The key innovation of VirtacoinPlus is Proof-of-Stake, a blockchain consensus algorithm that provides efficient, sustainable security and user governance, allowing for a trustless cryptocurrency network with adaptive inflation and a core focus on securely storing all types of value.
Since the creation of Bitcoin (Nakamoto 2008), Proof-of-Work has been the predominant design of peer-to-peer cryptocurrency. The concept of Proof-of-Work has been the backbone of the mining and security model of Nakamoto’s design. In 2017, the VirtacoinPlus community proposed an alternative form of consensus that was both more secure, but also energy efficient. Proof-of-Work, however, is subject to centralized mining, large amounts of power consumption and majority attacks. Centralized mining comes about due to the increased profits and production from large scale mining operations. Proof-of-Stake sought to provide sustainability and improved security through energy efficient staking and time-based confirmations (coin age). Instead of electricity and computing power, time could be used as a verification method that would prevent many of the issues plaguing Proof-of-Work consensus. Proof-of-Stake guards the blockchain, keeping users safe, while Proof-of-Work mining provides economic competition and maintains a balance in distribution.
Since its first block in March 2017, VirtacoinPlus has remained one of the most energy effective, secure, and size effective blockchains in existence. Off-chain transactions are extremely compatible with Proof-of-Stake, meaning future developments and scaling will be easy to develop and deploy with VirtacoinPlus.
VirtacoinPlus is secured by Proof-of-Stake consensus. Proof-of-Work uses energy as a scarce resource as means of selecting a block producer, while Proof-of-Stake uses time as a scarce resource measured in “coin age”. Once a transaction has reached an age of 24 hours, these coins become eligible for participation in consensus.
VirtacoinPlus’ name is based on the former virtacoin to which the nickname <Plus> was pasted as a result of the protocol improvement by adding the stake feature and using the X11-hashing algorithm. The abbreviation of VirtacoinPlus is X-V-P, X-coming from the X hashing algorithm family, V-coming from Virtacoin, P-coming from Plus.
Cryptocurrency world has seen tremendous growth in the past years. Billions of dollars pour into it everyday, big businesses like banking start to notice the groundbreaking technology behind it. While many people are rich from cryptocurrency trading, some also went bankrupt. But generally, the market is bullish and we’d like to think that it will keep bullish for many years to come. Lots of new traders or investors are looking for the next ‘Big Thing’, there are over 4000 cryptocurrencies available today, but many of those crypto-coins are actually scam, worthless or outright dead without any development.
|Founder(s)||Former Virtacoin Community Holders|
|Date of Release||March 2, 2017 (Genesis Block Timestamp)|
|Consensus mechanism||Proof of Stake|
|Circulating supply||https://chainz.cryptoid.info/xvp/api.dws?q=totalcoins (counting)|
|Maximum supply||100 M|
|Average Block Time||30-60 seconds|
|Difficulty retarget||Every 15 blocks|
|Mining reward||1.5 XVP|
|Staking reward||7% annually|
|Minimum stake age||24 h|
|Average block size||400 bytes|
|Space on the disk||3.5 Gb free space (after 4 years of running)|
XVP proposes a new protocol for a cryptocurrency, by combining its Proof-of-Work component with a Proof-of-Stake type of system. XVP’s protocol offers good security and has a relatively low penalty in terms of network governance and storage space.
XVP is trying to take the strengths and weaknesses of both Proof-of-Work and Proof-of-Stake and by combining these two mechanisms for consensus, it can wash out the weaknesses and pick up all of the gains.
In the case of Proof-of-Work, one of the major shortcomings is that if somebody can fabricate integrated circuits, way more cheaply and efficiently than us, they can effectively take over the network. So the consensus algorithm in the pure “Proof-of-Work Network” can be taken over by the people who fabricate these circuits. That has happened in Bitcoin and the vast majority of hash power coins. Is not only based in China, but it’s owned by Chinese individuals and corporations and that process is counterproductive. The idea with a consensus algorithm is that you want everybody to participate in some way. Maybe not everybody has the same network input, but just having everyone in one country take it over is really counterproductive and it makes for a crappy consensus algorithm.
In the case of Proof-of-Stake, the major shortcoming is that it’s kind of feudalism, like if you own 10% of the coins when project starts, you’re always gonna own 10% of the income from the subsidy, so XVP wanted to wash out the feudalism a bit, but can still have the meritocracy component of Proof-of-Work.
What is this really all about? Is about creating a fairer game. What attracted people to Bitcoin was that it created a fairer game, fairer than Fiat Financial System: you can’t have your account confiscated, people can’t stop you from sending transactions and no either the central bank or nation-state government can arbitrarily inflate that value away.
What XVP carries above is its hybrid protocol to combine the Proof-of-Work and Proof-of-Stake protocols, which means that participants can mine or lay down a share to validate the blocks. So XVP protocol provides a balance between the miners and the ordinary members of the network. Also, worth it a hybrid system, both in terms of scalability and security.
A classic PoW model favors entities with access to cheap electricity and the capital to invest in mining infrastructure. This model is subject to mining centralization and the 51% attack, where a miner or pool with more than half of the hash rate can control the blockchain and the transactions.
A classic PoS model favors early adopters who accumulated coins, typically during an initial distribution. The benefits of PoS include decreased infrastructure costs as well as the ability for any user to directly participate in the network. With a PoS-based blockchain, the network is maintained by validators who routinely lock up funds on their wallets in what is called ‘staking’. The more coins the validators lock up, the more blocks they can create, meaning they can reap more rewards. PoS only blockchains are subject to stake grinding vulnerabilities, which effectively allows a majority PoS minter to control the blockchain.
The hybrid consensus system in XVP network attempts to reduce the vulnerabilities of both PoW and PoS. PoW miners create the blockchain and earn the block reward. PoS stakeholders earn a portion of the block reward on whether a block is permanently added to the blockchain.
VirtacoinPlus is definitely a fairer crypto-game!
In the traditional sense, miners used to be the lifeline of the blockchain. They would perform difficult mathematical problems in order to create blocks and gain a reward in the form of newly created coins. This reward is the incentive for miners to keep producing new blocks. The rewards received were also used to pay for the expenses brought by the heavy energy consumption for solving these math problems or to further invest in better equipment. Better equipment meant a higher chance of solving the math problem first. Besides the energy consumption issue, VirtacoinPlus Community saw this as an inefficient means of the sustainability of the blockchain.
VirtacoinPlus consensus: hybrid Proof-of-Work and Proof-of-Stake network make VirtacoinPlus one of the few cryptocurrencies which utilize a hybrid between Proof Of Work (PoW) and Proof Of Stake (PoS) to achieve distributed consensus. It means that people can choose whether they want to mine VirtacoinPlus using GPU or CPU (Proof-of-Work), or staking it by letting their wallet unlock and act as a node (Proof-of-Stake).
This is quite cool because cryptocurrencies that are purely using PoW algorithms can become somewhat centralized, with miners holding so much power they are practically able to monopolize future consensus. Meanwhile the issue with PoS is, early adopters of the coin, especially the one with large balance will gain proof of stake rewards more than the others, discouraging new people to earn rewards via staking. With hybrid PoW and PoS systems, the goal is to solve both problems and have balance between miners and stakers.
1.7.1. XVP’s Proof-of-Stake Algorithm
VirtacoinPlus’ Proof of Stake system is a process of validating new transactions and blocks that works quite differently. PoS miners in VirtacoinPlus are called minters. Instead of difficult calculations, XVP emulates PoS competition in its protocol by using time as an alternative limited resource. In order to select the minter who will produce the next block, XVP’s protocol relies on a concept called coin weightage and wallet weight.
1.7.2. Coin WeightAge and Wallet Weight
Coin (weight) age is a number that is calculated from multiplying the amount of coins a minter owns stored in a wallet address by the time they have passed since the last counter reset. There are a number of rules coded into the protocol to keep minters with a high coin age from being able to dominate the process of minting new blocks. Minters are first required to hold coins in their wallet for a minimum of 24 hours before they can become eligible to compete in the process of minting new blocks.
The correlation between the number of addresses in a wallet, the amount of coins each address is holding and the time elapsed since the coins were last time transferred to each address determines the weight of the wallet and is automatically calculated by the program as long as the wallet is synchronized with the network.
1.7.3. Minting New Blocks
Once a new block is minted, a transaction is automatically generated. This transaction sends the XVP coins that were used to mint the block back to the minter. This automated transaction back to the minter of the new block causes the age of the coins to be reset. The minter needs to start from scratch now and wait another 24 hours in order to be eligible to participate in the minting process again.
1.7.4. Proof-of-Stake Minters
Proof of Stake minters in VirtacoinPlus are compensated with block rewards that are automatically generated by the network, similar to Bitcoin. Users who engage in the PoS minting process earn an annual total of about 7% on their holdings every year. This interest on the stake they hold comes to them throughout the year as blocks are produced and not all at the same time.
1.7.5. Staking: Orphan Blocks explained
In the Proof-of-Stake system, a block is created/validated by a user based on how many coins and how long they hold it in their wallet.
If your wallet is staking for a long period then at some point you may get an orphaned block. These orphaned transactions that you see in your wallet transaction list have a question mark (?) symbol next to it and are grayed out. It states “Generated but not accepted. Mined”. If you open and see the transaction details it says “Status: conflicted, broadcast through X nodes”. If you are new to staking then you might be wondering what these conflicted/orphan blocks are.
Beginners who are new to the PoS world think that they are doing something wrong. No, you are not! These orphaned blocks are something you’ll come across while staking. Not just in PoS systems but orphan blocks are a common thing in PoW (Proof of Work) as well. So it’s nothing to worry about. Just unlock the wallet, make sure the staking arrow in your wallet is green, coins are mature and then leave your wallet running in the background 24×7. Your wallet takes care of the rest. Based on your coin weightage and the network weight you’ll start receiving successful stakes and from time to time you’ll also receive an unsuccessful orphan.
1.7.6. Proof-of-Stake: Generated but Not Accepted
So what actually does “Generated but not accepted” mean when staking/minting and why am I not rewarded for it? It simply means the block generated by your wallet is not accepted by the network because someone submitted the result before you. It’s just like a race; the blocks that are generated from your staking results also need to be accepted by the network. If the network accepts your block then you’ll get a stake reward. However if it’s rejected from the blockchain you won’t get any reward. So why does it happen?
There are thousands of wallets/nodes around the world staking and they all are competing for the next block reward. An orphan/conflicted block is a result when two wallets stake and mint the next block for the blockchain at a similar time. The network cannot have two identical blocks. So the wallet client that staked a block and relayed to other nodes first will get accepted. The wallet whichever produced the result after that will get rejected from the blockchain.
Moreover, VirtacoinPlus is hybrid, which means both PoW and PoS blocks are added to the chain. If a PoW block is mined at the same time as a PoS block is minted, then the system chooses the PoW block to be added to the chain and the PoS block will become orphaned (generated but not accepted transaction). But I’m getting too many orphan blocks from staking results, is it normal?
As we said orphan blocks are normal, happens all the time and it also occurs to all other stakers on the network. These orphaned results will not reset your coin weight. You don’t lose anything from this and usually in the next few hours you’ll get a successful stake. In fact to compensate for the previous lost stake your coins will stake more in the next successful stake.
1.7.7. XVP’s Proof-of-Work Algorithm
VirtacoinPlus is using the X11 hashing algorithm. X11 was created by Evan Duffield and initially used in the Darkcoin protocol. X11 is one of the most powerful and secure crypto mining algorithms in the world, an algorithm designed on the basis of using a sequence of different hash functions, with a single purpose: to offer the best possible security for crypto mining. The truth is that the design of this algorithm is completely different from the known algorithms of other blockchains. And it is that unlike SHA-256 (the algorithm of Bitcoin) or scrypt, X11 is not a single hash function mining algorithm. Instead, X11 collects a total of 11 distinct hash functions that are used in a specific order to result in the final hash of a block.
1.7.8. Understanding How X11 Works
Now, how does a mining algorithm like X11 work? The truth is that algorithmically it is not complex. First of all, let’s see what hash functions X11 uses:
These algorithms are applied in this same order within X11 and the goal is for a miner to start generating a Block ID or Block Hash, starting with the first hash and ending with the last hash. Basically what it does is generate a first hash using BLAKE, taking into account the difficulty of the mining system and the target. Once this hash is generated and the work of Proof of Work (PoW) heavier, this new hash is taken and the rest of the hash functions are applied to it so that said hash changes. So every time we apply a new hash function, a different hash is generated and this hash is taken and the following function is applied to it, until the cycle ends.
An interesting point about these functions is that they were all created with the highest possible level of security in mind. In fact, all these functions were analyzed by the NIST (US National Institute of Standards and Technology) validating their security. With this we can be sure that X11 is an algorithm built on safe and proven technology.
A recognized problem in blockchains that are solely run on Proof-of-Stake is that coins are much more difficult to properly distribute. When first creating a pure PoS blockchain, the entire supply of coins needs to be created at the same time. This supply is then usually distributed to a small group. This is where the hybrid PoW/PoS comes in. PoW assists with security indirectly by providing for a more distributed network and this is achieved by mining blocks just as in the Bitcoin network, the newly created XVP coins are then distributed through the network as the miners will sell these coins to pay for the expenses during their mining operations.
VirtacoinPlus was born from the need of the former virtacoin community to find itself in a new and modern blockchain network. The XVP Community created a new viable way to maintain the network while at the same time decreasing the energy consumption and also allowing the network to keep running when there is a sudden drop in mining power.
In order to turn from the older virtacoin (vta) network to the new virtacoinplus (xvp) network, a swap took place in March 2017. March 2 is the genesis block timestamp and the days after the swap started. 9,000,000 Virtacoinplus was premined and used to swap Virtacoin (VTA) for Virtacoinplus (XVP) at a 1000:1 ratio. Great care was taken to make sure no single person would own more than 1% of initial XVP distribution. People who didn’t agree with the proposed solution embraced by the vast majority, remained in the old network. Once the time allowed to switch to the new network was over, the old coins can no longer be transited.
VirtacoinPlus is not a fork of any other older cryptocurrency. XVP was built from scratch and it was the first coin to introduce a hybrid of X11 for Proof-of-Work and Proof-of-Stake algorithms.
1.8.1. Original Mission
VirtacoinPlus was originally developed to tackle the issues which were found with the proof-of-work system that was used by the former virtacoin (VTA), but also many others: Bitcoin, Ethereum, Litecoin, Monero. The biggest issue was tackled with the proof-of-work/proof-of-stake hybrid algorithm model. Due to this new technology, VirtacoinPlus was able to offer a more secure coin which could prevent ‘51% attacks’ as well as reach a model in which decentralization is better obtainable. A 51% attack is an attack on a blockchain executed by a miner or a group of miners who control more than 50% of the network’s computing power. When you want to perform a 51% attack on VirtacoinPlus, you will have to own 51% of all the coins in circulation on the network.
1.8.2. Energy Consumption
One of the reasons why VirtacoinPlus has chosen for the proof-of-stake model is to fight against the energy consumption which is used by mining rigs when mining cryptocurrency. When you are minting coins, you do not require extra hashing power to ensure you get the best orders to validate. When minting VirtacoinPlus it does not matter how much hashing power you have.
The minter who will get the reward for completing a block is randomly chosen.
The annual reward of 7% for XVP holders makes VirtacoinPlus a great coin for store of value. If you would like to help the network and support the network security, VirtacoinPlus has developed the qt core wallet software, similar to Bitcoin, which is one of the most user-friendly ways of setting up a cryptocurrency node. This node can run on any computer.
VirtacoinPlus (XVP) was launched in 2017 and it was the desire of the majority of the former vta community. XVP introduced a number of new innovations which substantially improved on the design of other blockchain protocols that existed at the time, mainly in terms of exclusive (pure) proof-of-work or proof-of-stake systems. VirtacoinPlus’ alternative to proof-of-work, named proof-of-stake, remains unrivaled to this day as a blockchain consensus protocol and one which is achieving more mainstream adoption with each passing year.
For the newcomer, understanding why VirtacoinPlus’ blockchain technology is superior first requires some understanding about blockchains in general, as well as understanding VirtacoinPlus’ primary competitors, exclusively based on the proof-of-work or proof-of-stake component; therefore we will start by learning what blockchains are, and what they offer. Once we understand this, we’ll cover the main problems behind the world’s first blockchain, Bitcoin, and how VirtacoinPlus has fixed these flaws.
You will discover how VirtacoinPlus has been designed as a drop-in replacement in preparation for Proof-of-Work systems inevitable decline.
Ever since the initial launch of Bitcoin in 2009, blockchain technology has proliferated throughout the world in many different forms. This new and exciting technology has the potential to impact society in innumerable ways. In this section we will explain what a blockchain really is, how it works and its core purpose.
2.2.1. Centralized Private Ledgers
At its core, the VirtacoinPlus blockchain is a distributed public ledger. A ledger is traditionally a document such as a spreadsheet in which accounts are kept of economic transactions, including credits, debits, and balances. They are generally used to keep track of an individual’s or organization’s financial standing or other recordable data such as assets, liabilities, income, expenses and capital.
Before the invention of the blockchain, it was necessary for individuals to manage their financial accounts by placing their trust in a centrally managed third party organization which maintained its own private ledger. Example services include banks, credit card issuers, money transfer services and other financial institutions.
A high degree of trust is placed by customers in these centralized services and the people running them, all of whom are human and fallible. The ledgers of customer data are kept private and not routinely shared with the public for independent verification. In this outdated model, the customer is forced into a situation where they need to fully trust that the organizations handling their financial accounts are being truthful and accurate.
This lack of transparency is a central point of failure because it forces the customer to trust that the organization is acting in their interest and not against them. The need to trust without the ability to verify can invite errors, unaccountability and even outright fraud and corruption within an organization, which can impact customers in a damaging way.
2.2.2. Distributed Public Ledgers
Blockchain technology however completely removes the need for the user to trust a centralized organization in this way. Instead, the blockchain introduces the concept of a shared or distributed public ledger where a copy of the ledger is held by a large group of people all around the world who work together to validate transactions that are initiated by users of the blockchain network. The individuals who carry out this important work are known as validators.
Each validator hosts a full copy of the public ledger and operates a node, a program that validates incoming transactions and relays them to other nodes held by other validators. Together, these validators form a global network of nodes that secure the blockchain by protecting against fraud. Transactions initiated by users of the blockchain are broadcast across this network of nodes and they are either validated and accepted, or detected as invalid and rejected (as in the case where a malicious user attempts the same transaction twice in what is called a double spend attack).
Thus, rather than trust being concentrated in a central entity to manage its own private ledger without transparency or oversight, the blockchain distributes trust publicly and globally to a wide number of validators who work to prevent errors, alterations and acts of fraud. This open and transparent sharing of the public ledger allows each security validator the ability to independently verify the ledger’s integrity. In this way the public ledger acts as a digitally shared truth about the state of the network.
2.2.3. The Blockchain
The blockchain itself can be accurately described as a continuously growing list of individual transaction records called blocks. As transactions are initiated by users of the network they are broadcast out to the network of validation nodes. One by one these transactions are validated, grouped together and recorded into a block which is then attached to the end of the blockchain as the next link in the chain. Therefore every block is linked, forming one long cryptographically secured chain of blocks. When combined together these individual blocks of data form the entirety of the public ledger, which consists of all the transactions that have ever taken place on the network.
Different from bitcoin, where a new block is added to the chain every 10-20 minutes, in VirtacoinPlus a new block is added to the chain every 30 seconds to a minute, and the new block contains all the transactions made by users in that period. Account balances on the public ledger are consistently and automatically updated with each new added block to reflect changes from these transactions.
2.2.4. Distributed Consensus Protocol
Unlike a centrally managed entity that depends on user trust of authority figures who are capable of errors or intentional acts of fraud, the blockchain is designed with no such central point of failure. Instead user trust is placed in a blockchain’s distributed consensus protocol, which is an automated process responsible for achieving majority agreement among the network’s many validators on whether the public ledger can be considered valid or not. If the majority of validators working to secure the network can verify and agree that the public ledger is accurate and has not been tampered with, then it can be trusted as legitimate and held as absolute truth by all participants of the network.
A distributed consensus protocol is a coded set of rules that a blockchain runs on. This protocol and its underlying rules are entirely responsible for how a blockchain works as well as its process for validating transactions and blocks. The protocol is also what gives the blockchain its many beneficial qualities, which are summarized below.
Ultimately, these qualities combine to create a self auditing public record which can be used as a tool by people and organizations all over the world to conduct their day to day business. Use cases for the blockchain are plentiful, and new ideas are popping up every day. At a basic level blockchains feature trustless mechanisms for money and data transfer, traceability and the chronological ordering of data. Digital identities can be created to represent data on the chain and provide proof of exactly when a piece of data was created, its history as well as the ability to prove ownership of data.
Data Verification: Immutability of the blockchain allows for the creation of robust audit trails of the data hosted on the chain. Searchability is improved as the blockchain can act as a common database for relevant records or even carry pointers to externally hosted data. Many industries still rely on physical documents to verify data, which is a manual process that is very time consuming and prone to loss of information and errors. Using blockchain technology can speed the digital evolution of industries that are still heavily reliant on outdated manual verification practices, and can improve the efficiency and integrity of virtually any process involving data validation.
Smart Contracts: Other use cases include smart contracts, which are self-executing applications with the terms and conditions of an agreement written directly into code. The rules and penalties coded into a smart contract do not require the services of a middleman as obligations self-execute automatically. Smart contracts are great for setting up automated agreements for exchanging different forms of value without conflict or interference from third parties.
Tokens: Token protocols make it possible to create assets or tokens that are hosted on the blockchain. Tokens can represent anything from equity in a company, to ownership of property, tickets for an event, or even coupons at a grocery store. Tokens are also great for business ventures seeking investors through crowdfunding or initial coin offerings.
Distributed Autonomous Corporations: Token protocols also make it possible for distributed autonomous corporations to be created, which are organizations or companies that use the blockchain for administration and governance. A distributed autonomous corporation can organize itself in a number of ways, including allowing token holders’ decision making power over the business through voting rights, and the ability to receive company profits through dividend distributions.
2.3.1. Blockchain as Money: Cryptocurrency
It goes without saying that blockchains have the potential to become competitors to traditional state sponsored paper fiat money in the form of cryptocurrencies. The first blockchain, Bitcoin, for example, was originally invented by Satoshi Nakamoto as a replacement for fiat money, a peer-to-peer electronic cash system. It is believed by many that cryptocurrency can, in time, challenge existing financial institutions like central banks, which are responsible for managing monetary policy in various countries.
Where a central bank manages the supply of money in a centralized fashion with decisions being made by a core group of bankers, blockchains instead have strict coded rules about how new supply is introduced into the economy, how much and over how long a period of time. This makes distribution of new supply in cryptocurrencies more controlled and predictable and not subject to the changing opinions of central bankers.
Each blockchain can have its own separate rules regarding inflation of the supply and those rules can only be changed if a majority of network validators around the world agree to upgrade to the new rules, which prevents sudden changes from happening and helps maintain trust and stability in the system. In addition to controlled and predictable inflation, the blockchain also has a number of other benefits when being used as money:
o Irreversible: Transactions are irreversible, which prevents chargeback fraud as seen with credit cards. Transactions also cannot be denied by the network itself.
o Transparency: All transactions are transparent and easily viewable on the internet using tools like block explorers. This allows verification of data.
o Pseudonymity: As long as a user’s personal identity is not linked to the address they transact with, transactions will remain pseudonymous.
o International Payments: Cross-border trade is faster because payments avoid the delays associated with traditional methods.
o Identity Protection: Merchants with poor security measures are at risk of losing credit card information to hackers, but with blockchains vital payment information no longer needs to be stored by merchants.
o Convenience: There is no need to carry around a bulky wallet. With cryptocurrency your money can easily be transacted with by downloading various wallet apps on your phone.
o Ease of Access: For those in developing countries who may not have access to traditional banking systems, cryptocurrencies can provide greater access to the rest of the world economy because all that is needed is a phone and an internet connection.
o No Counterparty Risk: There are no third parties such as banks to rely on in order to transact with your money. Due to the direct person-to-person nature of blockchains, you can cut through any middlemen and send your payments directly where they need to go.
o Independent Control: The automatic nature of transactions from one user to another offers independence from banks and an increased level of control over funds, essentially allowing you to become your own bank.
Although blockchain technology has the potential to transform finance as we know it, it’s important to realize that not all blockchains are the same. When choosing a blockchain to operate on, the most important factor to consider is the chain’s underlying security. If the blockchain is not secure, then it’s like building on top of quicksand. At some point it may be compromised, which could result in the total loss of all funds. It’s not just a question about whether a blockchain is secure right now, but whether it will continue to be secure in the future.
A blockchain can only be considered trustless if there are a sufficient number of security validators and they are widely distributed around the world. Blockchain security stems from the fact that there are many validators and power is decentralized among them. This prevents collusion among validators as a great majority are likely to continue working in the interest of the network and its users. The few who attempt to collude and defraud will have no impact because they will be highly outnumbered by the many who play by the rules.
If a blockchain’s security protocol contained a design flaw that caused the number of validators to shrink over time then that would result in a highly centralized blockchain, which would completely defeat the purpose behind the technology as it could no longer be considered trustless. The fewer validators there are securing a blockchain, the more centralized it becomes and the more trust creeps back into the system making it just like the centralized organizations that we tried leaving behind.
As validators dwindle in number, the few that remain end up having a larger degree of influence and control over the network, which means there is a much higher chance they could collude and perform a double spend attack against the network. If a single entity somehow managed to gain majority control over the blockchain, then users of that blockchain would be at the mercy of that entity and would need to trust and hope that it would continue working in their interest instead of sabotaging the network for personal gain. The ideal blockchain is if validators continue to remain thoroughly decentralized so users of the network never have to trust anyone.
2.4.2. Consensus on a Single Shared Truth
A blockchain network’s ability to preserve its level of decentralization over time is highly dependent on how its distributed consensus protocol is designed. There are many types of distributed consensus protocols, but the two most well known are called proof-of-work and proof-of-stake.
These two consensus protocols operate in very different ways, but their overall goal is the same: to bring validators to consensus so they can agree on a single shared version of the truth regarding the state of the blockchain and its ledger, while at the same time preventing malicious or hostile actors from exploiting and derailing the system.
It is possible for certain validation nodes across the network to hold slightly different versions of the public ledger. This can happen if, for example, nodes are unreliable or slow because of issues with network latency, or because they are acting maliciously and run by people trying to fool the system by passing off their tampered version of the ledger as the real one.
Regardless of the reason for any disparity, it is the purpose of the consensus protocol to strive to keep all validation nodes synchronized so that a single version of the blockchain can be decided on, used and followed by all the participants of the network.
2.4.3. Incentivizing Validator Security
A consensus protocol achieves all this by incentivizing validators with monetary rewards in order to motivate them to perform validation and transaction processing work for the blockchain and its users. There are different types of validators however and not all of them receive this compensation for their work.
A full node is a validation node that has a full copy of the blockchain downloaded. There are three types of full nodes. The first type is run by individual volunteers or hobbyists who just want to help support the network, and so perform verification of transactions and blocks for free.
The second type are full nodes that are run by large entities such as merchants, exchanges and payment processors. These nodes are voluntarily operated, but the ability to monitor new transactions can give these entities benefits that can be passed on to their customers.
The third type of validator is only responsible for the task of building and adding new blocks of transactions onto the chain. These block producing nodes are different however and receive automated payments for their service from the network itself. In this way the blockchain literally pays for its own security maintenance and upkeep. Whether this validator is required to hold a full copy of the ledger differs with each blockchain. Block producers in Bitcoin are not required to hold a full copy of the ledger, whereas it is a requirement in VirtacoinPlus.
Validator roles can be thought of in this way. Simple validators who voluntarily run full nodes work to perform validation of transactions and blocks. Block producers however make it possible for the network to settle on a common truth every 10 minute. If there was no consensus protocol to help decide who can produce the next block, anyone would be able to produce and submit a new block to the rest of the network. Validators would try verifying the transactions and blocks that were submitted to them, however each validator would end up checking a different block which would make it impossible to determine which block gets added to the chain. The consensus protocol ensures it is possible for these validation nodes to settle on a common state. Once this state is decided, it is broadcast to the rest of the network so that all validators work to verify the same block of transactions. It is a way of putting all validators in the network on the same page.
The way in which a blockchain’s consensus protocol is designed to incentivize validators to produce blocks is precisely what causes them to either retain or lose their level of decentralization over time. This is exactly what we need to learn in order to develop an understanding of which blockchain protocols are designed for long-term security and which are not.
In order to create Bitcoin, inventor Satoshi Nakamoto had to solve a number of problems: how to get a distributed group of validators to agree on the true version of the ledger; how to incentivize and motivate validators to process transactions and provide security for the blockchain network; how to prevent hostile entities from altering transaction records by tampering with the ledger’s history of events; and how to space out the production of new blocks so the time between each one is consistent and predictable.
Satoshi’s brilliance was in combining multiple fields of study in order to solve these problems, including incentive engineering, cryptography, game theory and computer science. This combination led to a solution for Bitcoin known as proof-of-work, also referred to as Nakamoto consensus.
2.5.1. Mining Blocks by Solving Problems
The specific validators who are responsible for producing new blocks in Bitcoin are called miners. The block production process itself is called mining. In order for a miner to add their newly created block as the next link in the blockchain, they are first required to solve a difficult math problem. The problem itself involves making lots of random guesses in order to find a solution that matches.
There is more than one possible guess that will work as an answer for each problem. Each time a miner makes a new guess, that guess is first combined with some other relevant data and then it is run through a hashing algorithm, a program that checks and verifies whether it is the correct answer. The first miner that solves the problem gets to add their block onto the chain.
2.5.2. Hashing Algorithms
The hashing algorithm is very important to the mining process, and not just for verifying whether the problem has been solved. When a hashing algorithm is fed data as input, the algorithm converts that data into an output in the form of a small string of numbers and letters. This output data is called a hash. A hashing algorithm only works in one direction, which means the hash that is produced from the input data will always result in the same string of numbers and letters as the output.
You could take an entire book as input data and run it through a hash algorithm and it will always produce the same resulting hash no matter how many times you do it. But if you were to change just a single character in the book and run it through the algorithm again, the resulting string of numbers and letters would be completely different. This makes it possible to verify whether something in the book or input data has been tampered with, even if it is something as slight as changing a single character.
If the resulting hash always contains the same string of numbers and letters each time it is run through the algorithm, then you can be sure that the input data was not tampered with. Every block in the blockchain contains its own hash, which acts as a guarantee that the contents of each block is true and unaltered.
2.5.3. Searching for a Valid Hash
In order to find an answer to problems, miners need to combine three pieces of data: the hash from the previous block, the transactions from the block they are currently building and a random guess. They run this combined input data through the algorithm to produce a hash, which is then checked to see if it works as an answer to the original problem.
If the hash does not match, then it is considered an invalid hash, and miners will repeat this process over and over by changing their guess and hashing all three pieces of data until they find a valid hash. Only when a miner finds a valid hash can they be sure that the problem has been solved.
Once a miner succeeds in finding a valid hash, they broadcast their new block along with their correct guess to the rest of the validators on the network, who verify whether it is correct by also running it through the algorithm. This makes it possible for other validators to quickly establish whether the miner did the necessary work to solve the problem. Once validated, the block can then be accepted as the next block in the chain. If however validators are unable to produce a valid hash, the new block will be rejected. In the case of rejection, validators simply wait until another miner submits a new block that can be accurately verified.
This process is not done by miners manually, but automatically, using computer processing power. Modern computers are able to try thousands of combinations of hashes per second, so miners are capable of making many guesses very quickly.
2.5.4. Block Rewards
The process of mining blocks is expensive because of the use of electricity to power the computers that do the hashing. To make up for this cost, every time a miner solves a problem, that miner receives a block reward in the form of new bitcoin. These coins are automatically generated by the network with every new block that is produced. This is how new bitcoin is introduced into the supply and distributed over time.
Validators in Bitcoin are called miners because they are always digging for new coins by fulfilling the requirements of producing new blocks. Miners then sell the new coins they earn on the market to cover their costs while keeping the profit for themselves or reinvesting it in better mining equipment, which allows them to increase the hashes per second they perform along with their chances of earning more block rewards.
2.5.5. The Cost of Lying
The purpose of requiring miners to solve problems is to make it difficult and costly for miners to lie. For example, if a miner tries to include an invalid transaction in a block, perhaps to spend the same bitcoin twice, the miner will have their block rejected by the network. A rejected block means the miner will forfeit their block reward and lose money on the electricity they used to mine that block. Bad behavior is punished, resulting in miners having a financial incentive to tell the truth and play by the rules.
This process also explains how blockchains are designed to be immutable and unchangeable. For example, if a miner tried submitting an alternate version of the blockchain where they altered previous transactions, validators would detect the change because the hash of the altered block would no longer be valid.
Because every single block in the chain is cryptographically linked through hashing, an alteration in any block would also cause the hash for every block after it to become invalid. The only way to truly alter a block in the past without detection would be to mine the altered block over again and every single block that came after it until the end of the chain. You would literally need to spend the resources to prove that you did the work to find a new valid hash for every single block after the one you altered. Currently it would cost billions of dollars to mine Bitcoin’s blockchain from scratch in order to change something, which is financially infeasible even for the very wealthy.
Proof-of-work consensus therefore acts as a financial deterrent against altering the history of the blockchain by forcing a massive cost on those who try to attempt it. By rewarding miners, it incentivizes them to tell the truth and submit blocks with accurate transaction data while also punishing those who attempt to cheat the system with the risk of losing invested funds.
Blockchains can only be considered trustless if power is distributed among many network validators; proof-of-work’s design, however, has a tendency to centralize its validators (miners) over time. This centralization is a natural effect of economies of scale.
Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger factory will produce power hand tools at a lower unit price, and a larger medical system will reduce cost per medical procedure.
2.6.1. Mining is a Profit Driven Competition
Why is this? By its nature, proof-of-work incentivizes competition between its validators who, as miners, compete with each other to mine blocks, add them to the chain and receive their block reward of new coins.
To stay ahead of the competition, miners reinvest their profit in better mining equipment that increases their hashes per second. This allows a miner to make more guesses per second, which gives them a higher chance of solving a block before other miners. Miners who can afford to purchase this specialized mining equipment will have an edge over others when it comes to earning block rewards.
In the beginning, Bitcoin miners were plentiful, distributed, and used basic CPUs to mine blocks. As time went on, miners began to increase their hashing power by figuring out how to use GPUs and FPGAs to mine Bitcoin. Eventually miners graduated to ASICs, which are customized chips designed specifically for mining. At each phase, miners were either forced to upgrade to faster and more efficient equipment in order to keep up with the competition, or face becoming obsolete as their block rewards dried up.
2.6.2. Domination by Mining Pools
The constant upgrading and lack of profitability led to a situation where smaller miners with obsolete equipment could no longer compete with the hashing power of larger miners. In order to increase the lifespan of their equipment, these small miners began pooling their processing power together into mining pools. Instead of block rewards being distributed to individual miners, mining pools split rewards among participants, allowing miners with outdated equipment the chance to receive smaller but more consistent rewards so they could continue competing a little while longer. Even with pools though, eventually mining equipment became obsolete and miners were either forced to upgrade or drop out completely.
Due to lack of profitability and the inability to compete, what began as a distributed network with a large group of individual miners has slowly devolved into an increasingly centralized operation with a small number of larger mining pools. The operators of these mining pools have been able to increase their power and influence over the network because they are now the ones responsible for submitting the majority of new blocks. Individual participants of a pool can contribute their hashing power and collect their partial block reward, but only the owners of the pools themselves can build new blocks and submit them to be added onto the chain. As a result, the Bitcoin mining industry has come to be dominated by a handful of pool owners.
2.6.3. Majority Attacks
This is precisely the situation that blockchains were designed to move away from, centralized control by entities that need to be trusted. If one of these large mining pools were able to obtain enough control over the hashing power, or if a few of the larger pools got together and colluded, they could perform a number of actions against the network and its users.
For example, they would be able to control who gets their transactions included in new blocks, effectively having the ability to temporarily prevent the processing of transactions from certain individuals. Someone having their transactions censored by a misbehaving mining pool would need to wait until a different pool produced a block that included their transactions.
Even worse is a double spend attack against the network in which the mining pool attempts to spend the same coins twice. This attack could potentially destabilize the network and compromise the trust users have in the system itself. Naturally, users are only supposed to be able to spend the coins they own once. Double spends have already been successfully performed against other smaller proof-of-work blockchains besides Bitcoin, so it is a possibility this could occur again in the future if the centralization of miners worsens.
With that said, miners are financially dependent on the Bitcoin network through the dedicated mining hardware they own. The sole purpose of this hardware is to mine proof-of-work networks like Bitcoin. It is useless for any other computing task. Therefore directly attacking the network in this way may render all this hardware useless as trust in the network is lost. The potential loss of invested hardware acts as a financial deterrent against attempting double spends against Bitcoin. This deterrent however would do nothing to stop a government sponsored attack with the sole purpose of bringing down the network. If such a situation ever came about and a mining pool was committing the attack, the only thing that could be done to stop it is for individual miners to withdraw their hashing power from that misbehaving pool and move it to another.
2.6.4. Unsustainable Energy Consumption
Centralization of mining power is not the only major concern. The level of energy consumption by miners to keep the network securely operating is growing larger by the day. While it is difficult to accurately determine, current estimates put Bitcoin energy expenditure in the same league as the consumption of some medium sized countries in an entire year, and this is only expected to increase as time goes on. Such energy consumption just to secure a distributed network and prevent cheating is incredibly wasteful, especially when other blockchains like VirtacoinPlus exist which have been proven to drastically reduce the level of energy usage.
2.6.5. Geographical Centralization of Miners
Another problem concerning energy usage is the fact that most large miners operate in areas where there are low energy costs. Lower energy costs make it possible for miners to keep more of the profit they earn from block rewards. The problem with this is that it has had the effect of centralizing the majority of mining in countries where electricity is inexpensive.
Centralizing mining power in a single country exposes those miners, and therefore the network itself, to the possibility of being targeted by that country’s government. This could include heavy regulations, shutting down mining operations altogether or even forced censorship of transactions. A truly distributed network like VirtacoinPlus has security providers that are spread globally, making it incredibly difficult to influence or shut down the network.
2.6.6. Diverging Interests of Miners & Users
It should also be noted that miners may not personally have the interests of the blockchain in mind when it comes to long-term development. Miners are first and foremost profit generating businesses. Their main priority is making money, therefore they may favor developments that may place them at odds with those who use the network (i.e. bitcoin holders). When considering technical improvements and upgrades to the network, for example, miners may want one thing while users want something else. The desires of both groups fall out of alignment, making governance and protocol rule changes difficult, even impossible.
This may even lead to situations where miners act against the development of the network, favoring short-term rewards over long-term growth. In a severe case where miners refused to upgrade to the newest version of Bitcoin, other validation nodes were forced to start rejecting their new blocks; this caused miners that refused to upgrade to lose block rewards. Validators across the network held miners hostage financially, forcing them into a situation where they had to upgrade in order to continue earning money to pay for their mining operations.
This ability creates a separation of powers where block validators on the network can force miners to upgrade the blockchain to a new version by rejecting their blocks and not providing them compensation. A much better model however would be where the interests of both users and miners were aligned so that many of the toxic community disagreements between different factions were eliminated. A model like this, however, is impossible with proof-of-work; only proof-of-stake which VirtacoinPlus operates on.
There are rules coded into the protocol that govern Bitcoin’s supply. One of the rules is that only a maximum of 21 million bitcoin can ever be mined. Once the final block reward is mined, no more coins will be produced. Since block rewards subsidize costs so that miners have an incentive to continue producing new blocks, this rule has massive implications for the future security of the network. How will miners be compensated for producing blocks and security once the last coin is mined and block rewards come to an end?
2.7.1. Voluntary User Transaction Fees
The answer is that block rewards are not the only form of compensation that miners receive. Miners also receive transaction fees from users of the network in order to get their transactions included in the blocks that miners produce. So, miners are always receiving two forms of compensation: block rewards generated by the network itself and fees paid by users of the network.
Users can pay any size fee they want. A user paying a larger fee provides financial incentive for miners to prioritize and process their transaction more quickly, but naturally most users will elect to pay a lower fee.
2.7.2. Block Reward Halving
Rather than coming to an abrupt halt, block rewards are designed to be phased out gradually. Instructions are coded into the protocol to automatically halve block rewards every 210,000 blocks, which occurs about every four years.
When Bitcoin first launched, the block reward for the first four years was 50 bitcoins. This amount was reduced to 25 after the first halving, then 12.5 and will continue to reduce in half every four years until it reaches zero. The last block reward will be mined around the year 2140, which provides a long transitionary period of many years for miners to switch from block rewards solely to user transaction fees.
2.7.3. The Tragedy of the Commons
Phasing out automatic network generated payments in favor of user provided transaction fees may sound great in theory, but the reality has turned out quite different. The major problem with this model is the tragedy of the commons, whereby individual users, acting independently according to their own self-interest, collectively exploit a shared resource contrary to the common good of all users. A commonly cited example of the tragedy of the commons is the collective destruction of the environment by self-interested individuals attempting to achieve personal economic success.
In Bitcoin, the common shared resource is the blockchain and the security of the network itself. Users have a personal financial incentive to spend as little on transaction fees as possible; however, this self-interest has the effect of damaging the very system that they operate in.
As block rewards continue to reduce in size over time, miner compensation increasingly needs to be made up with user transaction fees. Without an appropriate level of fee compensation by users of the network, miners will not be able to afford the massive costs associated with mining, leading to the eventual shut down of their operations as funding runs low.
2.7.4. Short-Term Behavior Sabotages Long-Term Security
While users do care about the long-term health of the network, their immediate concern is saving as much money in fees as possible. Unfortunately this normal and predictable human behavior works against the financial interests of the miners who secure the network for them. In the future, if voluntary user transaction fees are not enough to sustain network security in the absence of block rewards, then unprofitable miners will continue to drop out until a majority of the hashing power is controlled by just a few people or even one large mining pool, which will put the network at serious risk from a double-spend attack.
Therefore, it is realistic to ask whether proof-of-work consensus will remain viable as a blockchain security protocol. It may still be secure right now, but due to flaws inherent in the system, that security may not be sustainable in the long-term.
2.7.5. Price Dependent Security
Another factor to consider is the market price of blockchain tokens. Since Bitcoin miners are compensated in their native token (i.e. bitcoins), their profitability is dependent on its price. In times of price appreciation, miners don’t have so much to worry about because the coins they earn are sold for high valuations.
In times of price depreciation, however, the market may not value coins highly enough for miners to be able to pay their costs of operation. Proof-of-work network security is therefore dependent on the market price of blockchain tokens; this can put the network at risk if too many miners drop out because of unprofitability.
Bitcoin was originally designed by Satoshi Nakamoto as a digital replacement for cash. In fact the original whitepaper was titled Bitcoin: A Peer-to-Peer Electronic Cash System. This implies that Bitcoin has the ability to scale to a global level where everyone in the world has the opportunity to transact with the digital currency.
Time has shown, however, that blockchain technology is not capable of scaling to worldwide use alone by itself. An intense debate has been raging in the crypto community for some years about the best way to scale the blockchain to higher usage levels. The core argument is about whether to increase the size of blocks.
2.8.1. The Block Size Limit
One of the rules coded into the protocol is that the size of each block can be no more than one megabyte. Since blocks contain transaction data, blocks will fill as users increase transactions on the network. Once a block contains enough transactions to reach 1MB, no more transactions can be added to it. Any transactions over the block size limit must wait for the next block to be added.
At a 1MB block size, the Bitcoin network can only support about seven transactions per second, and this prevents the blockchain from being able to scale to support worldwide usage levels. One proposal in the Bitcoin community was to increase this limit, so that the blockchain can support a higher capacity of transactions per block. However, others in the Bitcoin community believe that this will further centralize the network.
2.8.2. Block Size Limit Increases & Centralization of Full Nodes
Remember that full nodes carry a complete copy of the public ledger. The blockchain itself is massive in size due to the requirement to store every single transaction that has ever been processed by miners. This massive ledger needs to be stored on the computer that the validation node is operating on.
If the size of the blockchain becomes larger than what a validator can store on their computer then they will be forced to upgrade their storage capacity in order to continue holding a full copy of the chain. If they do not upgrade then they won’t be able to store the entire ledger, which will prevent them from being able to perform validation of transactions and blocks.
If the block size was increased for example and the number of transactions increased along with it, one fear is that there would come a point in the future where there were so many transactions being performed on the network that advances in storage technology would not be able to keep up with and support the rate of growth in the size of the blockchain.
If this occurred and prices for higher capacity storage did not fall fast enough, it might become unaffordable for certain validators to be able to store the entire blockchain history on their computers. As the number of transactions increased per block, validators would need to continue upgrading their storage capacity in order to hold the entire chain.
This may lead to a situation where volunteers and hobbyists operating full validation nodes would have to quit because they could no longer afford the costs of upgrading their storage capacity. The number of full nodes would decrease over time due to the unsustainable growth of the blockchain and only those with enough resources would be left operating full nodes, namely large merchants, exchanges or payment processors. Once again we have another path that leads to centralization, this time affecting the number of full nodes that do accounting and verification work for the network.
However this possibility depends on how quickly storage technology advances and how affordable it becomes for the average person. It is possible that storage technology may keep up with the rate of growth in the chain size, but only time will tell. In the meantime, other more pressing issues exist with bigger blocks. Validation nodes have the responsibility of relaying new blocks to other nodes in the network. However this process of propagating new blocks throughout the network will take much longer if block sizes start increasing, especially considering how unreliable internet infrastructure is around the world.
Bandwidth limits may also cause problems with propagating large amounts of data. Consider for example that many home internet packages have much lower upload bandwidth compared to the higher limits offered for downloads. Also remember that each new block takes about 10 minutes to produce. Once blocks become large enough they may reach a point where there is not enough time for each new block to propagate to the rest of the network before the next block becomes due.
Yet another problem is how validation nodes will process all this data. Research suggests for example that it will cost a considerable amount of RAM in order to process large blocks. Most people do not have access to the amount of processing power that will be required, which places the network in a position where volunteer nodes will no longer be able to participate. So both broadcasting and processing this level of data becomes a problem for the average user, placing the task of transaction and block validation mainly in the hands of larger entities that have the resources to continue operating full nodes.
2.8.3. 2017 Bitcoin Chain Split
In 2017 the block size debate came to a head when the two opposing camps decided to split the network into two separate blockchains that each followed different rules. Both blockchains contained the same history of transactions, but diverged at the block where the split occurred.
One blockchain retained the 1MB block size and continued to be called Bitcoin. The second blockchain increased the block size from 1MB to 8MB and became known as Bitcoin Cash. Supporters of each network went their separate ways: Bitcoin Cash supporters following the philosophy of scaling with block size increases and supporters of Bitcoin following an alternative scaling solution.
Developers on the main Bitcoin chain had a problem on their hands. The block reward halvings would eventually impact miner profits, so developers needed to solve this problem quickly or risk network security. Ultimately, developers intentionally chose to keep the 1MB block size limit for reasons that will become clear.
2.8.4. Transaction Fee Market
When the Bitcoin network is too congested with transactions and blocks are full, miners need to decide which transactions to include in a block. There is limited space available, so it becomes necessary to choose which transactions get priority. The Bitcoin network has a transaction fee market which takes over when blocks reach 1MB. When blocks are full, users realize that it will be difficult to get their transactions added to the chain, so they voluntarily begin to increase the transaction fees they pay to miners.
A higher transaction fee is more profitable for miners, so they will be more likely to prioritize transactions with higher fees over those with smaller fees. In this way users of the network enter a bidding war for the attention of miners. The highest bidders paying the largest fees will be the first ones to get their transactions included in new blocks, while the lowest bidders will need to wait.
2.8.5. Block Size Limit Solves Block Reward Halvings
Bitcoin developers realized that this transaction fee market was the solution to decreasing block rewards. Miners need to be able to stay profitable when block rewards are reduced, and so the only way to ensure miners are properly compensated is to create a situation where users are incentivized to pay more in fees. Bitcoin developers have brought this situation about by limiting the block size to 1MB.
With this artificial limit in place, as blocks fill up and transactions reach maximum capacity, users are incentivized to pay higher fees in order for their transactions to be validated by miners. If a user refuses to set a higher fee, then miners will likely pass over them in favor of others who pay higher fees. They may eventually get their transaction included hours or days later by a generous miner, but not everyone can afford to wait this long so in order to avoid the long wait times they will voluntarily raise their fee so they have a better chance at getting their transaction processed sooner.
This artificial block size limit therefore motivates users to voluntarily raise the transaction fees they pay to a profitable enough level for miners to be able to continue their expensive mining operations in the face of vanishing block rewards. In this way network security is able to be sustained for a while longer.
2.8.6. Block Size Limit Impacts Network Usability
This model solves the issue of decreasing block rewards so that miner provided security is retained, but at the same time it creates new problems. Bitcoin was originally designed as a peer to peer digital replacement for cash. By limiting the block size, this vision is no longer possible through use of the blockchain alone.
The Bitcoin community once advertised the blockchain as having lower fees than credit card networks. The implementation of a fixed block size limit means this advantage of lower fees is eliminated when blocks are full. When this does occur, users of the network are forced to pay exorbitant fees in order to transact.
While the block size limit solves the problem of decreasing block rewards, the resultant transaction fees will ultimately spike during extreme price rises; at the peak of a price bubble, network congestion is at its highest due to a fight over limited block space. This extreme rise in fees negatively impacts users by preventing them from making smaller transactions without significant cost. Not only does the block size limit increase fees to unaffordable levels during peak trading, but it also does not solve the scalability problem. A 1MB block size does nothing to support higher usage levels.
2.8.7. Bitcoin as a Settlement Network
Bitcoin developers however realized that it was not possible for the blockchain to facilitate worldwide transaction volumes, due to the block size limit, so they made plans for an alternative solution.
Rather than attempting to engineer changes into the blockchain that would eventually centralize it like block size increases, it became obvious to developers that the purpose of the blockchain needed to be refocused to that of a settlement layer for high value transactions.
2.8.8. Secondary Layers & Off-Chain Transactions
The purpose of the blockchain as a settlement layer is that secondary layer technologies can be built on top of it. These secondary or layer 2 networks are designed to take full advantage of the blockchain’s trustless security. They benefit the overall network by providing additional functionality that the blockchain is unable to perform by itself.
For example, some layer 2 networks allow users to make high speed transactions at low cost without needing to wait for miners to produce new blocks. This is possible because transactions that are performed on layer 2 networks exist outside of the blockchain.
Transactions performed directly through the blockchain are considered on-chain transactions. Transactions performed on layer 2 networks are processed off the blockchain, and are quick and inexpensive. On-chain transactions are stored in the blockchain history by a miner. Off-chain transactions are not stored in the blockchain history at all.
2.8.9. The Lightning Network & Payment Channels
The primary example of layer 2 technology is the Lightning Network, which was developed for Bitcoin. To begin, a user will make an on-chain transaction by first depositing some coins into a special address associated with the Lightning Network; the user then opens a payment channel which allows them to transact with other users of the Lightning Network. All transactions are performed off-chain and the Lightning Network keeps track of balances.
A user can perform as many off-chain transactions as they want. Finally, once a user is done making payments on the Lightning Network they finish by closing their payment channel. Closing a channel has the effect of settling by recording the final changes in balance on the blockchain.
In this way, the Lightning Network and other layer 2 solutions allow users to bypass expensive miner fees by performing the majority of transactions on secondary layer networks. The blockchain is used mainly to synchronize balances whenever a payment channel is closed and changes need to be recorded.
This is what is meant by the blockchain becoming a settlement layer. Transactions are conducted off the blockchain, thereby preventing the chain from bloating and growing in size too much. Off-chain transactions are periodically totaled and permanently recorded on the ledger.
2.8.10. Blockchain as a Base Layer
There will be other examples of a layer 2 network as time goes on. Eventually features and improvements will build to the point where we will have layer 3 networks and beyond. All future layers remain completely dependent on the security of the base layer blockchain. Without a secure base layer acting as a solid foundation, everything built on top will be jeopardized.
Satoshi’s original vision – a peer to peer cash system where transactions are typically conducted on chain – is no more, at least with regards to Bitcoin. Developers have instead elected to focus on an alternate scaling solution that limits the amount of on-chain transaction volume.
2.8.11. Putting it all Together
Let’s summarize now to make sure we fully understand the reasoning behind the decisions of the developers.
A block reward is distributed with every new block, which compensates miners for the costly work they perform and incentivizes them to continue producing new blocks and security for the network. The block reward is on a set schedule where it will continue decreasing until it becomes zero. Voluntary user transaction fees are not a reliable replacement for block rewards because users are motivated to save as much on fees as possible. Bitcoin developers therefore instituted a 1MB block size limit.
As a result of this limit, when a block fills up with transactions, users are incentivized to pay higher fees to have a better chance of getting their transactions accepted by miners. These raised fees are profitable enough for miners to sustain themselves in the absence of block rewards. However these raised fees make it too expensive for normal users to transact on the blockchain.
In response, developers refocused the Bitcoin blockchain from a peer-to-peer cash system to a base layer settlement network. This base layer blockchain works in conjunction with other layer 2 networks such as Lightning, which makes it possible to perform lots of quick and inexpensive off-chain transactions. The high fees of on-chain transactions push users conducting micro-transactions off the blockchain onto these layer 2 networks where transactions are more affordable.
These developments accomplish a number of things. Miners receive their proper compensation to continue operating. Micro-transactions are off-loaded onto layer 2 networks, which makes fees cheaper and speeds faster for users and prevents the blockchain from bloating and growing too fast from too many on-chain transactions.
Any on-chain transactions will be high value transactions where the fees spent are marginal compared to the value that was exchanged. Layer 2 networks also finally make it possible for Bitcoin to scale to support global transaction volumes and usage levels. With layer 2 networks, the number of possible transactions is no longer limited by the block size.
2.8.12. Fee Competition Between Miners & Secondary Layers
One issue that remains to be explored is how the existence of layer 2 networks will impact miner profitability. Off-chain transactions on layer 2 networks do not provide any fees to Bitcoin miners. Only on-chain transactions do this. It would appear then that Bitcoin miners and layer 2 networks are in direct competition with each other when it concerns fees, maybe even incompatible.
However this is untested since layer 2 networks are still new and have not seen significant adoption yet. Some even argue that the low fees of layer 2 networks will actually attract more on-chain transactions, resulting in higher profitability for miners. Price is also a major factor. If bitcoin were high priced, miners may be able to remain profitable off a few very expensive transactions, even when 90% of users are conducting off-chain transactions on layer 2 networks. The crypto industry is currently in unexplored territory and it remains to be seen how these new technologies will impact blockchain security.
What we can say for sure however is that VirtacoinPlus and proof-of-stake were intentionally designed without this conflict over transaction fees. VirtacoinPlus by design is not dependent on transaction fees for security, therefore it is 100% compatible with layer 2 networks. This will be fully explained later in the article.
Proof-of-stake is an alternative consensus protocol that was invented by Sunny King and Scott Nadal and first implemented in Peercoin in 2012. In a proof-of-stake based blockchain, coin owners are the ones who wield influence over the network, produce new blocks and secure the chain. Stakeholders of VirtacoinPlus effectively co-own the blockchain network, similar to how shareholders co-own a publicly traded corporation.
2.9.1. Time as an Alternative Scarce Resource
In VirtacoinPlus, the process of validating new transactions and blocks works quite differently. Block producers in VirtacoinPlus are called minters rather than miners. In place of electricity, VirtacoinPlus emulates proof-of-work competition in its protocol by using time as an alternative limited resource. In order to select the minter that produces the next block, VirtacoinPlus’ protocol relies on a concept called coin age.
Coin age is a number that is derived from multiplying the amount of coins a minter owns by the number of days those coins have been held in their wallet. A minter who has a high coin age for example has both a high number of coins in their wallet and those coins have also been sitting in that wallet for quite a long period of time.
VirtacoinPlus’ protocol combines some amount of randomization with coin age in order to automatically select the next person who mints a block. A minter with a high coin age has a higher probability of minting the next block over a minter with a low coin age. There are no computationally difficult problems for minters to solve in VirtacoinPlus’ protocol. A minter’s chances of being selected as the next block producer rely specifically on the number of coins held and time in the form of coin age and some amount of luck.
2.9.2. Time Based Rules & Restrictions
There are a number of rules coded into the protocol to keep minters with a high coin age from being able to dominate the process of minting new blocks. Minters are first required to hold coins in their wallet for a total of 24 hours before they can become eligible to compete in the process of minting new blocks.
Once a new block is minted, a transaction is automatically generated where the participating coins that were used to mint that block are sent back to the minter. Basically minters automatically send the coins being held back to themselves. This automated transaction back to the minter of the new block causes the age of the coins to be reset. It is an automatic and forced transaction to move the coins that were used to produce a block, which resets the number of days that those coins have been held back to zero.
The minter then needs to start from scratch and wait another 24 hours in order to be eligible to participate in the minting process again. This helps avoid a situation in which a minter is able to consistently produce blocks one after the other over and over again. The mandatory coin age reset institutes a 24 hours wait time which gives other stakeholders a better chance of minting blocks.
All of the rules are put in place in order to prevent minters with high coin age from being able to hold a monopoly on the block generation process.
2.9.3. Majority Attacks are Cost Prohibitive
The process of proving your stake produces new blocks and secures the network against malicious attacks. The proof-of-stake protocol also makes VirtacoinPlus much less susceptible to a double spend attack. For example, a potential attacker would need to own a majority of the total coin age of all coins participating in the minting process. Given that most coins are in personal wallets and not trading on exchanges, it would require a considerable investment in order to pull off such an attack.
A malicious actor would need to purchase enough coins from the market in order to try mounting an attack against the network. Attempting this vast purchase would cause demand to spike and the price per VirtacoinPlus to skyrocket. Any attempt to acquire the amount of coins necessary to perform a successful attack would likely bankrupt the attacker in the process.
The only thing they would succeed at is driving the price of VirtacoinPlus out of the range of affordability. The attacker would likely run out of funds long before being able to complete their total purchase. Attempting to purchase more than half of minting coins in circulation is also likely more costly than attempting to acquire a majority of the hashing power that exists in proof-of-work blockchains.
2.9.4. Attackers are Financially Tied to the Network
If by some miracle a successful attack was able to be performed, an attacker would only end up harming themselves in the process. In order to pull off an attack they would need to make a significant investment in VirtacoinPlus. A successful attack however would end up damaging the price of VirtacoinPlus and along with it the attacker’s original investment in the coins they used for the attack.
Further, any attempt by the double spender to cash out such a massive number of coins after a successful attack would only end up crashing the market price, which would also harm the attacker’s original investment. If the ultimate goal of a double spend attack is earning money then it should be considered counterproductive as the attacker would likely end up losing more funds as a result of the drop in value of the coins they purchased than they could ever hope to gain from a successful attack.
With proof-of-work consensus on the other hand there is no requirement to hold bitcoin in order to pull off a successful attack. All that is required is a majority of hashing power. In VirtacoinPlus however the attacker is financially tied to the network they are initiating an attack against through the coins they purchase.
As such, an attack of this nature would likely not be profitable and is best avoided completely. The only way an attack like this would make sense is if the goal of the attacker was to destroy trust in the network itself rather than use it to earn money. The attacker would need to be completely willing to risk losing their total financial investment in the network in order to achieve their desired result.
Earlier we learned that mining power in Bitcoin centralizes over time. This occurs because it’s possible for proof-of-work to be gamed in such a way that a miner can achieve an advantage over their competition. All miners have to do to increase their chances of earning rewards is to figure out how to be faster than everyone else. Over time this drive to be faster has led to the creation of the mining industry and specialized equipment. These developments have caused the cost of entry to skyrocket in price to the point of being unaffordable for normal users.
Due to the fact that a large miner will always be able to process more hashes per second, they will always have a higher probability of mining a block than a small miner. It is possible for a small miner to solve a block, but their odds of doing so are extremely minuscule to the point that they could mine consistently for many years before being able to find one.
Unfortunately, not many people can afford to waste money on electricity costs for years on end for such tiny odds of mining a block. Electricity bills have to be paid in the meantime and that length of time to wait in between rewards is just too great without being paid. Once regular rewards are no longer possible they are likely to just quit mining altogether, leaving a shrinking number of larger miners to compete amongst themselves.
Proof-of-stake in VirtacoinPlus however is not capable of being gamed in the same way. Since proof-of-stake does not rely on hashing power in order to achieve consensus, no specialized equipment can be designed in order to increase the chances of minting a block. Faster processing speeds therefore have absolutely no effect on the probability of producing new blocks in VirtacoinPlus.
The consensus rules of VirtacoinPlus are completely different and minters must work within the confines of these protocol rules in order to be able to produce blocks. Because rules about hashing power are replaced with time based rules, it is no longer necessary to purchase expensive equipment in order to give yourself an advantage over others.
Proof-of-stake minting itself is an efficient process that is capable of being performed on any lightweight CPU based device, from phones and tablets to basic desktop and laptop computers. Due to the nature of proof-of-stake time based consensus rules, it is extremely low-cost to operate a full minting node and the overall blockchain requires very little energy to secure.
2.10.1. Qualities of Proof-of-Stake Consensus
Due to these innovations, VirtacoinPlus can be considered one of the fewly efficient and sustainable public blockchain technologies. As a result, proof-of-stake consensus impacts the VirtacoinPlus blockchain in a number of beneficial ways.
Efficient & Sustainable: Proof-of-stake in VirtacoinPlus is efficient because network security is not dependent on wasting massive amounts of electrical energy. Instead minters invest in coins and time in order to emulate the proof-of-work process. This is done by simply opening their wallet app, sending coins to their VirtacoinPlus address and letting them sit while they are occasionally selected by the protocol to mint the next block. This process is both energy and cost efficient, which makes VirtacoinPlus a long-term sustainable network capable of operating indefinitely.
Aligning Interests: Because coin owners are the ones who produce new blocks in proof-of-stake, this means security providers and users of the network are ultimately the same group of people. So rather than miners and users being out of alignment like in proof-of-work based networks, minters and users in VirtacoinPlus are the same exact people which means interests are completely aligned. All security providers are forced to own a stake in the network through ownership of VirtacoinPlus. This causes everyone to have a similar financial interest in the long-term future of the network, which leads to much less conflict between fractions with different ideas about how the blockchain should develop and evolve.
User Governance: Because users in VirtacoinPlus have the ability to produce blocks, they also have the power to influence and determine the future direction of the network. This user governance is only possible because proof-of-stake grants power over the network to stakeholders. As such, VirtacoinPlus is one of the first blockchain capable of allowing its protocol rules to be governed directly by its users, making for a network that is far more democratic.
Global Security: As a direct consequence of a resource efficient consensus mechanism, the number of people capable of participating in creating blocks and securing the network is much expanded. Security providers are no longer drawn to geographical locations with cheap electricity. Due to how cost efficient proof-of-stake is to operate a node, minting nodes can be set up anywhere in the world. This allows VirtacoinPlus to maximize its level of decentralization and achieve global security from minting users all around the world.
Price Independent Security: Unlike proof-of-work where miners are completely dependent on the market price of a blockchain’s native token to ensure profitability, VirtacoinPlus contains no such price dependency. Proof-of-stake minters are compensated as motivation to provide consistent security, however since this process is so inexpensive to perform, minters actually have the ability to voluntarily operate a minting node without compensation if they want to.
Even without compensation from the network, the process of minting helps to secure the blockchain and along with it a stakeholder’s overall investment. The ability to decide which version of the protocol to run also gives a minter the opportunity to make their voice heard concerning future upgrades to the network. These are two important reasons a stakeholder may have to want to run a node for free, however compensation is automatically provided which makes it even better to participate. Voluntarily running a proof-of-work mining node is just not possible due to the requirement of being profitable enough in order to afford the associated costs of participating.
Since 2017 though it has been proven that VirtacoinPlus is capable of sustaining its network security even during the lowest periods of demand where market price was close to zero. If the network is capable of surviving extremely stressful conditions like these, then it can likely survive anything the market throws at it. There is a good reason why VirtacoinPlus has been called the nuclear bomb shelter of crypto. It is highly capable of withstanding almost any scenario.
2.10.2. Higher Resistance to Censorship
As explained above, the efficiency of proof-of-stake results in a blockchain network that can easily be secured by people all over the world who hold some amount of VirtacoinPlus. This global decentralized security makes the VirtacoinPlus network incredibly difficult to censor and shut down. It is similar to downloading files through a bittorrent network.
In a bittorrent network, many people around the world operate nodes where they hold a full copy of the file that is trying to be downloaded. Pieces of the file are downloaded from different nodes until the full file has finished downloading. If a government were to deem this file sharing illegal and attempt to shut down the torrent network, they would be forced to target every single node on the network no matter where they happen to exist in the world. Even then, there is nothing stopping more torrent nodes from popping up that share the exact same file. As long as one node exists that shares the file, it can be downloaded and spread to others.
A government’s reach extends only as far as its own borders, therefore in order to target nodes halfway across the world they would need to rely on cooperation from other governments which is not always easy to attain. Due to the inability to easily target nodes offering a file for download, it is incredibly difficult for governments or other entities around the world to shut down file sharing torrent networks.
VirtacoinPlus works in a similar way where minting nodes that process transactions can be operated from anywhere in the world as long as the minter has access to a computer, minimal electricity, some amount of VirtacoinPlus and an internet connection. Geographical decentralization of minting nodes makes it incredibly difficult to shut down the VirtacoinPlus network, but when the number of nodes around the world expands to thousands or even tens of thousands then it essentially becomes impossible to censor.
In systems like these, individual nodes are usually called peers. Together they act as a peer-to-peer network. Due to the nature of proof-of-stake, VirtacoinPlus is one of the world’s first truly decentralized peer-to-peer financial networks.
2.10.3. Reduced Incentive for Minters to Centralize
Proof-of-stake minters in VirtacoinPlus are compensated with block rewards that are automatically generated by the network, similar to Bitcoin. Users who engage in the proof-of-stake minting process earn an annual total of about 7% on their holdings every year. This interest on the stake they hold comes to them throughout the year as blocks are produced and not all at the same time.
For example, a user who is minting with 10,000 coins in their wallet would receive many block rewards throughout the year that end up totaling about 700 XVPs. 700 coins is the 7% annual interest that was earned on the 10,000 coins that were held in that minter’s wallet throughout the year.
There is a criticism that exists in the crypto community about proof-of-stake that states the rich get richer. Recall that in Bitcoin a large miner can essentially game the entire system and achieve an advantage over everyone else by using mining equipment with faster computer processing ability. This rich get richer argument against proof-of-stake basically states the same exact thing, except that minters with large stakes can achieve an advantage over minters with small stakes.
The argument states that large minters with lots of coins in their wallet are able to gain higher amounts of coin age, which gives them an advantage over all other proof-of-stake minters. This increased advantage allows them to mint more blocks and gain more rewards than everyone else participating in the network.
Over time this allows the rich stakeholders in the network to collect more rewards and become even richer to the disadvantage of all other participants. New coins will increasingly get rewarded to rich stakeholders and eventually the majority of power in the network will centralize to those rich stakeholders.
This commonly stated scenario however is a myth and a misunderstanding of how proof-of-stake works in VirtacoinPlus. When the entire money supply grows due to the new coins coming from the minting process, all VirtacoinPlus holders who participate in minting can maintain their relative share of the network. Although large stakeholders do generate a higher total number of blocks and VirtacoinPlus rewards than small stakeholders, they cannot, in percentage terms, pull ahead of other minters.
For example, let’s say the entire VirtacoinPlus supply is 100,000 coins. A small minter who owns 1% of the supply owns 1,000 coins. A large minter who owns 10% of the supply owns 10,000 coins. After a full year of consistent minting, the small minter would own about 1,070 coins while the large minter would own 10,700 coins.
While the large minter technically did mint more blocks and 700 coins while the small minter earned only 70 coins, their overall ownership of the supply in percentage terms did not change. The small minter still owns 1% of the supply and the large minter still owns 10%. Even though the large minter was able to earn more overall coins, they were not able to increase their percentage of ownership over that of the small minter. The rich stakeholder therefore did not become any richer than they were before the minting process started. Both minters ended up maintaining their relative share of the network without any change.
In this way proof-of-stake consensus can be used to secure the VirtacoinPlus blockchain without providing an incentive for minters to centralize over time. As long as a minter participates in the proof-of-stake minting process then they will receive the rewards they deserve. If they don’t participate in minting however then those potential rewards will be forfeited.
The problem that cryptocurrency seeks to fix is not inflation itself, but inflation that is excessive, centrally controlled, and open to manipulation. The solution is not zero inflation, but inflation that is limited and decentralized.
Earlier in this text VirtacoinPlus was called a drop-in replacement for Bitcoin. This label fits because VirtacoinPlus provides a blockchain with an alternative consensus scheme that solves Bitcoin’s major security flaws in a way that allows the chain to operate smoothly. However VirtacoinPlus diverges from Bitcoin in a major way when it comes to the economics behind the system.
2.11.1. Illusion of 7% minting
VirtacoinPlus’ overall coin supply does not increase by 7% per year by minting. Only stakeholders who participate in the minting process will receive this 7% interest on their stake. Stakeholders who refuse to mint will receive no interest at all. For example if a blockchain has a total supply of 10,000,000 coins, 7% on that whole amount would be 700,000 coins.
However this example assumes every stakeholder in the network is minting and every single coin is being minted with. If however only 2,000,000 coins are being used to mint with out of a total of 10,000,000 coins, then the yearly inflation of the supply from proof-of-stake rewards should only be about 140,000 coins. 700,000 coins could only be produced if all coins in the network were being used to participate in the minting process.
Since the number of coins being minted with by stakeholders is considerably less than what actually exists in total, the yearly inflation that is produced through new coins will also be significantly less. It is not necessary for all coins to be minting in order for the network to be considered secure, however higher participation rates will increase the security and decentralization of the network.
2.11.2. The 7% Standard
VirtacoinPlus community are often asked why they don’t increase the annual percent from 7% to some arbitrary number like 10% or even 20%. The argument usually provided is that a higher reward percentage will encourage more people to participate in minting. Either that or the person suggesting the idea is just more concerned about earning a profit over what is best for the long-term health of the network.
Increasing the mint reward percentage to higher levels is a bad idea on many fronts. As mentioned already, not all stakeholders participate. There are minters and there are non-minters. Non-minters have made a choice not to participate and have accepted the fact that they will not earn any block rewards.
Refusing to mint however prevents a stakeholder from being able to keep up with yearly inflation and as a result their overall percentage of ownership in the network will decrease over time while those stakeholders who do mint will increase their percentage of ownership. This change of percentage of ownership from non-minters to minters is extremely slow however since the rate of change is only 7% per year.
Adopting a higher mint reward such as 20-25% would exacerbate this change though. Such an extreme change in the mint reward would end up benefiting minters at the expense of stakeholders that have not begun minting yet. Minters would begin increasing their stake by 20% per year, effectively funneling value much faster from non-minters to minters. The number of coins held by non-minters would remain stagnant from not participating in earning block rewards. At the same time minters would be able to drastically increase the number of coins they own every single year, increasing their control over the network.
Not only does this work to centralize the network, but it does not make for a cryptocurrency that acts as a proper store of value. In order for people to be able to properly store their wealth in a currency, its inflation rate needs to be well regulated to provide enough scarcity. A currency that is not scarce enough will cause any wealth being stored in it to be devalued over time.
So VirtacoinPlus yearly inflation rate is a balancing act between providing enough motivation for stakeholders to mint blocks and keeping it low enough to maintain some level of scarcity so VirtacoinPlus can be used as a vehicle for value storage.
As a principle, stakeholders should not be required to mint if they don’t want to. Forcing them to participate by making them lose significant value every year if they don’t will likely just result in pushing non-minters away to other blockchain networks with more sustainable inflation rates.
Sometimes stakeholders may have a legitimate reason for not participating. For example they may have concerns about the security of their coins or they have temporarily placed some of their coins into another investment and will return to VirtacoinPlus after they are finished with it.
Lastly, increasing the mint reward would also punish the market capitalization and price of VirtacoinPlus. If stakeholders continuously mint and sell lots of coins on the market for profit, this will work to inflate the supply and may result in a situation where the supply of new coins overpowers the current level of demand. Too many coins on the market results in a lack of scarcity and without enough buyers it will negatively impact VirtacoinPlus by driving down its price.
This is why VirtacoinPlus maintains its proof-of-stake inflation rate at a low 7%. Increase the rate too much and it becomes a burden. It may sound attractive at first, but it is short-term thinking and the long-term consequences far outweigh the benefits.
2.11.3. Pure Proof-of-Stake Distribution Problems
A recognized problem in blockchains that are solely run on proof-of-stake is that coins are much more difficult to properly distribute. When first creating a pure proof-of-stake blockchain, the entire supply of coins needs to be created at the same time. This supply is then usually distributed to a number of investors who purchase stakes in the network.
This however leads to the creation of blockchains that are owned and operated by a small number of individual investors. Blockchains like these are centralized from the start because the initial coins were not distributed to a wide enough group of people.
In a scenario like this, network security ends up being provided by a small and centralized group of people. In some projects, a large number of coins may even be distributed solely to developers on purpose in order to provide funding for future development work.
These uneven and unfairly distributed blockchains are not representative of a properly decentralized network and thus are not as secure as they could be. They should be avoided in favor of blockchains that have taken proper measures to ensure a wide enough distribution.
Further, in a pure proof-of-stake blockchain newly produced coins from the minting process can only be distributed to existing holders. Because of this, the only way for new coins to enter the market so others have the chance to purchase them is for stakeholders to sell their new coins on exchanges, which is not guaranteed or likely to happen.
With proof-of-work for example, miners are forced to sell a large portion of the coins they earn on exchanges in order to pay for the costs of their mining operations. This selling provides a constant source of new coins on the market for purchase and also increases trading liquidity on exchanges.
Proof-of-stake minting on the other hand is inexpensive to perform, so minters do not necessarily need to sell their newly earned coins. This is because there are no costly electricity bills to pay that require the selling of new coins. This allows minters the ability to hold onto all of their earned coins, which creates a distribution problem where it becomes difficult for new people to be able to obtain coins.
The majority of coins end up being held by stakeholders in personal wallets instead of on exchanges where they can be easily purchased, which hinders adoption. A mechanism which incentivizes stakeholders to sell coins from time to time would help alleviate these distribution problems.
2.11.4. Hybrid Blockchain: PoS Security & PoW Distribution
That is where proof-of-work comes into play. VirtacoinPlus is more than just proof-of-stake. It is also the world’s first hybrid X11 algorithm blockchain, utilizing both proof-of-stake and proof-of-work. The hybrid nature of the VirtacoinPlus blockchain allows it to draw strength from both protocols while at the same time minimizing weaknesses.
In VirtacoinPlus, the blockchain is secured only through proof-of-stake minting. Proof-of-work mining also runs in the background however and provides the network with continual distribution of new coins. Firstly, in the very beginning, 9 mil XVPs was premined to be distributed to a vast number of people who used to hold the former vta. When the network was initially launched, the majority of blocks were created with proof-of-work in order to bootstrap the network, distribute coins and create new stakeholders. One more million XVPs were created in the first phase by proof-of-work and people used to mine using their own computers. The reward for a PoW block was initially set to 30 XVP. Security then transitioned to proof-of-stake as minters took over security of the blockchain and the reward for PoW was lowered down to 2.7 XVP settled by the code to be reduced by 0.2 coins at each 525600 blocks starting 23/03/2017.
Here’s the PoW reward evolution:
|Block Height||PoW reward|
XVP adopters saw proof-of-work mining as a better way to achieve a more decentralized distribution, rather than simply selling coins to investors. Today half of the blocks in VirtacoinPlus are created through proof-of-stake while the other half are created through proof-of-work. To be clear though, proof-of-work plays no part in securing the VirtacoinPlus blockchain. Security is achieved solely through proof-of-stake.
At most, it can be said that proof-of-work assists with security indirectly by providing for a more distributed network. Imagine a flower for example. A flower occasionally releases new seeds, which spread around to new areas over time. Some of these seeds then grow into new flowers. In this example, the original flower is the VirtacoinPlus blockchain itself and the seeds are proof-of-work rewards.
As miners earn rewards in the form of new coins, they sell them on exchanges in order to pay for their expensive mining operations and eventually get a small profit. People all around the world purchase these new coins that have been distributed by miners. Once purchased and transferred to a wallet, the new stakeholder now has the opportunity to become a security provider for the network by engaging in the process of minting new blocks.
So VirtacoinPlus’ proof-of-work does not directly secure the network, but it is designed to do so indirectly by strengthening the decentralization of the network through the creation of new potential minters over time. A pure proof-of-stake system on the other hand is designed to distribute new coins only to existing holders, which does nothing to further decentralization or improve security.
In addition, proof-of-work also adds a bit of randomness to the proof-of-stake process. It was explained before that the selection of the next proof-of-stake block is the result of a mixture of both randomness and coin age. Proof-of-stake is unable to generate that needed randomness alone by itself, so an external source is required. That source of randomness is provided by the mining in proof-of-work and used by the proof-of-stake protocol in the block selection process.
This is why a hybrid system like VirtacoinPlus is superior. It combines the security benefits of proof-of-stake and the distribution benefits of proof-of-work. This combined approach eliminates the long-term security weaknesses of pure proof-of-work and the distribution weaknesses of pure proof-of-stake, forming a superior consensus protocol that only strengthens as it ages.
2.11.5. X11 Algorithm
X11 algorithm is a Proof-of-Work hash function designed by Evan Duffield. He is the core developer of Dash (previously Darkcoin) and is the first cryptocurrency to implement the X11 hashing algorithm. The main purpose for the creation of this algorithm is prevention of ASIC miners.
Why prevent ASIC? ASIC miners are always considered a threat to the crypto mining ecosystem. They are the main cause of centralization of hashing power. ASICs (Application Specific Integrated Circuit) are powerful, resource intensive and their only purpose is to mine a specific algorithm efficiently. Since they are faster, regular users with GPUs and CPUs are put at competitive disadvantage with regards to receiving block rewards. Thus limiting mass participation from mining the cryptocurrency.
After the implementation of SHA-256 (Bitcoin) ASIC and Scrypt ASICs (Litecoin), X11 was introduced in early 2014 to provide a more sustainable mining ecosystem for CPU & GPU miners.
X11 was designed to be ASIC resistant. It is much more complex than Bitcoin’s SHA-256 and it works by combining 11 different hashing algorithms (hence the number 11 in X11). Since X11 uses multiple rounds of 11 different hash functions, it is considered to be one of the safest and the most advanced hashing algorithms in the cryptocurrency space. While it is still more secure and complicated than Bitcoin’s SHA-256, it failed its original purpose of being ASIC-resistant.
In early 2016 ASICs for X11 started appearing, slowly pushing GPU miners out of the game. Currently there are many ASICs capable of mining this algorithm more efficiently. They comprise a major portion of the network hashrate. So this algo is no longer possible to mine using general purpose hardware like CPU or GPU. Even though X11 is no longer providing ASIC resistance a lot of coins are still based on this algorithm. Majority of them were from the initial days of X11 when the algorithm actually provided ASIC resistance.
2.11.6. Inheriting the Mining Industry
A fact that many people don’t realize is that VirtacoinPlus is currently positioned to inherit the mining industry from other X11 family coins, like Dash. As mining gear on the Dash network becomes exhausted and better technology is released to replace it, this outdated equipment can find a new lease on life by mining at VirtacoinPlus instead.
This has been shown to be true over time. The hashing power being directed at VirtacoinPlus for example has continued to rise over the years as advances in Dash mining equipment are made. These technological advances in speed and efficiency displace older equipment, causing it to be unprofitable. This older mining equipment must then find a new home where it can still be considered profitable. After some research, miners eventually find this new home at VirtacoinPlus.
This is possible because Dash and VirtacoinPlus use the exact same mining algorithm, which means all specialized equipment that is developed for Dash is 100% compatible with VirtacoinPlus. If Dash ever switches to another mining algorithm or if the network just doesn’t succeed, miners will always be able to find a home at VirtacoinPlus.
In fact it may even be a more favorable environment for miners as they don’t need to worry about the various politics that exist in the X11 communities. Since proof-of-stake minters hold all the power, proof-of-work miners would not be required to do any important decision making. Miners can simply mine and distribute new coins for the network without having to worry about the politics of upgrading the network. In VirtacoinPlus no one is depending on them to make vital decisions, which allows for a more stress-free environment.
2.11.7. Benefits of a Fixed Transaction Fee
The value of transaction fees are also not voluntarily set by the user like in Bitcoin. Instead users in VirtacoinPlus are charged a fixed fee per transaction. This static fee is set at 0.00001 XVP per kilobyte. Every transaction uses up a certain amount of blockchain space. Larger transactions take up more space on the chain.
The rule above basically states that for every kilobyte of space a transaction takes up on the chain, the user must pay 0.00001 XVP. So for example if it took 5 kilobytes of space to store a user’s transaction on the chain, then that user would be charged 0.00005 XVP. This fee is mandatory and if a user tries to pay less than the required amount, their transaction will be rejected by the network.
This is a powerful rule for VirtacoinPlus. The fixed fee basically acts as a filter on the blockchain to weed out low value micro-transactions. If for example the required fee is larger than the transaction a user is trying to send, it simply doesn’t make sense to send that transaction. Instead the user should use a second layer network or wait until they have more VirtacoinPlus to transact with. This filter works to prevent blockchain bloat from transaction spam and helps limit the increase in the size of the chain.
Another important side effect of a fixed fee is that it makes it easier on the user to figure out how much they need to pay to the network to conduct their transactions. It is difficult to do this in Bitcoin for example, because fees can change so rapidly. If a block in Bitcoin is filled up then users are forced to start paying more fees in order to get their transactions included in the block.
This negatively impacts the user experience as fee levels fluctuate wildly from day to day. In VirtacoinPlus however the required fee will always be known to the user. If they have 10 kilobytes worth of transactions to send, then their fee can easily be determined to be 0.0001 XVP.
In addition to this, transactions in VirtacoinPlus are always first come first served. Because of this, users no longer have to worry if their transactions might get delayed by miners if they don’t send a fee that is attractive enough. In VirtacoinPlus if a user sends a transaction then their transaction will be included in the next available block by minters. It is very straightforward and significantly improves the user experience.
2.11.8. A True Digital Replacement for Gold
Bitcoin is often described as being a digital replacement for gold because the supply is limited and not controlled by any one individual or central authority, however the comparisons ultimately fall short of the mark. Bitcoin is not a suitable digital replacement for gold precisely because of the amount of expended energy required to sustain its network security. It’s a very slow, difficult and expensive process to extract gold from the Earth. This is similar to the process of mining new coins through proof-of-work. However this similarity ends when it comes to simply maintaining the security of gold.
Once the extraction process is complete, very little effort is required to actually maintain and secure gold. In contrast, once new bitcoins are extracted those coins can only be considered truly secure if expensive mining operations continue servicing the Bitcoin blockchain forever. This large and continual cost to simply sustain the Bitcoin network diverges from the small cost to maintain the security of gold.
By comparison, VirtacoinPlus can be considered a true digital replacement for gold. Proof-of-work in VirtacoinPlus imitates the expensive extraction process of gold. However once extraction of new coins is complete, proof-of-stake provides a cost efficient way to actually secure that value similar to the lower cost of securing gold from theft. This two step process of extracting a resource and then maintaining its security in a cost efficient manner is best compared with the VirtacoinPlus blockchain.
A deflationary network like Bitcoin does not make for an acceptable cryptocurrency. As the supply reduces, this causes an upward pressure on the value of the coins over time. Due to its deflationary nature, users of the network are incentivized to hoard their coins in order to achieve gains in value rather than using it as a transactional currency.
A network like VirtacoinPlus is better suited for use as a currency. If VirtacoinPlus is able to hold its annual inflation rate at a low level, this would provide users of the network with more of an incentive to transact with their VirtacoinPlus as a normal currency.
Unlike most blockchain projects, we have never believed that blockchains alone by themselves could scale to full worldwide usage levels. In fact, the VirtacoinPlus blockchain and its economics was tailored to fit what the originally termed the “backbone currency” role, which is now commonly known in the crypto community as a settlement layer.
The Backbone of Crypto
From the very beginning, we believed that adapting blockchains directly for wide scale use only through on-chain transactions would negatively impact the decentralization level and security of the network over time, therefore we intentionally chose to develop the VirtacoinPlus blockchain to function as a base layer settlement network, a backbone currency.
VirtacoinPlus is energy efficient and is designed to last. Bitcoin has a long term uncertainty as to whether transaction fees can sustain a good enough level of security. Before that the main concern is how to balance transaction volume and transaction fee levels. Currently we get the feeling that bitcoin developers favor very low transaction fees and very high transaction volume, to be competitive against centralized systems (paypal, visa, mastercard etc) in terms of transaction volume, to the point of sacrificing decentralization. This also brings major uncertainties to bitcoin’s future.
From our point of view, we think the cryptocurrency movement needs at least one ‘backbone’ currency, or more, that maintains a high degree of decentralization, maintains a high level of security, but does not necessarily provide a high volume of transactions. Thinking of savings accounts and gold coins, you don’t transact them at high velocity but they form the backbone of the monetary systems.
Pure proof-of-work systems such as bitcoin are not 100% suitable for this task. This is because the transaction fee is not a reliable incentive to sustain network security. If the mining generation amount is kept constant (there have been several such attempts in altcoins) it would work better security-wise but then it would also significantly weaken the scarcity property of the currency.
VirtacoinPlus is designed to serve as a backbone currency. The proof-of-stake technology in VirtacoinPlus is not only energy efficient; it also maintains a high level of security without relying on transaction fees. Thus VirtacoinPlus could be safely designed with a strong scarcity property yet serve well as backbone currency. VirtacoinPlus uses protocol enforced transaction fees, which reflects our preference that high transaction volume is discouraged in favor of serving as backbone currencies.
Right now if we are talking about micropayments in the US $1 range, VirtacoinPlus still handles them with much lower overhead than credit card networks. In the long term micropayments should be provided by centralized providers, or a less decentralized network optimized for high capacity transaction processing.
On the other hand there is no promise that the minimum transaction fee wouldn’t be adjusted. If processing capacity of personal computers continues to advance at the current pace, both max block size and minimum transaction fee could very well be adjusted at some point. However we do take a very cautious approach to adjusting transaction fees, as opposed to bitcoin devs. The impact to the fitness of the currency as a backbone currency is of great concern.
The main worry is the potential loss of decentralization over time by focusing the blockchain on directly supporting high on-chain transaction volumes. This fear eventually became realized with the creation of Bitcoin Cash, a blockchain completely focused on on-chain transaction volume through regular increases in the block size. Recall that these increases in block size make it difficult over time for network validators to store the entire chain on their personal devices due to the increasing need for more hard drive space as well as the difficulty of broadcasting and processing bigger blocks.
Focusing VirtacoinPlus on supporting high on-chain transaction volume for example would negatively impact both validators who voluntarily operate nodes as well as proof-of-stake minters. Over time this would lead to the centralization of security providers as only those who could afford to keep up with the demands of larger blocks would be left running nodes. Unsustainable growth in the size of the blockchain, bandwidth requirements for broadcasting big blocks and hardware requirements for processing big blocks would drive away both volunteers and small stakeholders.
2.12.1. The Original Base Layer Settlement Network
VirtacoinPlus was designed to completely avoid this problem. Instead it was implemented with a fixed transaction fee to act as a deterrent against high on-chain transaction volume. By doing this, it was purposefully treating the VirtacoinPlus blockchain as a settlement network. The crypto community needed a secure and censorship resistant base layer for the future blockchain connected world. VirtacoinPlus was designed as this base layer, upon which other supporting layers could be developed.
Changes to bitcoin’s core protocol and the adoption of second layer networks, Blockstream, the company responsible for Bitcoin’s development, has basically done all it can to make Bitcoin more and more like VirtacoinPlus. VirtacoinPlus adopters are happy to see the world’s largest blockchain becoming closer to the way we’ve always imagined blockchains should operate.
Bitcoin developers for example have basically been forced into changing Bitcoin from a peer to peer electronic cash system into a settlement network with high fees and limited transaction volumes in order to sustain network security in the future. This is the only way that Bitcoin can survive. Instead they will treat Bitcoin as a base layer and attempt to unload micro-transactions onto secondary layers built on top of the blockchain such as the Lightning Network. This is the way VirtacoinPlus was designed from the very beginning.
2.12.2. Compatibility of Minters & Second Layers
Previously it was explained that layer 2 networks are ultimately incompatible with proof-of-work miners. This is true because any off-chain transaction prevents miners from being compensated. Once block rewards are gone, miners can only be paid if users perform on-chain transactions, therefore any increase in off-chain transactions will cause miners to suffer financially. Eventually this will negatively impact network security as miners become unprofitable and drop out.
However once again, VirtacoinPlus completely solves this issue. Since proof-of-stake minters are compensated from block rewards that are automatically generated by the network, off-chain transactions that are conducted on layer 2 networks have absolutely no impact on the VirtacoinPlus blockchain’s overall security.
In other words, minters do not rely on user transaction fees. They obtain their motivation to provide security from network generated block rewards. As a result, proof-of-stake minters are not impacted if off-chain transactions increase. Minters have no reason to care whether transactions are being made on-chain or off-chain, since they are being compensated from a completely different source.
Therefore VirtacoinPlus is one of the only blockchains that really makes sense to be paired with secondary layers like the Lightning Network. Unlike proof-of-work networks, security validators at VirtacoinPlus do not depend on expensive transaction fees in order to sustain network security. Instead transaction fees in VirtacoinPlus are burned rather than distributed to minters as compensation.
This is important because it means off-chain transactions being conducted on the Lightning Network will not compete with VirtacoinPlus minters. Minters can sustain themselves completely on network generated block rewards, which means Lightning and other layer 2 networks are not a threat to VirtacoinPlus’ security model.
A conclusion that can be drawn from this is that only proof-of-stake blockchains that burn fees are compatible with secondary layer networks. Any blockchain that is reliant on fees to sustain network security will be incompatible with secondary layers.
2.12.3. Dynamic Block Sizes
The VirtacoinPlus community should actually be interested in implementing both on-chain and off-chain scaling mechanisms. Off-chain scaling would rely on secondary layer networks like Lightning that are developed by external development teams. On-chain scaling in VirtacoinPlus would consist of a change to the core protocol that allows for dynamic block sizes.
If dynamic block sizes are implemented in the future, it will most likely function like the following. When a block is filling up and transactions are almost at maximum capacity, the block size limit will be allowed to temporarily rise above 1MB. As long as there is demand for the extra space, the block size limit will stay at this level. If transaction volume decreases however, then the limit will fall back to 1MB.
These temporary block size increases in VirtacoinPlus would be much different than the ones in Bitcoin Cash however due to VirtacoinPlus’ use of a static transaction fee. In Bitcoin Cash a user attempting to transact with their coins can volunteer to pay whatever fee they want to miners, no matter how small it is.
Since the block size limit in Bitcoin Cash is much larger than 1MB, the extra space means there is much less of a chance for a block to be filled up, which also means higher fees are less likely to be triggered because of a full block. Without higher fees, it is much easier for users to fill up the blockchain with cheap on-chain transactions. A minimum transaction fee is required to help filter out and prevent severe transaction spam and the resulting bloating of the chain size.
In VirtacoinPlus however a user is forced to pay the mandatory fixed fee of 0.00001 XVP per kilobyte of space used. This static fee acts as a restriction to curb the number of on-chain transactions, which prevents bloating of the blockchain size. Consider also the fact that the fee is priced in VirtacoinPlus rather than in fiat money like the dollar or the euro. If the price of VirtacoinPlus rises in terms of dollar value, the 0.00001 fee will cost more.
For example, if the price per VirtacoinPlus is $10, then the value of the 0.00001 XVP fee will cost a user almost nothing per transaction. If the price per VirtacoinPlus is $100, then the value of the 0.00001 XVP fee will cost a user one tenth of a cent per transaction. If the price is $1,000, then the transaction fee will cost 1 cent and so on. As the price of VirtacoinPlus rises, the cost of on-chain transaction fees will rise along with it. It is possible to adjust the static fee lower in the future if transactions become cost prohibitive, however an upgrade of the network like this would require consensus from stakeholders.
The way this would work in VirtacoinPlus is that users would make transactions on the chain only up to the point of affordability. Users who are transacting large amounts of VirtacoinPlus for example may consider the high fee marginal compared to the amount they’re trying to send. Plus they may not mind high transaction fees if it means taking advantage of the higher security of on-chain transactions over doing those same transactions on layer 2 networks. On the other hand a user that is trying to transact small amounts may find the transaction fee they need to pay is worth more than the coins they are trying to send.
There may be enough transaction volume to temporarily raise the block size limit for a short period of time, but there are only so many people who are willing to pay for on-chain transactions when the cost is so high. This results in a situation where users only pay for on-chain transactions if the security advantages of transacting directly on the blockchain are worth it for them when the fees of those transactions are taken into consideration.
The remaining users who feel the cost of on-chain transactions aren’t worth the security benefit will use secondary layer networks instead. For example, small transactions that are too costly to be performed on the blockchain will end up being off-loaded by users onto layer 2 networks where they are less expensive to perform. In this way the cost of the transaction fee will determine whether users decide to transact on-chain or off-chain. With dynamic block sizes in VirtacoinPlus, the limit would only increase as long as there are users willing to pay the fee for on-chain transactions.
Attack surface is an important concept to grasp when it comes to blockchain security. The more you add to and modify a system, the more complex it becomes. And as a system becomes more complex, there is a higher chance that something can go wrong or fail. In the short-term, a blockchain team that is constantly adding new features and rapidly advancing the protocol may seem exciting and innovative, however in the long run they are likely creating new bugs and vulnerabilities that will inevitably come to light.
The VirtacoinPlus community believes in modularity. This means that VirtacoinPlus as the base layer should remain fairly unchanging. New protocol developments are slow to be implemented in order to prevent fatal issues from occurring. New protocols and functionality such as tokens, smart contracts and high speed low cost transaction processing can then be added as independent layers.
Rather than developing these additional improved features and technologies directly into the blockchain protocol itself, instead they are built as separate layers that exist on top of the base layer blockchain. In the long run, this modularity will make VirtacoinPlus more secure and easier for developers to build upon.
This slow changing, ultra secure base layer blockchain is the ultimate foundation upon which any number of additional layers can be built. Anyone is free to build anything on top of VirtacoinPlus that is as risky or complex as they can conceive. And if their conception is flawed, VirtacoinPlus does not need to fall with it. The failure of any layers on top of VirtacoinPlus will have no impact on the base layer blockchain.
Overall, VirtacoinPlus’ primary purpose is to maximize decentralization in order to preserve a trustless network that can be relied upon now and in the future to secure all different types of value. The efficient and sustainable proof-of-stake technology provided by VirtacoinPlus offers developers a solid and decentralized foundation to build upon.
bitcointalk ANN: https://bitcointalk.org/index.php?topic=1851562.0
Blockchain Explorer: https://chainz.cryptoid.info/xvp/#