There has been much anticipation about Ethereum’s planned move to a new way of achieving consensus and validating transactions on its network. The excitement among Ethereum’s participants, followers, and enthusiasts revolves around the idea that future transactions will finally be much faster, highly scalable, and much more sustainable.
For a while now, Ethereum’s founder, Vitalik Buterin, and his team have been planning and anticipating that Ethereum will finally complete the transition from using Proof of Work (PoW) to Proof of Stake (PoS) as the main consensus algorithm protocol powering the way the system works. This new PoS system, which start from being a hybrid to a full PoS, uses an algorithm code named Casper.
What Is Proof of Work (PoW)?
This is one of the unique features of the rise of the cryptocurrency innovation, as originally conceived by Bitcoin pioneer Satoshi Nakamoto and followed by others who spawned different versions of digital tokens (Dash, Litecoin, Ethereum, etc.). Essentially, PoW means that computers need to participate in the network through the ‘mining’ process–that is–solving algorithmic problems and then getting rewarded with a coin(s) as they do so. Consequently, as they solve the puzzle and validate transactions, miners are also rewarded with a share of the processing fees.
The participants in the mining process essentially power the network. The computers also process and validate transactions with an eye towards achieving consensus and forming a permanent record through the creation of a blockchain. It must be noted that, for the sake of nuance, Ethereum uses its own version of PoW named GHOST. This is distinct from traditional PoW in that it allows for avoidance of ‘hard forks’ (formal splitting of a once-identical blockchain protocol into two).
There are inherent problems and limitations associated with the PoW protocol, not the least of which is the fact that the process consumes a lot electricity on a daily basis. Some critics say the electricity consumed per day is enough to power a small country for a year.) Confirming a transaction through the PoW process can also take time (10 seconds at the very least; or hours or even days, for some). This also means that it is difficult to scale the technology and make it a sustainable venture in the long run.
Enter Proof of Stake (PoS) as an alternative solution.
What Is Proof of Stake (PoS)?
PoS is different from PoW because of the way the reward incentive is being structured. Instead of being rewarded with coins for participating in the mining process as in PoW, in the PoS process, computers on the Ethereum network are requested to ‘stake’ a certain number of coins in order to be able to actively participate in the validation and processing of transactions.
It is important to mention that there are different types of PoS that now exist for Bitcoin, and that they all have subtle differences in terms of execution and implementation. For example, Cardano is a one-block validator, EOS (dPoS) has 21 block validators, and NEM is a reputation-based PoS. For both Cardano and EOS, the participant will lose the value of their stake if the coins drop in price. Meanwhile, in NEM, one loses reputation according to a numerical value. Finally, in Casper (PoS for Ethereum), one can lose coin in stake numbers. The system will take away all coins, making the price of an attack really costly.
Ether coins that are ‘staked’ are locked down in a specialized wallet. The reward for ‘staking’ comes in the form of dividends derived from the processing of fees paid by users of the platform. The larger the number of Ether coins set aside for staking, the bigger the monetary rewards and dividends. Theoretically, those who ‘stake’ their coins could also lose their value if they fail to play by the rules and/or try to subvert the system.
What Is Casper?
This is not the friendly ghost character named Casper from a 1995 hit animated movie, although it is a rather friendly protocol in that it provides a bridge for transitioning from PoW to PoS — with the latest version being a stand-alone PoS.
Both mechanisms for achieving consensus and validating transactions will work simultaneously, with PoW being slowly wound down (until it reaches the state called the Ethereum Ice Age) and PoS being raised to full implementation.
Ethereum’s developers have already done a full early implementation (version 1), which was targeted to coincide with the Constantinople hard fork. The new Ethereum system started to have its own complete set of protocols while veering away and operating autonomously from the old one. It must be clarified that this is not your classic example of a hard fork, because there is no formal split of the network that is taking place. Ethereum was essentially forced to implement a new protocol.
What Are the Advantages of PoS?
The excitement surrounding Proof of Stake (PoS) mainly comes from four factors that are currently not being realized using Proof of Work (PoW):
Speed
It will be much faster to validate and process transactions, because they can be allocated and performed right away through the ‘staking’ process. Whereas in PoW, it typically takes time to reach consensus on the network to validate a transaction; some miners prefer to process big transactions first due to the prospect of bigger fees. This means smaller transactions can be relegated to the sidelines, taking days or even infinity to get confirmed and recorded on the blockchain.
Scalability
Because PoS will make it a whole lot faster to process transactions, the technology then can be scaled exponentially, allowing a lot more people to use the platform. This means a much wider and more diverse sphere of potential users will be involved, not to mention higher revenues.
Sustainability
Much of the criticism of the crypto world and the mining process as required by PoW revolves around high energy consumption. It takes a whole lot of electricity to mine and perform PoW. It is also very costly, considering the high electricity rates in many countries. Some critics say that the process of mining one coin alone, for example, can be so energy-intensive that the electricity used in a day is enough to power one small poor country for an entire year.
Security
Last but not least, PoS offers a much more secure way of using the Ethereum platform because it prevents centralization and the so-called ‘51% attack’ on the network — a common security threat for platforms using PoW protocol.
There have been some criticisms of the slow transition approach from PoW to PoS. Some experts say that it might not be possible to make the change, because the two approaches are totally different and cannot be bridged. Either you do PoW or you don’t, as some have pointed out. Version 1 of Casper, which provided the transition approach, has actually been shelved at the moment while prepping for the upcoming release of Version 2.
Casper Release Date
The lighter version of Casper (version 1), called Casper FFG (Friendly Finality Gadget), was released last year. It was designed to give PoS a kickstart with a new way of validating while still allowing people to use PoW as a consensus mechanism.
Version 1 has now been shelved to make way for the full-fledged Casper Version 2, which is due to be released in the middle of 2019. This is supposedly the pure form of the PoS consensus mechanism fully working on its own. ETH investors will be allowed to participate in the ‘staking’ process for as little as 32 ETH.
Conclusion
The next year (2019) will be a busy one in the Ethereum world, as the technology moves toward the use of the PoS consensus algorithm and away from the status quo of using PoW as a validation mechanism. A process called “sharding” will also be introduced as part of the PoS feature next year. Sharding is simply an attempt to avoid redundancy and save time by not having to validate every individual transaction through every single node in the network.