In this episode of CrypTalk, Ross Sinclair of BizNews talks with alternative investment fund Jaltech’s Gaurav Nair about the difference between proof-of-work and proof-of-stake verification, Ethereum integration, and the collapse of Celsius and Voyager.
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Gaurav Nair about what crypto mining is
Blockchain. These are just a way to validate a transaction and are actually very slow compared to other methods of validating a transaction. But the good thing about them is that no one needs permission to join the network and there is little trust involved. And the way to achieve this is by mining. The basic premise behind all this is that every miner on the network tries to validate the transaction. And to validate the transactions, they basically verify that all running transactions are actually valid. So if you’re sending me the bitcoins you have and something needs to be at stake, all the other miners say these deals are valid individual miners Check. And if the miner cheats, something they lose must be at stake.
On the other hand, if they are honest, they need to be rewarded for doing this job. For example, the way Bitcoin blockchain achieves is to set up very difficult math problems. Miner. Then try to solve the problem. Doing this requires very expensive hardware and consumes a lot of energy. When they solve this math problem, they tell the rest of the miners that I have solved this math problem. Then execute the transaction over the network. And if they are dishonest about any of the transactions, the rest of the miners will not accept those transactions. As a result, miners have lost their energy and capital investment. They still have the hardware, but they need to use it again to mine new blocks. If they are honest, they will be rewarded. And that reward is called the block reward. Therefore, some crypto tokens or Bitcoins will be printed and awarded to the miners.
About the difference between proof of work and proof of stake
Therefore, Proof of Work is the original method of verifying transactions on the blockchain, and Bitcoin uses it. And the proof of stake is another way. There are some blockchains that are already using it. There is a lot of debate in the crypto community about which method is better. And part of the reason for the large-scale debate is that there is not much evidence yet. Maybe it will be solved when blockchain technology is 50 years old. One is better than the other. But for now, both have different advantages on paper. What I’ve described about mining is proof of work. And the proof of stake is another way. And instead of having someone invest a lot in hardware and then a lot of energy, you lose it if you make a fraudulent transaction. Instead, the Proof of Stake requires the validator to invest some capital. And as long as they are honest with how they validate the transaction, they will be rewarded. On the other hand, if they make fraudulent transactions, the capital they raise will be reduced. They lose some of their capital. And it serves as an incentive to remain honest, as opposed to the work that verifiers have invested in certifying their work. Currently, the main advantage of Proof of Stake is that it is climate friendly and uses 99% less electricity. And apart from a better mechanism for validating transactions, it’s definitely more climate-friendly.
About the causes of the collapse of Celsius and Voyager
With the failure of Voyager and Celsius, and some of these other crypto banks, I call them, many people have asked, you know, this is generally blockchain and cryptocurrency Was it a failure? The reason I call these crypto banks is that they accept deposits from the public in the form of tokens, not necessarily in the form of cash, and promise to pay interest on those tokens. And how do they make money to pay this interest and tokens? And usually the promise was to lend it to other parties, hedge funds, etc. who were using it in action. Some of these entities, like Celsius, have also invested in DeFi (Distributed Finance), which is just a line of code running on the blockchain. No humans are involved in generating these yields and paying customers. What turned out to be the case was that most of these crypto banks lent to a very small number of parties. In fact, most seemed to lend to a hedge fund named Three Arrows Capital. And they weren’t talking to each other. As a result, they were unaware that the same collateral for these loans was being used in multiple locations. It also has a huge amount of leverage or debt taken by Three Arrows Capital. Three Arrows Capital is a bit of a celebrity in the world of cryptocurrencies. So they didn’t seem to have adopted proper risk management either, but they were impressed with the celebrity status of Three Arrows Capital rather than actually looking at their finances to manage risk. Currently, some of these entities are filing for bankruptcy. Voyager, Celsius, and others were rescued. FTX founder Sam-Bankman Fried has bailed out at least one of these. And there may be other remedies behind the scenes. But what’s interesting is looking at Celsius. They have financed many hedge funds, including Three Arrows Capital, but have also been financed by these DeFi protocols. They pledged collateral and borrowed tokens. And interestingly, Celsius repaid all DeFi loans before filing for bankruptcy. The reason is that when it comes to Defi, the code just has rules. You never have the opportunity to be impressed with the status of someone’s celebrity. There are no exceptions. And most of these DeFi protocols are over-collateralized. If you deposit $ 1,000,000 in collateral, you can only borrow a loan of $ 500,000 to $ 600,000, depending on the nature of the collateral. Therefore, if Celsius does not repay these loans, the collateral will be sold and deducted from the loans, including the penalty for liquidation. So Defi actually came out well from now on. And what we see is that the failure here was, in fact, the failure of a centralized institution. Therefore, there is a misunderstanding that cryptography or blockchain has failed, but in reality it is proof of how successful the blockchain is. DeFi worked perfectly well. Everyone who deposited with these protocols did not need to have a haircut. There was no loss in the protocol. And the centralized institution made a bad decision. And they are currently in a loss position and have to have a haircut.
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