The CloakCoin network
CloakCoin uses the Enigma system to provide ‘cloaked’ transactions, which are private, secure, and untraceable. When sending an Enigma transaction, mixer nodes are used to mask the origin. Through a secured Cloakshield channel, the sender of the transaction communicates with other Cloakcoin users who will assist in cloaking the transaction. These users will be rewarded for their efforts by the network.
Cloakcoin uses a proof-of-stake algorithm to secure its network. Most traditional cryptocurrencies, such as Bitcoin, use a proof-of-work algorithm to facilitate trust in the network. In this model, so-called ‘miners’ spend computing power on difficult calculations. These calculations are used to create new ‘solved’ blocks of transactions that are then included on the blockchain. Whenever a miner does this succesfully, they are rewarded by the network. Other nodes will check the transactions and will either accept or reject them. Because all these miners are expending great amounts of electricity to perform these checks and calculations, they are incentivised to only provide valid transactions. They will not receive their reward if the rest of the network rejects their solved block, which would make an attempt to introduce false transactions a waste of resources . Proof-of-work, through the electricity cost associated with the required calculations, thus introduces an economic safeguard that will ensure fair play by those involved. Only when a single actor or collaborating group of actors reaches 51% or more of the computing power in the network will they be able to reliably introduce false transactions, but doing so would require so much hardware that this is cost-prohibitive and financially uninteresting.
However, all the computing power spent on securing the network bears a considerable price that is not just financial, but also environmental. In July of 2018, the total energy expended by the Bitcoin network was estimated at around 22 TWh per year, which is equal to that of Ireland. Furthermore, proof-of-work algorithms have a tendency towards centralisation. With Bitcoin, for example, mining has quickly become a project that depends on specialised hardware and cheap electricity. For this reason, mining operations have become larger and larger and are situated in specific locations where costs of electricity are low. As small actors do not possess the means to buy the specialised hardware and do not have the scale to negotiate the best prices for electricity, the security of the Bitcoin network comes to rest with a small group of very large mining farm operators.
Proof-of-stake algorithms, such as the one used by CloakCoin, provide an alternative that answers to the faults in proof-of-work. In a proof-of-stake algorithm, the network does not require very difficult calculations to be completed in order to add blocks to the chain. Similar to the reward that miners receive in a proof-of-work algorithm, proof-of-stake networks reward their stakers for taking on a similar responsibility. However, the actions that stakers need to work through are far less complicated. Proof-of-stake does not use expended computing power as a way to facilitate trust, but rather requires stakers to show ownership of coins in order to sign blocks of transactions. Where proof-of-work would require an infeasible amount of computing power to be able to introduce false transactions, in a proof-of-stake algorithm a prohibitively large number of coins would be required. Both expended work as well as coin ownership cannot be falsified. Any attempt to introduce false transactions would thus be cost-prohibitive. A proof-of-stake is far more environmentally friendly. Furthermore, as no difficult calculations need to be made, anyone with a computer, an internet connection, and some coins can start staking. This means that more people can take part in securing the network, allowing further decentralisation. For users this is interesting as well, since they can increase their funds over time through the rewards offered for staking and they can use a network that will not end up in a stranglehold by several large mining operations.