As expected, we received a lot of questions from readers after the publication of Crypto TREND. In this issue, we will answer one of the most common.
What changes are coming in the cryptocurrency sector that could be game changers?
One of the biggest changes that will affect the world of cryptocurrency is the alternative block verification method called Proof of Stake (PoS). We will try to keep this explanation high enough, but it is important to have a conceptual understanding of what the difference is and why it is an important factor.
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Keep in mind that the core technology with digital currencies is called blockchain, and most existing digital currencies use a validation protocol called Proof of Work (PoW).
You must rely on a third party, such as Visa, Interact, or a bank or check clearing house, to perform your transaction with traditional payment methods. These trusted entities are “centralized”, meaning they keep their own books, which keep track of the history of the transaction and the balance of each account. They will show you the transactions and you have to agree that it is right or start arguing. Only the parties to the operation see this.
With most Bitcoin and other digital currencies, books are “decentralized,” meaning that everyone on the network gets a copy, so no one should trust a third party, such as a bank, because anyone can check the information directly. This verification process is called “distributed consensus”.
PoW requires “work” to confirm a new operation to access the blockchain. With cryptocurrencies, this check is performed by “miners” who have to solve complex algorithmic problems. As algorithmic issues become more complex, these “miners” first and foremost need more expensive and powerful computers to solve problems. Minning computers often specialize in using ASIC chips (Application Specific Integrated Circuits), which are more efficient and faster at solving these difficult puzzles.
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Here is the process:
- Transactions are collected in a “block”.
- Miners confirm the legitimacy of transactions within each block by solving a riddle of a hashing algorithm known as “proof of work problem”.
- The first miner to solve the bloc’s “proof of work problem” is rewarded with a small amount of cryptocurrency.
- Once approved, transactions are stored in a public blockchain throughout the network.
- As the number of operations and miners increases, so does the difficulty of solving hashing problems.
While PoW helps get blockchain and decentralized, unreliable digital currencies out of the way, it has some drawbacks, especially with the amount of electricity these miners try to solve as soon as “proof of work problems.” 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 problems, consuming more energy.
All of this energy consumption has prompted many in the digital currency space to look for an alternative way to validate blocks just to validate transactions, and the leading candidate is a method called “Judicial Evidence” (PoS).
PoS is still an algorithm, and the goal is the same as in the proof of the case, but the process of achieving the goal is completely different. There are no miners with PoS, instead we have “validators”. PoS is based on the knowledge that all people who confirm trust and operations have skin in the game.
In this way, instead of using energy to solve PoW puzzles, a PoS validator is limited to approving the percentage of transactions that reflect its ownership share. For example, a validator with 3% of the existing Ether can theoretically validate only 3% of the blocks.
Your chances of solving a proof of work problem in PoW depend on how much computing power you have. With PoS, it depends on how much cryptocurrency you have. The higher your stake, the higher your chances of solving the block. Instead of winning cryptocurrencies, the winner receives a confirmation transaction fee.
Appraisers enter their shares by “closing” part of the stock marks. If they try to do something harmful to the network, such as creating an “invalid block”, their share or security deposit will be confiscated. If they do their job and do not break the network, but do not gain the right to approve the block, they will get their shares or deposits back.
If you understand the main difference between PoW and PoS, here’s what you need to know. Only those who plan to become a miner or validator should understand all the intricacies and subtleties of these two verification methods. The majority of the population wishing to own cryptocurrencies will receive them only through one exchange and will not participate in the actual drilling or approval of block transactions.
Most in the cryptographic sector believe that digital tokens need to switch to the PoS model for digital currencies to survive in the long run. At the time of writing, 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 several years. Preferring Ethereum over all other major cryptocurrencies, we are expected to see the introduction of Casper in 2018.
As we have seen in the past, major events such as the successful implementation of Casper could significantly increase the price of Ethereum. We will inform you in future issues of Crypto TREND.
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