As we expected, we received many questions from readers since the publication of Crypto TREND. In this issue, we will answer the most common ones.
What changes are coming that could change games in the cryptocurrency sector?
One of the biggest changes that will affect the world of cryptocurrencies is an alternative validation method called Proof of Stake (PoS). We will try to keep this explanation at a fairly high level, but it is important to understand conceptually what the difference is and why it is an important factor.
Note that the underlying technology with digital currencies is called blockchain and most current digital currencies use a validation protocol called Proof of Work (PoW).
Traditional payment methods need to be trusted by a third party, such as Visa, Interact or a bank or check clearing house to settle your transaction. These trusted entities are “centralized,” meaning they keep their own private ledger that keeps a history of transactions and the status of each account. They will show you the transactions, and you must agree that it is correct or initiate a dispute. Only the parties to the transaction ever see him.
With Bitcoin and most other digital currencies, general ledgers are “decentralized,” which means everyone online gets a copy, so no one has to trust a third party, like a bank, because anyone can directly verify the information. This verification process is called “distributed consensus”.
PoW requires a “deal” to be done to confirm a new transaction to enter the blockchain. In the case of cryptocurrencies, this check is performed by “miners”, who have to solve complex algorithmic problems. As algorithmic problems become more complex, these “miners” need more expensive and powerful computers to solve problems ahead of all others. “Mining” computers are often specialized, typically using ASIC chips (application-specific integrated circuits), which are more adept and faster at solving these difficult puzzles.
Here is the procedure:
- Transactions are linked in a block.
- Miners check whether transactions within each block are legitimate by solving a puzzle of a scattering algorithm, known as “proof of operation”.
- The first miner to solve the problem of proof of the block’s work was rewarded with a small amount of cryptocurrency.
- After verification, transactions are stored in a public blockchain across the entire network.
- As the number of transactions and miners increases, so does the difficulty of solving hashing problems.
Although PoW has helped remove blockchains and decentralized, distrustful digital currencies, it has some real drawbacks, especially with the amount of electricity these miners consume trying to solve “proof of work problems” as quickly as possible. According to Digiconomist’s Bitcoin energy consumption index, bitcoin miners use more energy than 159 countries, including Ireland. As the price of each Bitcoin rises, more and more miners are trying to solve the problems by consuming even more energy.
All of this energy consumption just to validate transactions has motivated many in the digital currency space to look for an alternative method of validating blocks, and the leading candidate is a method called “Proof of Stake” (PoS).
PoS is still an algorithm and the purpose is the same as in the proof of work, but the procedure for achieving the goal is completely different. There are no miners with PoS, but instead we have “validators”. PoS relies on the trust and knowledge that all people who confirm transactions have their skin in the game.
In this way, instead of using energy to answer PoW puzzles, the PoS validator is limited to confirming the percentage of transactions that reflects his or her ownership stake. For example, a validator that owns 3% of the available ether can theoretically only validate 3% of the blocks.
In PoW, the chances of solving a proof of performance problem depend on how much computing power you have. With PoS, it depends on how much cryptocurrency you have on the stake. The higher your stake, the better your chances of solving the block. Instead of winning crypto coins, the winning validator receives transaction fees.
Validators enter their stake by locking part of their fund tokens. If they try to do something malicious against the network, such as creating an ‘invalid block’, their stake or deposit will be lost. If they do their job and do not violate the network, but do not gain the right to verify the block, they will return their stake or deposit.
If you understand the basic difference between PoW and PoS, that’s all you need to know. Only those who plan to be miners or validators need to understand all the details of these two validation methods. Most of the general public who wants to own cryptocurrencies will simply buy them through exchange and will not participate in actual mining or blockchain validation.
Most in the crypto sector believe that in order for digital currencies to survive in the long run, digital tokens must be switched to the PoS model. At the time of writing, Ethereum is the second largest digital currency after Bitcoin and their development team has been working on their PoS algorithm called “Casper” in recent years. We are expected to implement Casper in 2018, putting Ethereum ahead of all other major cryptocurrencies.
As we saw earlier in this sector, major events such as the successful implementation of Casper could significantly increase Ethereum prices. We will keep you informed of future releases of Crypto TREND.