When a fork occurs, the Consensus Method helps the network agree between the two chains. Participants have to choose which chain to follow, and the majority wins. Ideally, you want the Consensus Method to incentivize people to choose only one of the chains.

Kinda like you having your employees choose between this:  “Should I should I slap my boss across the face – or should I keep my job?”

You can’t have both.  You can’t act “badly” and have no costs. (Unless you have another job waiting for you, in which case – power to you!)

Proof Of Stake allows you to slap your boss and keep your job - You have nothing at stake.

Proof Of Stake: The Costs To Validate

Proof Of Stake:  A Fork In Mess 

However, things can get really messy if we run into a “Fork”.  A “fork” in the chain may occur if:

In both cases, two new blocks are proposed – and  hence we have a split in the chain:

Now, participants have to pick one of the two chains. The problem, however, is each participant can choose to follow both chains. Ideally, one chain will be picked:

Remember, the only real cost to a validator was his deposit. Since the chain forked, his deposit exists on both chains. So it costs him nothing more to validate on both chains. This allows him to collect transactions fees and rewards on both chains.

Nothing At Stake Problem: Best To Cheat

In fact, he is incentivised to follow both chains as his optimal strategy.

When every validator picks the optimal strategy, we will end up with a chain like this: 

Why? Because we’d have 100% consensus on both chains. Everyone’s voting for both sides – so the chains extend at the same pace. At first glance, it may not seem like a big deal. But this compromises the security of the network drastically. A malicious actor can intentionally fork the chain, and get away with a double-spend. All he has to do is the following steps:

1. Keeps validating on both chains as well.
2. Wait for confirmation of the bad transaction. 
3. Stop validating on the first chain.

This would tip the balance of the vote onto the other side of the chain – the one with his bad transaction.  Eventually, the second chain would outpace the original chain. The bad transaction will be officially accepted, and first chain will be orphaned.

 Longest Chain Explained  - A Farmer Analogy

Let’s pretend we’re all farmers living in a small town. Majority of us farm rice as our major source of income. Weharvest the rice and pack them into 1KG gunny sacks and then carry the sacks to the Townhall. The sacks are then placed onto the only carriage the town has and transported to The Main City and sold.

An angry debate ensues on whether or not they should increase the size of each gunny-sack. Some farmers want the increased gunny-sack size for increased profits. But other farmers are against the idea – and claim it will make it more difficult for the older/younger/weaker farmers to carry the gunnysack to the Townhall.

The Mayor suggests that a vote should be conducted to solve the matter. However, an objection is raised:

Each gunny-sack would represent a vote. That way, if you have more gunny-sacks you can cast more votes.Each sack of rice would be proof of their hard work. Farmers who worked harder, had more rice – and hence got to cast more votes 

Farmers would carry their gunny sacks to the town hall and place each sack in one of the two rows – thus casting their vote.   The row that had the longer chain of gunny sacks would be picked as the final decision.

At the end of the day, the “Don't Increase Gunny Sack Size” row had the longer chain of gunny sacks – and thus was the winner!

Disagreements within a blockchain are pretty much solved the same way. Each gunnysack represents a “block” in the blockchain.  A row of gunny sacks represents a chain.

Whenever there’s a disagreement, network participants can “fork” off the current chain. Thereby starting a new chain of blocks. Participants who agree with this new chain can now start applying their “blocks” to the new chain as well. Eventually, if the new chain extends the old chain – the Longest Chain Rule will kick in and will be declared the winning chain.

So now you could say...

The PoW “Lottery” vs PoS “Lottery”

A couple of weeks ago, I explained Proof Of Work’s Puzzle using the Reverse Lottery Analogy.

In brief, Proof Of Work uses the Cryptographic Puzzle to setup a lottery. The winner of the lottery gets to place the next block in the blockchain – and everyone else agrees on it.  To win the lottery, miners have to churn numbers after numbers repeatedly until they generate the winning number. This process is extremely resource intensive.

And Voila! – we eliminate the intensive resource consumption.

Blockchain Immutability Is Relative

To put into perspective, lets go over a few rudimentary things we deal with on an everyday basis:

Toothpaste
Try squeezing out all the toothpaste from a tube, and putting it back in. It’d be difficult, tedious, and evident that it has been tampered with - It would be Tamper Evident

Emails
Emails that have been sent out cannot be “un-sent”. Although, through an individual perspective, emails can be quite “immutable”. However, you can always persuade the recipient of the email, or the person running the mail server to delete it. Once again, difficult, and not without risk of detection - This too, is Tamper Evident

​Notice how even the most immutable things on an individual perspective can be changed someway or the other. The only difference is that somethings are harder to change than others - Immutability is relative.

Everything can be changed. To say something can never be changed, is us discounting the progress of technology.

The Maid Service Analogy

Suppose you join a new Maid Service Agency. But they decide to give their Maids more freedom & flexibility in how they conduct their business. They wanted the Maids to be allowed to earn more if the “market” deems it worthy.

 So, instead of charging you in USD$, they charge you in MaidTokens.  MaidTokens can be redeemed for cleaning activities (operations) as such:

These prices are set by the Maid Service Agency – and don’t change. So no matter what – the Maid Service Agency will get a fixed number of MaidTokens for each job (based on the rooms being cleaned).

Flexibility & Freedom 

We mentioned that the MaidTokens are being used for more freedom. But how is this freedom achieved?

The flexibility comes from the fact that the Maids can negotiate how much you (the customer) pay for each MaidToken. Here’s an example:

The Maid (Miner) can then either take you up on your offer, and clean your rooms (validate your transaction) – OR look for other customers that will pay more.

This is exactly what you're doing when you set your "Gas Price"

Similarly, a Miner can choose to take your offer or not.

(To automate things – Miners set up a minimum a minimum Gas Price they are willing to accept. They have the freedom to include your Transaction in their block or not. But just like the Maid, they are always looking to maximise profits.)

Okay, awesome.. Using the “MaidToken Price” we have a better understanding of “Gas Price”. Now let’s tackle “Gas Limit” – what in the world is it really?!

MaidToken Limit

Now let’s suppose you rent a cottage and host a huge party. You wake up the next day to a gigantic mess and a colossal headache. You call the Maid Service Agency, and they send over a Maid. You guys negotiate and agree on a MaidToken Price of  $20. 

She agrees, and you’ve now agreed to the following:
MaidToken Price:   $20 per MaidToken
MaidToken Limit:  100 MaidTokens

This is essentially the same type of agreement you get into when you send a transaction with the following:
Gas Price:  20 Gwei (per Gas)   
Gas Limit:  10,000 Gas

**Note:  Gwei is a subunit of Ether.  1 Ether = 1,000,000,000 Gwei

Hitting The Gas Limit  & Losing ETH

Hopefully, 10,000 Gas is enough to complete execution of your Smart Contract. If the operations within the Smart Contract was costlier than you anticipated – then the execution will not complete. And the transaction fails.

Similarly, if your 100 MaidTokens aren’t enough to clean your rooms (the cottage may have had more bathrooms than you thought) – then the Maid will stop cleaning/executing.

The difference in our analogy is that when you hit your “MaidToken Limit” you get to keep the clean rooms.  Your house will be partially clean and the maid will leave. 

Tip:  If you’re trying to save on transaction fees, set a LOW Gas Price and a higher Gas Limit.  Too often people do the opposite.

To avoid the nitty-gritty technicals, let’s use an analogy. 

Suppose you enter yourself into a lottery.. But this is a special kind of lottery. We’ll call it a “Reverse Lottery".
In this lottery everybody knows the winning numbers. Sounds like an easy lottery to win, right? Not exactly.

You can’t simply “pick” your numbers when buying your ticket. You can only buy a ticket with numbers randomly generated on it. So, the only way for you to win the lottery is to keep buying ticket after ticket after ticket…. Until you buy one that matches the winning numbers you have.

This is precisely what is involved in the Proof Of Work cryptographic puzzle. People use their computers to randomly generate numbers at a rapid pace. (These people are called miners, btw.)  If they generate the “winning” number, they win the lottery.

Let’s say you know the winning ticket number of a Reverse Lottery to be:  1111111111.

Now it’d be nice if you could go up to the counter and ask for a ticket with those numbers. But you can’t. All you can do is pay for a ticket and hope it generates: 1111111111. If not – tough luck. Buy another ticket and try again.

The good news is that you can try as many times as you can. The bad news is that you have to pay for each new ticket.

Our “Reverse Lottery” is essentially what the cryptographic puzzle is.

In the Reverse Lottery, each player is hoping that he generates the winning ticket number before someone else does.  Similarly, each Miner is hoping that he can generate (by ‘hashing’) the winning numbers before other miners do.

The good news is the miners are using hardware that generate millions of hashes per second.

The miner who finds the winning hash gets to add his “block” to the blockchain. In return he gets a reward. He also gets to collect transaction fees for all transactions listed in the block.

On average, a winning number (or winning hash) is found every 10 minutes. This average can be adjusted but we’ll talk about that later. And the miners move on to compete for the next winning hash. It’s kinda like a new Reverse Lottery every 10 minutes.

The process of trying to find the winning hash is called “Mining”.  The term actually originates from the traditional “mining” of gold. But instead of using a pick-axe to dig for Gold, Miners are using their computers to dig for the winning hash.

That’s pretty much it. You pretty much understand how the process works now.  But I may have left out one aspect. The Nonce.

Let’s go back to our Reverse Lottery.  Suppose the creators of this lottery decide to spice things up. They realize that they need to make lottery players feel more “involved”.

To achieve this, they add a new element into the Reverse Lottery. Now, instead of simply randomly generating a number they ask the player for the following information first:

The Reverse Lottery will take all three answers –  Bob, Green, 7 – and put it into a special “mixer”.  You can think of Bob, Green and 7 are the “ingredients”.  The mixer will spit out a Lottery Ticket for Bob based on the ingredients he gave it.

(Btw this is precisely what “hashing” is. A function/algorithm that takes “ingredients” and produces an output based the input.)

If the ticket matches the winning number – great! He wins! If not, he will have to try again – but this time with a different “random number”.  This will give him a new lottery ticket number.

Essentially, his name “Bob” and favorite color “Green” will remain fixed as ingredients. His ‘random number’ keep changing until he gets the winning lottery ticket.

In Mining, this “random number” is what we call the nonce. The other “fixed” ingredients are the transaction data, block data, timestamp etc.

The nonce is incremented after each failed attempt. (Fyi, the other ingredients are relatively fixed. They change when necessary – but that’s nitty-gritty stuff we don’t care about at them moment)

Suppose we have a network of 1000 participants. Each of them are allowed one vote per IP Address. The participants have to come to a decision between Decision A and Decision B.

999 participants vote for Decision A.  But John – a network participant – wants Decision B for his own agenda. He decides to create 1000 Virtual IPs and casts votes for Decision B from each one of them. The network now thinks it has a total of 2000 participants.