Proof-of-Work Vs Proof-of-Stake: A Comprehensive Comparison

| November 17, 2023

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Proof-of-Work Vs Proof-of-Stake

Blockchain technology has come a long way since the invention of Bitcoin. While several developments have emerged in the blockchain industry since Bitcoin’s arrival, their core functionalities rely on the fundamentals laid down by the first-ever blockchain network. Data integrity, transaction security, and permissionless access are enabling numerous disruptive applications in every major industry.

The utility brought about by blockchain exists thanks to the underlying consensus mechanism brought to fruition by the creator of Bitcoin. Essentially, consensus mechanisms are the operating force behind blockchains that prevent hacks and attacks, which can render them useless and their native crypto’s value to plummet. Consensus mechanisms, therefore, secure blockchain protocols and additionally introduce new cryptocurrencies into circulation.

While the Bitcoin network functions on the Proof-of-Work consensus, there are other mechanisms — mainly Proof-of-Stake — being developed and implemented. As these updates try to accommodate the growing blockchain user base and offer other incidental benefits like sustainability, PoW still remains the most reliable in certain aspects. The secureness of the Bitcoin network and the fact that it has never been attacked is because it operates on PoW.

What is Proof-of-Work?

While PoW was introduced in the early 90s for use cases beyond what it offers today, Satoshi Nakamoto, the pseudonymous creator of Bitcoin, made it possible for PoW to secure a fully decentralized payments network. There were many attempts to create such a network prior to Bitcoin, but all were futile because of the centralization they needed at some point in their operation.

What Satoshi got right with PoW’s implementation in Bitcoin was its decentralized consensus and its ability to secure the network from users spending the same cryptocurrency twice or more. To understand how PoW secures blockchain networks, let’s look at how the consensus mechanism works.

How Proof-of-Work Works

Network participants known as miners on PoW networks are tasked with building the blocks containing transactions and adding them to the blockchain. The process of building the blocks starts with miners across the network competing for the opportunity to do so. PoW networks like Bitcoin require miners to solve complex cryptographic puzzles which utilize a lot of energy and processing power. The miner who solves the puzzle first gets the chance to build the subsequent block for the network by filling it with transactions and adding it to the blockchain. The transactions on the proposed block are verified by the other miners on the network. Once a majority consensus of 51% or more is reached, the block is considered valid, and the chain continues to grow. As a reward for building the block, the miner is paid the transaction fees from the validated transactions, and the cryptocurrency is minted into circulation as a result of mining.

The Pros Of PoW

The incentivization of network participants for their efforts in building valid blocks breeds good behaviour, providing the basis for network security. If an attacker is looking to double-spend cryptocurrency, they need to fill a new block with the fraudulent transaction and add it to the blockchain. Due to consensus, however, the rest of the network will deem the block invalid and stop adding blocks past the invalid one.

In theory, such attacks would be successful if the attacker gained enough resources to form a majority consensus by themselves. This would require them to possess at least 51% of the network’s processing power to successfully validate a block with one or more fraudulent transactions.

In reality, such a feat is close to impossible, especially with large networks like Bitcoin. The need for mining processors and the massive amounts of electricity required to take over the network would cost the attacker billions. Not only is such an attack infeasible, but it would also lead to the network’s currency plummeting in value, defeating the entire purpose of the attack.

The Cons Of PoW

While PoW networks are known for their superior security and decentralization, they do have shortcomings, keeping networks like Bitcoin from becoming mainstream payments system. The amount of energy these networks consume is tremendous, and although that helps protect networks from attacks and centralization, it brings about massive environmental concerns. Further, PoW networks are also known to lack the capabilities to scale. The amount of work needed to create blocks chokes the network’s throughput, offering it the ability to process no more than a few transactions every second.

The latter is persistent with all PoW chains and is the reason why many developers are building blockchain networks with newer and more experimental consensus mechanisms like the Proof-of-Stake.

What Is Proof-of-Stake?

In the pursuit of bringing scalability to decentralized ecosystems, many newer blockchain protocols are implementing a newer consensus mechanism known as the PoS consensus. Most recently, the Ethereum network switched its consensus mechanism from PoW to PoS. The porting of consensus mechanisms was done to offer an environmentally sustainable network that can scale to process thousands of transactions per second.

How Proof-of-Stake Works

The PoS consensus mechanism offers faster transaction confirmation capabilities by removing the need for solving cryptographic puzzles that require processing power. Instead, network participants known as validators on PoS chains stake the blockchain’s native crypto asset into a smart contract. By doing so, they become a part of the block creation process. Most chains need a minimum amount of cryptocurrency to be staked to become a validator.

The staked crypto breeds good behaviour among validators, as behaviour, like not participating in the consensus mechanism or adding fraudulent transactions to blocks, can lead to the stake being slashed partially or completely. Moreover, validators are also incentivized for appropriate validation by rewards like those received by PoW mining. Transaction fees and newly minted cryptocurrency compensate for the efforts of validators and keep them working in the best interest of the network.

To create blocks on PoS blockchains, validators are chosen at random from the network by an algorithm. The chances of being chosen to create the block are proportional to the amount staked, thus being higher for validators with larger stakes. Once chosen, the validator simply creates a block, adds transactions to it, and submits it to the blockchain, where it is verified by the rest of the network. There is no work needed to be done on PoS chains, unlike PoW chains.

The Pros Of PoS

PoS blockchains, therefore, are much faster than PoW blockchains and allow blocks to be created and added in a fraction of the time needed to do so on PoW chains. Additionally, PoS blockchains are capable of onboarding scaling solutions like sharding much easier than their PoW counterparts. Such scaling solutions can allow the blockchain network to scale transaction throughputs to hundreds of thousands of transactions.

The Cons Of PoS

While the PoS consensus is becoming the way to go for developers building new blockchains, it does not come without its own issues. Because these chains allow network participants to validate blocks based on their stake, they bring about centralization concerns. It is easy for groups and corporations who possess massive financial backing to acquire a large number of the network’s coins and stake them for validation purposes. This makes it possible for these entities to gain control over the network, enabling them to bar transactions and thwart the permissionless nature of blockchain technology.

The Perfect Consensus Mechanism Is Not Here Yet But Will Be Soon

Proof-of-Work and Proof-of-Stake are two of the most widely used consensus mechanisms in the development of blockchain protocols. While both have their shortcomings, it is evident that much more developments are needed with the technologies that are so fundamental to the blockchain’s functioning.

As Proof-of-Work offers great security, it is better suited for cryptocurrencies like Bitcoin that are used to hold large value and occasionally transact rather than using it as a means of exchanging value. Thus, its low scalability and high transaction costs are not really of great concern to users mostly investing in it for the long term. Proof-of-Stake technology, on the other hand, is geared towards faster transaction capabilities and is being worked on by developers the world over to bring in higher levels of decentralization. This consensus mechanism is still in its experimental stages and its adoption by Ethereum will let us know how centralization hurdles can be tackled and if PoS is the future of blockchain consensus.

In the meantime, there are other consensus mechanisms being developed, too, like Proof-of-History and more. It will be interesting to see how these mechanisms are adopted and the challenges they face themselves. However, the large amounts of developments occurring are sure to bring a consensus mechanism that can solve the issues faced by blockchains of today.

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More on Crypto

The digital asset industry is more popular than ever, but it still has a lot of gas in the tank. Its current prevalence makes it accepted beyond the niche subsection of retail investors and cryptographic enthusiasts. Financial institutions are also dipping their feet into the digital asset waters, trying to capitalize on the ingenuity the assets bring to finance.

With the recent listing of Bitcoin ETFs by mammoth financial houses, the scope of investing in digital assets for institutional investors has opened up for the better. 

So, what’s changed the game for institutions? Previously, many were hesitant to jump into the digital asset world due to concerns about managing private keys securely, finding reliable custodians, and ensuring smooth transaction processing. 

Digital Assets are catching the attention of all kinds of institutional houses

With the true potential of this asset class far from reached, many investors are flocking to get some, or lots, knowing how their values can be appreciated enormously in the times to come. Assets like Bitcoin constantly show how they can multiply investments severalfold when timed correctly.

Beyond that, digital assets have proved to be great stores of value over longer durations, helping beat the corrosive effects of inflation on fiat currency. Worried about the short-term volatility of these assets, most institutional houses prefer to hold on to them for extended periods.

Family Offices Find Themselves Growing Closer to Digital Assets. 

And that has positioned family offices perfectly to jump into the digital asset landscape. Single- and multi-family offices working to preserve and grow the wealth of affluent, high-net-worth families have begun making digital assets a significant part of their overall investment portfolios, looking to tap into the burgeoning potential of blue-chip tokens and altcoins.  

Blockchain and Web3 implementations depict their ability to transform the tech and finance industries over the coming decades. Logically, family offices are turning to digital assets at the center of the transformation to set future generations up with this lucrative innovation. While these investment strategies look to become generational, family offices must make several considerations, including educating themselves about the asset class and implementing effective risk management strategies.

Choosing the ideal custodian is imperative for Family Offices

A stop-stop solution for Family Offices to maneuver their way into simplified digital asset investing and management is with digital asset custodians

Handling millions or billions of dollars in assets is no sweat for experienced custodians. They have an arsenal of solutions from wallet options like hot and cold wallets, Multi-Sig and MPC configurations compliance integrations, regulatory licenses, institutional-grade custody structures, succession planning tools, and more. But choosing the right one for your specific situation is crucial.

Family offices are best suited to choosing the services of third-party custodians for managing the digital assets in their portfolios. Self-storage solutions come with a steep learning curve and, more consequentially, the possibilities of irrecoverable asset loss if the private keys securing the assets are mishandled or lost. There is no recourse from that, possibly jeopardizing vast amounts of value.

So, relying on reputed custodians specializing in managing digital assets for clients interacting with massive volumes is the best bet for family offices. Their convenience and security make them the pragmatic option for anyone beyond the average retail digital asset investor who deals with less significant values.

What to Look for When Choosing a Custodian

While several custodians operate in the digital asset landscape, family offices must choose the right one for various reasons. Let’s examine what they must focus on and how it can make their interactions with the asset class seamless.

Secure Infrastructure

Dealing with digital assets revolves around secure infrastructure, especially when trusting third parties to manage them. After all, the amount of security breaches around private key handling leads to losses in the billions in the industry every year. Custodians possessing secure infrastructure and integrating best practices to store private keys and transfer data regarding user accounts are the ones to look for.

Identifying such custodians requires checking if they hold cybersecurity certifications, including SOC2 (Systems and Organizations Control 2) and CCSS (CryptoCurrency Security Certification) certificates, which they obtain upon intense scrutiny and audits by the issuing agencies. Simultaneously, custodians engaging in continuous bug bounties and penetration testing stay safe from emerging cybersecurity risks.

Insurance

One thing is sure in the digital asset realm – anyone can be a victim of exploits and hacks despite employing all kinds of cybersecurity protection. Cybercriminals can stay one step ahead of all preventive measures, waiting for the right time to attack. And that can lead to the theft of millions of dollars worth of assets from custodian platforms.

Insurance is the recourse for such inevitable situations, ensuring custodian clients regain lost value. It also helps clients access their value if custodians misuse the funds under management and indulge in corrupt, self-serving practices. Think of the FTX catastrophe that caused losses of user values amounting to multiple billions.

Moreover, insurance providers are very strict about the platforms they insure, doing thorough due diligence before taking custodians on board. So, insured platforms are more trustworthy than those that are not.

Regulation-Oriented

Opting for custodians that focus on regulations is a must. Several jurisdictions have rolled out their digital asset regulations, with many more in the process of doing the same. Those in regulated jurisdictions must possess licenses from regulators overseeing their national crypto ecosystems. Others in countries yet to release relevant frameworks are still answerable to financial regulators.

Ergo, choosing licensed custodians, or those following digital asset and other financial regulations in areas without specific regulations, can save family offices many headaches stemming from non-compliance. They often manifest as having the assets entrusted to the custodians frozen or seized by authorities.

Good Track Record

Family offices must stick to well-established custodians favored by institutions and enterprises in the digital asset landscape. Looking for those operating in the industry with extensive and familiar clientele for considerable periods offers the social assurance that family offices need.

Such custodians have earned their reputations by servicing their clients aptly and focusing on their specific needs, making them better options to manage crypto funds. However, that is not to say that family offices should not consider newer custodian solutions.

Looking for ones that follow all best practices, offer avant-garde features, and work towards building trust in the ecosystem can be highly beneficial. Liminal is a custodian making strides in the digital asset management vertical, providing feature-packed solutions with bank-grade security to family offices. It has also received licenses to operate in multiple jurisdictions thanks to its emphasis on a regulation-first approach.

Comprehensive Reach

The digital asset landscape is evolving rapidly, with new tokens that power highly innovative use cases emerging constantly. Simultaneously, several dApps, including DeFi protocols and DAOs, are scattered across various blockchains, proven to offer high-level yields and profit-generation measures.

Engaging with custodians supporting multichain capabilities and allowing family offices to interact with various digital assets and protocols from various chains is necessary. Moreover, they must offer convenient and intuitive workflows on their platforms for their clients to buy, trade, sell, and utilize digital assets and Web3 applications.

Sensible Pricing

A good custody solution does not equate to being expensive. Several custodians offer economical pricing tailored to the needs and usage of family offices rather than rigid, one-size-fits-all plans. Delegating the custodianship of digital assets to such solutions can keep the billables inexpensive while still providing access to a broad range of features and high-quality service.

Conclusion

Digital assets are bleeding into the portfolios of family offices thanks to their capacity to preserve value, build wealth, and complement traditional investment vehicles as an emerging, speculative asset class. While family offices are accepting it wholeheartedly and geared towards indulging in risky assets, top digital assets’ value retention and inflation-beating capabilities set the asset class up for increased adoption.

Of course, dealing with these assets at any point in time requires family offices to be equipped appropriately. It includes choosing the proper digital asset custodian. Partnering with the right one can make all the difference while treading this novel landscape, allowing family offices to hold and generate value from all facets safely.

February 29, 2024

Digital Asset markets have taken a giant leap ever since their categorization from purely being a volatile alternate investment asset to now being a robust and regulated asset class. 

The journey of digital assets, most significantly that of blue-chip tokens like Bitcoin and Ethereum, has been nothing short of a protagonist in the fight against traditional financial systems, investment avenues, and age-old yield mechanisms. 

However, it was only after the introduction of regulation for these digital assets that they garnered huge institutional interest, pushing the scale of adoption and inviting the likes of family offices to partake in the “coming of age” story of investing in digital assets. 

In the underlying characterization of digital assets as the next best portfolio addition for institutional investors, with a significant boost kicking in after the launch of Bitcoin ETFs(with Ethereum ETFs also on their way), there are still reservations as to how to go about tackling the security, custody, and management challenges that come with them. 

To discuss how current market conditions are driving family offices to embrace portfolio diversification strategies that include allocating funds to digital assets, we dive deep into the intricacies of digital asset custody

Challenges In Secure Digital Asset Investing For Family Offices 

Family offices, traditionally known for their conservative investing approach, sit in the middle of the institutional investors’ branch, bringing untapped liquidity into the market. Conventionally, family offices used to rely only on safer investment bets to accrue value for their investments, but now they are increasingly dipping their toes into the dynamic world of digital assets. 

Despite the potential for high returns, family offices have historically faced significant challenges when considering digital assets as an investment class. Factors such as market volatility, regulatory uncertainty, and the need for established custody solutions have deterred many from fully embracing digital assets.

Talking about the key hurdles family offices face in navigating this exciting but complex landscape, here are some top-of-the-line challenges for them:

  1. Security Concerns: The nascent nature of digital assets presents unique security risks. Hacking, scams, and volatile markets can threaten portfolio stability. Family offices need robust custody solutions, advanced cybersecurity measures, and comprehensive risk management strategies to mitigate these threats.
  2. Regulatory Uncertainty: The regulatory landscape surrounding digital assets is still evolving, creating uncertainty and compliance hurdles. Family offices must stay updated on changing regulations and navigate complex compliance requirements across jurisdictions.
  3. Limited Expertise: Building internal expertise in digital assets can be time-consuming and expensive. Family offices often need more in-house knowledge and resources to properly evaluate, manage, and secure their digital asset investments.
  4. Lack of Infrastructure: Integrating digital assets into existing portfolio management systems can take time and effort. Family offices need secure and reliable infrastructure to seamlessly store, manage, track, and report on their digital asset holdings.
  5. Complex Valuation: Accurately valuing digital assets can be difficult due to their volatility and lack of standardized methodologies. Family offices need robust valuation frameworks and access to reliable market data to make informed investment decisions.

Enabling Family Offices to overcome challenges in digital asset custody

The promise of digital assets is undeniable, yet the hurdles for family offices can seem daunting. 

Overcoming the challenges mentioned above and finding the best probable solutions for them becomes a hardcore reality that must be dealt with utmost precision. 

At Liminal, we work extensively with institutions looking to go one step beyond simply investing in digital assets and look to operate them securely under all circumstances. The same logic applies to family offices as well. 

In our pursuit of building such a robust infrastructure solution, tailored to address the challenges faced by family offices fully and to empower them in their journey to moving to a new asset class for investment, we have created a comprehensive custody solution, integrated best-in-class security protocols and provide real-time monitoring and risk management services to proactively identify and mitigate potential threats, giving family offices peace of mind knowing their assets are secure.

  1. Security Concerns:

Fortress-grade custody: We leverage multi-sig and MPC wallets, leading asset-to-insurance ratios, and bank-grade security protocols to ensure the safety of your assets. Our CCSS Level-3 certification and FIPS-compliant hardware devices go the extra mile, minimizing security risks and providing unmatched peace of mind.

Advanced Cybersecurity Measures: Our vigilant team constantly employs 24/7 SOC monitoring, strict access controls, and penetration testing to identify and mitigate potential threats.

Comprehensive Risk Management: Our experts help you create and implement tailored risk management strategies, considering internal vulnerabilities, market fluctuations, and evolving threats.

  1. Regulatory Uncertainty:

Staying Ahead of the Curve: We have a dedicated team of compliance experts who stay abreast of evolving regulations worldwide. We integrate crucial compliance monitoring in our solutions such as KYC/KYB, AML, and Travel Rule checks, to help navigate complexities across jurisdictions and proactively adapt our services to ensure your portfolio remains compliant.

Streamlined Reporting: Our platform generates comprehensive compliance reports automatically, saving you time and resources while ensuring transparency and regulatory adherence.

Regulatory Partnerships: We actively engage with regulatory bodies and industry leaders 

to become accredited custodians. Currently, we hold a TCSP license in Hong Kong and have also received an IPA from ADGM for an FSP license for our Abu Dhabi entity. 

  1. Limited Expertise:

Your Digital Asset Knowledge Hub: Our team of seasoned custody, compliance, wallet, and security professionals offers expert guidance on evaluating, managing, and securing your digital asset investments. We share industry insights, educational resources, and ongoing support to enhance your knowledge base.

Dedicated Account Management: A dedicated account manager serves as your point of contact, providing personalized guidance and support tailored to your specific needs and goals.

Extensive Resource Library: Access easy onboarding docs, a curated developer section, seamless user-guiding workflow, and trending topic discussions through webinars, research whitepapers, and market reports to build your understanding of digital assets and make informed investment decisions.

  1. Lack of Infrastructure:

Seamless Integration: Our API library, Liminal Express, seamlessly integrates with your existing portfolio management systems, creating a smooth and efficient workflow for managing your digital assets.

Secure Storage and Management: We provide institutional-grade hot and cold wallets for self and managed custody infrastructure, eliminating the need to build or manage complex systems.

Automated Workflows: Streamline recurring tasks and automate key processes with our automation engine, with powerful functionalities like smart refill wallet, smart consolidation, and auto-sweep, enhancing efficiency and reducing operational burdens.

  1. Complex Valuation:

Reliable Data and Valuation Tools: We offer access to trusted market data providers and valuation tools tailored for digital assets, enabling you to make informed investment decisions based on accurate assessments.

Insurance-as-a-Service: We have collaborated with Costero brokers to provide the best possible insurance to our clients that covers their entire portfolio at the best market price. 

Asset segregation and transparency: We deploy segregated accounts, succession planning, and no rehypothecation of assets to allow family offices to maximize transparency and access. 

Embracing the Future Of Family Office Investing 

The future of wealth management includes digital assets. Family offices are actively exploring this burgeoning space, recognizing the potential for diversification and growth. Liminal Custody stands as your trusted partner in this journey. As a regulated custodian, we offer best-in-class security, industry-leading compliance solutions, and a dedicated team of experts, empowering you to invest in digital assets confidently.

Let Liminal Custody guide you through the process, making the path towards secure and compliant digital asset investment smooth and efficient. Contact us today and explore the new frontier of wealth management

Remember, while the potential is promising, navigating the digital asset landscape requires careful planning and collaboration with trusted partners. Liminal Custody is here to equip you with the knowledge and resources to succeed.

February 23, 2024

As we continue constructing a fully regulated digital asset custody platform, ensuring secure storage for both crypto and fiat assets remains a critical priority. 

To facilitate the last checkpoint of enabling institutions to convert their digital asset treasury into fiat currency, we’re expanding beyond pure wallet infrastructure and integrating seamless fiat off-ramp capabilities for our partners.

We’re thrilled to announce our partnership with Encryptus, licensed and compliant off-ramp solutions tailored for institutional clients. This collaboration elevates Liminal’s service offerings by empowering our partners to convert their digital asset treasuries into fiat currencies efficiently.

Integrating A Seamless Off-Ramp Solution

The digital asset ecosystem historically faced friction points when transitioning between fiat and cryptocurrencies. Off-ramp solutions address this pain point by enabling efficient and streamlined conversion between asset classes, minimising value loss and simplifying compliance processes.

Here’s how off-ramp changes the game:

  • Reduced Friction: Frictionless conversion minimises delays and operational complexities associated with traditional fiat-crypto exchange methods.
  • Enhanced Efficiency: Streamlined workflows expedite asset conversion, increasing speed and cost-effectiveness for institutional and individual users.
  • Optimised Value Preservation: Advanced off-ramp solutions prioritise minimising price slippage and value loss during conversion, protecting user portfolios.
  • Simplified Compliance: Integrated compliance features navigate regulatory complexities, ensuring adherence to relevant financial regulations.

With our partnership with Encryptus, we have embedded their institutional-grade APIs, connecting their off-ramp solution within Liminal’s wallet and custody platform. 

This integration simplifies our clients’ liquidation requirements while keeping their assets secure and more:

  • Effortless Digital Asset to Fiat Conversion: Our partners will be able to access treasury management and facilitate business payments in 54 countries and individual payments in an extensive network of 80+ countries.
  • Streamlined Compliance and Regulation: Our partners will be able to leverage Encryptus’s rigorous licensing and compliance framework, ensuring adherence to stringent financial regulations.
  • Enhanced Platform Value: We will be able to expand the functionality of the Liminal custody solution, attracting institutional users seeking comprehensive digital asset management capabilities.

Moving Towards A Robust Off-Ramp Partnership With Encryptus

The partnership between Liminal and Encryptus earmarks a significant step forward in secure digital asset custody, representing a shared commitment to pushing compliant practices while supplying institutions with easy access to convert their digital assets to fiat. 

For Encryptus, the opportunity to integrate with Liminal’s established platform presents a chance to reach a wider audience and scale their innovative off-ramp solutions to new heights. By streamlining fiat conversion within Liminal’s secure custody infrastructure, Encryptus gains access to a trusted network of institutional users seeking seamless and compliant treasury management.

For Liminal, this collaboration reinforces our dedication to partnering with companies that demonstrably prioritise clear governance and robust policy frameworks. By aligning with Encryptus’s stringent compliance standards, we reaffirm our commitment to building a secure and sustainable future for digital assets, where trust and regulatory certainty go hand-in-hand.

January 22, 2024

Find Out How You Can Benefit From A Fully Self-Custodial Wallet Architecture