Why We Built Skycoin

Satoshi envisioned Bitcoin as a decentralized digital currency. Blockchain networks were intended to democratize finance, eliminating corporate control and spreading power among users. However, Bitcoin and related currencies have become centralized due to their reliance on Proof of Work (PoW) and Proof of Stake (PoS) algorithms, as well as their use of mining to create coins. This centralization defeats the original purpose of digital currencies.

We created the Skycoin blockchain to correct these flaws. The Skycoin blockchain uses a novel consensus algorithm to replace PoW and PoS. It also fixes security problems associated with other blockchain networks and decouples coin creation from the mining process. The result is a fully decentralized cryptocurrency that fulfills Satoshi’s original vision.

The Skycoin blockchain does not use mining, so user power cannot be concentrated in a few large mining pools as it is with Bitcoin today. Coin creation doesn’t give certain users disproportionate control over the network. The supply of Skycoin is fixed. Skycoin transactions occur in seconds and are more secure. With Skycoin, we’ve created an immutable cryptocurrency that functions as digital property, rather than a political tool for amassing control over networks.

Issues with Proof of Work

The PoW algorithm has a fatal flaw: it places control of the network in the hands of those with enough economic power to control mining and thus obtain consensus. The monopolization of mining has become a major problem for blockchain networks.

Bitcoin developers initially believed that the mining system would support decentralization. Instead, it did the opposite. Since consensus was based on processing capacity, the mining system incentivized the purchase of hashing power. By accumulating greater and greater hashing power, certain users obtained disproportionate amounts of control over the network.

This led to the centralization of Bitcoin into just three major mining pools. Today, these mining pools concentrate the network’s hashing power on their servers and occasionally split power between themselves by agreement. Because they have so much processing power, they are able to revert and falsify transactions using 51% attack. Not only does this threaten the stability and security of the network, it destroys any possibility of achieving a truly decentralized currency.

The economic and environmental cost of these mining processes is astronomical. The electricity required for processing runs in the tens of millions, and cannot be offset by new users and capital except in the rarest cases. Even with large coins like Ethereum and Bitcoin, skyrocketing transaction fees and inflation are bleeding users dry. Each user sacrifices the equivalent of over $50 with each Bitcoin transaction to support the operations of centralized mining pools. That’s more expensive than an international bank transfer. With Bitcoin, users are throwing away their money in support of mining costs that benefit only a select few operators. In the case of smaller coins, high mining costs result in continuous devaluation that eventually extinguishes the coin itself.

In short, PoW-based coins have completely failed to deliver a decentralized system. Mining pools exploit other users in order to subsidize their own costs, while eating up huge amounts of processing power. We can do better. At Skycoin, we tackled this problem head-on in developing our alternative consensus algorithm.

Proof of Stake: More Centralization Problems

With PoW, 51% attacks due to mining are a major security threat. PoS algorithms are intended to solve this problem, but they have centralization problems of their own. At coinfox.info, Joseph Young explains: “A system where the major stakeholder enjoys extensive control and authority over both technical and economic aspects of the network creates a major monopoly problem.” This is exactly what PoS creates.

With PoS, users have voting power on the network in proportion to their cryptocurrency holdings. In other words, users with a greater stake have a greater power to make technical changes. This idea may seem to be a good way to guard against 51% attacks, since majority stakeholders have the most to lose from such attacks and are therefore motivated to avoid them. However, because PoS systems centralize voting power, they allow certain users to make network changes without considering other users or the community at large. In this sense, PoS is just as bad as PoW – it creates a centralization of power that defeats the purpose of the decentralized ledger system.

Obelisk: The Key to Decentralization

It’s clear that both PoW and PoS algorithms are self-sabotaging. These algorithms undermine the idea of decentralized digital currency, since they result in the creation of new central authorities. They concentrate network power in the hands of just a few individuals, preventing users from reaping the benefits of a decentralized network. In fact, PoW and PoS create a system that’s no better than the traditional central banking system cryptocurrency originally sought to replace.

At Skycoin, we want to bring users what they asked for: a true, decentralized network without central authority. To accomplish this task, we went beyond PoW and PoS to create a wholly new decentralized algorithm that reconfigures the inner workings of blockchain. Our distributed consensus algorithm, Obelisk, succeeds in delivering just such a network.

Obelisk is different from both PoW and PoS because it functions based on distributed influence, also known as a “web of trust.” In this system, each node subscribes to a list of other nodes. The density of a node’s network determines its influence. Nodes have personal blockchains that broadcast and record all actions publicly. Because the node’s communications are public and transparent, the community can verify that nodes are operating fairly.

If a node fails to comply with community standards, its actions will be visible in the public record. The network can then sever connections with that node, decreasing its influence over the network. In this way, our web of trust system weeds out malicious nodes and rebalances power according to the collective will of the community. The result is a smaller core of trusted nodes that make network decisions through verified relationships.

The Skycoin blockchain lets the community audit nodes and hold them accountable. This creates a transparent consensus that allows for collective decision-making and true decentralization of power. By eliminating PoW/PoS issues, Skycoin delivers a digital currency that provides all the benefits of a democratic network.

Obelisk is the key to reinventing blockchain. Its web-of-trust style consensus prevents the development of centralized power. Skycoin requires no mining, so the network is immune to 51% attack. Transactions are significantly faster, occurring in seconds. Decisions are made through community consensus, not based on the wishes of a few majority stakeholders. These features make Skycoin the most secure blockchain option available today.

The original purpose of digital currency was to reinvent the economy so that users could be independently empowered to trade in a peer-to-peer fashion, without interference from centralized powers. At Skycoin, we believe strongly in this mission. That’s why the Skycoin blockchain is designed to benefit all users, not just a select few. With Obelisk, we’re solving the problems inherent in PoW- and PoS-based coins to bring you a decentralized and democratic consensus network.