November 15, 2018 00:13:43
Bitseven.com - Initially creating Ethereum blockchain the developers built it on the Proof-of-Work (PoW) algorithm, because this algorithm was attracting a lot of miners due to high revenues for the cryptocurrency mining. However with the development of this project the scalability problems started to appear, therefore Vitalik Buterin and Ethereum Foundation started saying more and more often about switching to Proof-of-Stake algorithm (PoS). Such transition is possible because of the introduction of the new protocol called Casper.
What is Casper exactly and why is it needed?
Casper is an update for the Ethereum blockchain, which will make it possible to generate blocks verified using Proof-of-Stake algorithm. But the implementation of this protocol is planned to be carried out in two stages. Initially only the intermediate protocol Casper FFG will be included which is a hybrid between mining and forging. Its principle is based on limiting miner’s profit from 3 to 0.6 ETH, and also to include forgers (validators) to the work. The second stage CBC should launch the complete Proof-of-Stake without using the PoW algorithm.
However, Casper is a little different from other Proof-of-Stake algorithms, firstly it is the protection against an “empty stack”. That means that during the confirmation of blocks a part of the validator’s funds is frozen and if he approves an empty chain, he will lose the frozen funds and additionally also the same amount for the verification of DDOS attacks. This protocol feature requires for validators to be actively present. If the participant goes offline, he risks approving an empty chain and therefore lose some of his money.
Benefits for switching to Proof-of-Stake
The PoS algorithm is most often matched with PoW. It was designed as its substitute to solve or mitigate certain problems appearing while using PoW.
One of the main advantages of PoS is that it’s environmental friendly, because it doesn’t have energy intensitive mining process that the algorithm PoW is using. Although many experts think that this problem is exaggerated, for example for Bitcoin mining are often used the cheapest electricity sources. They are either renewable or the excess energy is used for mining.
Conflict of interests
When using PoW often the interests of miners (especially large ones) are different from the interests of investors, because for the miners in the first place it is very important to pay back the equipment cost which is why they constantly throw a large amount of mined coins into the market. While PoS automatically turns validators into investors, who are interested in long-term coin storage.
Today the vast majority of PoW mining facilities belong to large corporations, which makes the cryptocurrency less decentralized. Equipment production is also very centralized and fully controlled by major players, and many technologies are already protected by patents. And in general the algorithm PoW has many factors that are making it unprofitable and completely unaccessable for the average user.
Possible consequences switching to Proof-of Stake
The implementation of Casper will literally kill the Ethereum mining ASIC market and will completely change the economical component of the platform. However such transition can also have negative consequenses. If in the case of the PoW the blockchain is managed by large pools, then in the case of PoS the large investors will set the tone. And it’s difficult to say for now how it will affect the market.
However, due to the fact that with the implementation of PoS in the Ethereum network the bandwidth will increase. This will significantly expand the application area for blockchain and also will attract new developers and investors.