As many of you may have heard by now, Ethereum is moving away from mining and towards a Proof of Stake model. What does this mean, other than a lot less electricity use? What are the implications for investors? We have done some research into this development and we think it could mean big things for Ethereum.
Proof of Work (PoW)
As of now, Ethereum’s token “Ether” is generated through a PoW (Proof of Work) method. That means that random miners are responsible for the creation of Ether. This uses a lot of resources- a very high amount of computational power and electricity. The brains behind Ethereum, Vitalik Buterin, has himself stated that the electricity which is consumed by only Bitcoin and Ethereum is excessive.
To take Ethereum to the next step, the 24 year old inventor has decided to change the fundamental workings of the open source project. The plan is simply to shift the network to a PoS (Proof of Stake) model.
Proof of Stake
Proof of Stake in simple terms is the process of using “validators” in order to check the transactions. Processing under PoS is much simpler and easier i.e. the user just has to prove that he owns a certain amount of the coins which are in circulation. Also, PoS makes the system more secure and robust than PoW.
Vitalik Buterin has announced a roadmap for this transition. The initial step will be in making a “hybrid system” which the system will be running between PoS and PoW starting from August or September. The full transition is estimated to be completed by the end of this year. He has already released the PoS repository on GitHub. To make the transition happen there needs to be a PoS protocol in place. Vitalik has decided to go with a smart contract PoS protocol known as “Casper”.
What is Casper?
Casper has been around since 2014 and simply put, it is going to be the work protocol for Ethereum’s PoS method. It lets the users of Ethereum vote for which block should be added to the chain. The final result will be taken on a consensus basis. If the user votes in favor of the eventual consensus then he will receive benefits. If his vote was against the consensus then his stake may be lost or reduced as a punishment for incorrect voting (assuming the majority of voters are not malicious). Casper regulates the mechanisms of processing the results, determining the consensus, granting benefits and nullifying or reducing the stakes of bad voters.
Three important applications of Casper
- Less Censorship – in Bitcoin, if a miner loses a block/gets censored, remaining miners will benefit from this. In the case of Ethereum with Casper, everyone will benefit more if more correct blocks are added to the chain.
- Costs – The validator method will have fewer costs than mining because of less electricity and less computing power usage.
- Scalability – some of the scalability problems can be finally solved, as transactions should be sped up under PoS.
What will be the benefits for existing stakeholders?
There will be no requirement for generating new Ether which means that the existing stakeholders will be benefit on a large scale when compared to the new stakeholders in the future. However, the hard number of Ether which will be required to stake has not yet been released. Based on the working mechanism the amount required to stake during the start will be high and will eventually be reduced.
The problem and the solution
One of the long-discussed problems was the uncertainty of success in the PoS system. Many developers were worried that smart contacts might not work properly if PoS was implemented due to the “finality” problem. However, the ingenious Ethereum inventor has explained it briefly in this post. Casper will offer stronger finality guarantees than any proof of work method.
Downside of PoS
It is interesting to note that the biggest advantage of PoS system of Ether is also its biggest disadvantage. The major shareholders will be granted the access to more authority and control in both economic and technical areas. This may them to have undue influence versus the average stakeholder.
Cryptocurrencies sprang up based on a number of novel concepts, however Ethereum is one of the very few cryptocurrencies which is on a continued path towards innovation. One of the advantages for Ethereum is that under its Enterprise Ethereum Alliance program it gets help from various Fortune 500 companies. It also has an incredible developer base that is dedicated to its success. As stated earlier, users can look forward to the switch from the current system (PoW) to the hybrid system by the August or September. The complete transition is expected to happen before the end of this year.
After the Casper update, the price may experience a positive shock, not only because of the new features but because there will limited availability of Ether in the chain. This may be a catalyst for Ethereum to overtake Bitcoin in 2018.