Proof of Stake Velocity Building the SocialCurrency of the Digital AgeLarry Ren April 2014AbstractProof of Stake Velocity PoSV is proposed as an alternative to Proof ofWork PoW and Proof of Stake PoS to secure the peer-to-peer networkand con rm transactions of Reddcoin, a cryptocurrency created speci -cally to facilitate social interactions in the digital age. PoSV is designed toencourage both ownership Stake and activity Velocity which directlycorrespond to the two main functions of Reddcoin as a real currency storeof value and medium of exchange. Reddcoin can also function as the unitof account in heterogeneous social context. The technological aspects ofPoSV are presented after a detailed review of existing designs. The eco-nomic aspects of Reddcoin are then analysed. Finally the unique positionof Reddcoin as a digital social currency in the competitive landscape ofcryptocurrencies is discussed.1 IntroductionBitcoin is among today’s most discussed and controversial topics. Ever sinceSatoshi’s seminal paper [9] in 2008, Bitcoin has evolved from a technologicalexperiment embraced by a small group of computer enthusiasts to what sometoday consider to be the most important innovation since Internet. Most re-cently, there are new variants of Bitcoin, called altcoins, created everyday and awhole new industry of altcoin trading exchanges, mining pools, gaming websitesemerged. Few topics today are more polarising than cryptocurrency. Some mer-its of cryptocurrency touted by technologists are considered sins by economists.Cryptocurrency is considered a movement by believers and a fad by disbelievers.Instead of an open and honest discussion involving all sides, what we have wit-nessed is a dialogue of the deaf, in which each camp justi es its own intellectuallaziness by pointing to the intellectual laziness of the other camps. This is oneThe lead developer of Reddcoin, a.k.a. \laudney PGP Public Key1of the main obstacles that prevent cryptocurrency from being accepted by thegeneral public.What do we really know about this evolution Is cryptocurrency just a tech-nological breakthrough or also an economic one [7] Is mining cryptocurrencya progress or retrogression [6] Is cryptocurrency meant to replace governmentand nancial institutions or complement them Is cryptocurrency designed forhoarding or spending And, the most fundamental question of all is cryptocur-rency real currency or just virtual property for speculation [13]So far innovation in the cryptocurrency world has been almost exclusivelytechnical. Technologists have proposed improvement on various aspects of Bit-coin, such as new hash functions [11] to replace SHA256 and new mechanism [4]to replace Proof-of-Work. There have been very few cryptocurrencies designedto address the economic and social aspects of being a real currency. Reddcoin,at the time of writing, seems to be only one.We write this paper with three goals in mind 1 to give a broad overviewof the current issues around cryptocurrency, both technological and economic,which might not have been foreseen by the original designers. 2 to addressthese issues with proposals which require coordinated changes in both low-levelnetwork protocol and high-level economic and social ecosystem. 3 to encouragea more open and objective discussion of cryptocurrency by the general publicand promote a more complete thinking for future innovation in cryptocurrencyworld.The rest of the paper is organised as follows. Section 2 describes in detailthe merits and drawbacks of Proof-of-Work PoW and Proof-of-Stake PoSfrom both technological and economic points of view. PoSV is then proposedto address those drawbacks in the speci c context of a digital social currency.The technological design choices of PoSV are given in broad strokes. More de-tailed technical analyses will be presented in a companion paper [12]. Section3 addresses the most common criticisms by economists on cryptocurrency andshows how Reddcoin and PoSV together provide new answers and new oppor-tunities for social research in general. Section 4 emphasises the main di erencesbetween Reddcoin, a digital social currency which focuses on integration withhuman social interactions and aims to concretise and quantify people’s intan-gible asset of social in uence, and the much more common digital commercialcurrencies which aim to facilitate transactions of goods and services and o erprotection from hyperin ation.2 TechnologyA cryptocurrency uses principles of cryptography to implement a distributed,decentralised and secure cash system. It solves the problem of double-spendingin a distributed ledger by introducing a mechanism to secure the network against51 attacks and Distributed Denial of Service DDoS attacks. The underlyingprinciple of such a mechanism is the necessity of expending resources when con-rming transactions. Once con rmed, transactions become irreversible because2it’s practically infeasible for any attacker to have access to the huge amount ofresource required to modify them. Di erent mechanisms use di erent types ofresources.2.1 Proof of WorkA Proof-of-Work PoW is a piece of data which is costly to produce so as tosatisfy certain requirements but is trivial to verify. Bitcoin uses the HashcashPoW [1]. Mining, the process of producing PoW, plays the central role in creat-ing, distributing and securing Bitcoin and many its variants. The most commoncriticism of PoW mining is its massive waste of energy. At the time of writing,the total daily revenue of mining Bitcoin is around 1.8 million USD. Dependingon the aggregate pro t margin and the fraction of overall cost that electricityaccounts for, we estimate the daily total electricity cost at between 200K and500K USD. In addition to this wastefulness, there are several more reasons whymining remains a very controversial aspect of PoW cryptocurrencies.2.1.1 Mining Arms RaceMining is by nature extremely competitive. Mining costs include initial expendi-ture on equipment plus on-going energy cost. Miners are predominantly rationalpro t seekers. Their top concern is how long it takes to recover the initial cost,i.e. the length of Return on Investment ROI. During the very early age ofBitcoin, mining was carried out by CPU. When mining later became availableon graphics cards GPU, mining on CPU became immediately loss-making. AsBitcoin price continued to soar, mining operation witnessed a mini industrialrevolution. Application Speci c Integrated Circuit ASIC designed to carryout PoW computation at several magnitude higher speed and lower energy coststarted to emerge and soon rendered GPU mining obsolete. This relentless armsrace causes constant worry among average miners who usually fail to recuperateinitial investment and cannot a ord continuous hardware upgrade.Bitcoin uses SHA256 [10] as the hash function in PoW and is the rst toexperience this arms race. The same arms race is happening to cryptocurrenciesthat use the Scrypt hash function [11]. Scrypt was initially touted as \ASIC-resistant due to its heavier memory usage. In reality, ASIC-resistance is oneof the most misleading and over-abused marketing slogans in the cryptocur-rency world. The correct word is \ASIC-ignored. ASIC can be designed andmanufactured to per all hash functions. The entry barrier is not technicalbut nancial. Unless there is su cient market demand for mining Scrypt-basedcryptocurrencies, it’s simply nancially unpro table for manufacturers to investin the production of such ASICs. While Scrypt is under the threat of ASIC,many cryptocurrencies have been created to use alternative hash functions suchas Scrypt-N, Scrypt-Jane and X11. These cryptocurrencies all market them-selves as the \latest and best generation of ASIC-resistance when this resis-tance is entirely dependent on being a minority. It’s deeply self-contradictory3for a cryptocurrency to pitch ASIC-resistance as its main merit to gain wideadoption when this sole merit depends on it being unpopular.In theory, it can be preferable to have separation between mining a cryp-tocurrency and using it. It’s more e cient to leave mining operation to spe-cialists who use their domain knowledge to achieve economy of scale. This isindeed the case for Bitcoin, the most established cryptocurrency. However, any newly created variants, average GPU-miners make up the vast majorityof user communities and the fear of ASIC directly threatens their social fabric.2.1.2 Miner IncentiveMiners provide a paid service to cryptocurrency networks. They are all pro tseekers rst and foremost. At a xed cost, it’s perfectly rational for them tomine the most pro table cryptocurrency and sell it quickly on market to limitexposure to price risks. Hence were born the so-called \multipools which fullyautomate this process. Multipools create two new problems in the cryptocur-rency world.First, the pro t-seeking by multipools pushes many cryptocurrency pricesto just above mining production cost. As mining production costs inevitablygo down due to technological advances, many cryptocurrency prices su er fromdownward death spiral, which hurts the morale of the corresponding communi-ties. Second, multipools employ strategies that exploit the lag in readjustmentof di culty of PoW. Multipools switch to a cryptocurrency with low di cultyand keep mining it while its di culty gradually catches up. The moment thedi culty rises to its fair value, multipools switch again. As a consequence, mul-tipools mine blocks at a signi cantly lower average di culty than other miners.Although from a pure Darwinian point of view multipools help improve mar-ket e ciency and lter out the weakest, they do force most cryptocurrenciesto focus on extremely short-term interests rather than long-term growth andinnovation.2.1.3 Manufacturers of ASIC Mining EquipmentTo be the most pro table miner, one must be the rst to get hold of the latestequipment that o ers the highest hash rate per unit of cost. Therefore manufac-turers of ASIC mining equipment have strong nancial incentive to use their ownproduct for mining rst and only start shipping equipment to buyers after min-ing pro tability drops enough. This inherent con ict of interests has profoundimpact on every aspect of the mining business. For example, the vast majorityof manufacturers ask for prepayment in exchange for a promise. The actual de-livery is usually delayed by months, which reduces mining pro tability for theirbuyers to almost zero. Manufacturers often o er no refund for shipping delay orproduct defect in their terms and conditions, e ectively eliminating their ownliabilities and openly exploiting the desperation of buyers. All these frustrationsreduce the con dence of average miners and undermine the soundness of PoWmining as the guardian of cryptocurrencies’ decentralised networks.42.2 Proof of StakeProof-of-Stake PoS is an alternative to PoW rst introduced in Peercoin [4].The resource used by PoS is \coin age currency amount times holding period.Similar to energy, coin age as a resource is expensive to amass in huge quantity.For an attacker to accumulate enough coin age to attack the distributed network,he either has to buy on open market a large amount of the very currency he’strying to attack, driving up its price during the process and diminishing hiseconomic incentive, or hold coins for a very long time, reducing the frequencyof his own attacks.One useful feature of PoS is the signi cant saving in energy consumption.Another main feature is the better alignment of incentives between miners andstakeholders because miners are now the stakeholders. PoS however has severallimitations2.2.1 Initial DistributionPoS by construction relies on a fair and wide distribution of a cryptocurrencybut doesn’t deal with the logistical issue of how to achieve this fair distributionin the rst place. By comparison, mining in PoW, despite all its drawbacks,also serves as a potent channel of distribution. This chicken-and-egg problemwas and remains a major challenge for all PoS cryptocurrencies. So far therehave been two popular workarounds a \pre-mine, i.e. similar to subscriptionto stock IPO in nancial markets and b a hybrid system of PoW and PoS withPoW gradually fading away after an initial period.The main criticism of \pre-mine for PoS coins is its lack of guarantee ofeither fair or wide adoption. The vast majority of \pre-mine turned out to befraud. For those which were not, investors and speculators with deep pocketscan easily control a large stake in the currency, transing its nature intomore as a speculative vehicle than a currency. Over-concentration of stakes alsoincreases the security risk of the decentralised network.The PoW-PoS hybrid system alleviates these concerns by running PoW andPoS in parallel. PoW mining works as both a steady distribution channel anda fall-back network security mechanism. As PoW block rewards go down overtime, PoS has enough time to move to the spotlight.Unfortunately, it doesn’t matter what particular model a PoS cryptocur-rency uses for initial distribution. The mere knowledge by the public that acryptocurrency will eventually rely on PoS compromises its ability to achieve afair and wide distribution. This is the inherent paradox of Proof-of-Stake.2.2.2 HoardingThe entire PoS network depends on coin age as the scarce resource. Coin agecan only be earned by holding coins. To earn coin age at a higher rate thanothers, one must hold more coins. Coin age is consumed when a coin is spentin a transaction. PoS mining requires a user to repeatedly send coins to herself,thus consuming his reserve of coin age in exchange for probabilistic winning5a PoS block reward without reducing the size of the holding. Coins spent intransactions facing other users also have their coin age reset to zero but thisconsumption of coin age is outside the scope of PoS mining, unquali ed for blockrewards and is considered a \waste by most PoS stakeholders.It now becomes clear that PoS has been designed to encourage hoardingand discourage spending. Some PoS coins, such as Peercoin, openly declaretheir philosophy to \function more as a long-term store of value than mediumof exchange. In this sense, PoS coins are created to be collectibles rather thancurrencies. Scarcity is a necessary but insu cient condition for collectibles tohave value. Collectibles must also o er some of utility such as aestheticsand historic signi cance. Considering the fact that anyone can access and mod-ify the source code of PoS coins and potentially o er an improved version, intheory there is in nite supply. The scarcity condition doesn’t hold. It remainsan unsolved puzzle where PoS coins marketed as collectibles derive their valuefrom.2.2.3 Full NodesPoS transs all stakeholders into miners. All they need to do to collectinterest rate is to leave their wallets running and conne