As we expected, since the publication of Crypto TREND, we have received many questions from our readers. In this edition we will answer the most common question.
What kind of upcoming changes could be a game changer in the cryptocurrency sector?
One of the biggest changes that will affect the world of cryptocurrencies is an alternative method of block validation called Proof of Stake (PoS). We will try to keep this interpretation at a fairly high level, but it is important to have a conceptual understanding of what is the difference and why it is an important factor.
Remember that the core technology of digital currencies is called blockchain and most of today’s digital currencies use a verification protocol called Proof of Work (PoW).
With traditional payment methods, you need to trust a third party, such as Visa, Interact, a bank or check clearing house, to settle your transaction. These trusted entities are “centralized,” which means they maintain their own ledger that stores the transaction history and balance of each account. They will show the transactions to you, and you must agree that they are correct, or launch a dispute. Only the parties to the deal ever see her.
With Bitcoin and most other digital currencies, ledgers are “decentralized,” which means everyone on the network has a copy, so no one has to trust a third party, such as a bank, because anyone can directly verify the information. This verification process is called “distributed consensus.”
PoW requires that “work” be done in order to validate a new transaction to enter the blockchain. With cryptocurrencies, validation is done by “miners”, who must solve complex algorithm problems. As problems with algorithms become more complex, these “miners” need more expensive and more powerful computers to solve problems before anyone else. Often “mining” computers are specialized, usually using ASIC (Application Integrated Circuits) chips, which are more adept and quick to solve these difficult puzzles.
This is the process:
- Transactions are grouped together into a “block”.
- Miners verify that transactions within each block are legitimate by solving a hashing algorithm puzzle, known as “Proof of Work Problem”.
- First miner solving a block’s “proof of work problem” is rewarded with a small amount of cryptocurrency.
- Once verified, transactions are stored in the public blockchain across the entire network.
- As the number of transactions and miners increases, so too does the difficulty of solving hash problems.
Although PoW has helped get the blockchain and unreliable decentralized digital currencies onto the ground, it has some real shortcomings, especially with the amount of electricity these miners consume in an effort to solve “proof of business problems” as quickly as possible. According to Digiconomist’s Bitcoin Energy Consumption Index, Bitcoin miners use energy from 159 countries, including Ireland. As the price of each bitcoin rises, more and more miners are trying to solve problems, consuming more energy.
All this energy consumption just to validate transactions has spurred many in the cryptocurrency space to search for an alternative method of block validation, and the main candidate is a method called ‘Proof of Stake’ (PoS).
PoS is still an algorithm, the purpose of which is the same as in proof of work, but the process for reaching the goal is completely different. With PoS, there are no miners, but instead we have “auditors”. PoS is based on trust and knowledge that all the people who verify transactions have a good appearance in the game.
This way, instead of using energy to answer PoW puzzles, the PoS auditor is limited to validating a percentage of transactions that reflect its ownership stake. For example, a validator with 3% of available ether could theoretically validate only 3% of blocks.
In PoW, your chances of solving a proof of business problem depend on how much computing power you have. With PoS, that depends on how much cryptocurrency you have on the “stake”. The higher your stake, the higher your chances of resolving the block. Instead of winning cryptocurrencies, the winning auditor receives transaction fees.
Auditors enter their stake by “locking” a portion of their money tokens. If they try to do something malicious against the network, such as creating an “invalid block,” their stake or security deposit will be forfeited. If they did their job and did not violate the network, but did not win the right to validate the ban, they would get their share back or say goodbye.
If you understand the basic difference between PoW and PoS, this is all you need to know. Only those who plan to be miners or auditors need to understand all the ins and outs of the two validation methods. Most of the general public who want to own cryptocurrencies will simply buy them through the exchange, and will not be involved in the actual mining or validation of block transactions.
Most of those in the crypto sector believe that for cryptocurrencies to survive in the long term, digital tokens must transform into the POS model. At the time of writing this post, Ethereum is the second largest digital currency after Bitcoin and their development team has been working on a PoS algorithm called “Casper” for the past few years. We expect to see Casper in 2018, putting Ethereum ahead of all other major digital currencies.
As we have seen previously in this sector, major events like the successful implementation of Casper could drive Ethereum prices up a lot. We will keep you updated on future releases of Crypto TREND.