As we expected, since the publication of Crypto TREND we have received many questions from readers. In this edition we will answer the most common.
What kind of changes are coming that could be game changers in the cryptocurrency sector?
One of the biggest changes affecting the cryptocurrency world is an alternative block validation method called Proof of Stake (PoS). We will try to keep this explanation at a relatively high level, but it is important to have a conceptual understanding of what the difference is and why it is an important factor.
Keep in mind that the underlying technology with digital currencies is called blockchain and most of today’s digital currencies use a validation protocol called Proof of Work (PoW).
With traditional payment methods, you have to rely on a third party, such as Visa, Interact, or a bank, or a check -clearing house to complete your transaction. These trusted entities are “centralized”, meaning they keep their own private ledger that stores the transaction history and balance of each account. They will show the transactions to you, and you will have to agree that they are correct, or launch an argument. Only the parties to the transaction saw it.
With Bitcoin and most other digital currencies, ledgers are “decentralized”, which means everyone on the network can get a copy, so no one has to trust a third party, such as a bank. , because anyone can directly verify the information. This verification process is called “consensus distribution.”
PoW requires “work” to be done to validate a new transaction for blockchain entry. With cryptocurrencies, that validation is done by “miners”, who have to solve complex algorithm problems. As algorithm problems become more complex, these “miners” need more expensive and more powerful computers to solve the problems first of all. “Mining” computers are often specialist, often using ASIC chips (Application Specific Integrated Circuits), which are more skilled and faster at solving these difficult puzzles.
Here is the process:
- Transactions are grouped in a ‘block’.
- Miners verify the legitimacy of transactions within each block by solving a hashing algorithm puzzle, known as “proof of problem work”.
- The first miner to solve the “proof of work problem” on the block is rewarded with a small amount of cryptocurrency.
- If verified, transactions are stored in a public blockchain across the network.
- As transactions and miners increase, the difficulty of solving hashing problems also increases.
Although PoW has helped get blockchain and decentralized, unreliable digital money off the ground, it has some real drawbacks, especially in the amount of electricity used by these miners trying to address “ proof of work problems ”as soon 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, wasting even more energy.
All the power consumption just to validate transactions has inspired most 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 the proof of work, but the process to reach the purpose is different. In PoS, there are no miners, but we have “validators.” PoS relies on trust and the knowledge that all the people who validate transactions have the skin of the game.
In this way, instead of using force to solve PoW puzzles, the PoS validator is limited to validating the percentage of transactions that reflect its stake in ownership. For example, a validator that owns 3% of the Ether that can be used in theory can only validate 3% of the blocks.
In PoW, the chances that you can solve the proof problem at work depend on how much computing power you have. In PoS, it depends on how much you have in the “stake”. The higher your stake, the higher the chance that you will solve the block. Instead of winning crypto coins, the winning validator receives transaction fees.
Validators enter their stake by ‘locking’ a portion of their fund tokens. If they try to do something malicious against the network, such as creating an ‘invalid block’, their stake or security deposit will be lost. If they do their job and don’t break the network, but don’t win the right to validate the block, they get their stake or deposit back.
If you understand the basic difference between PoW and PoS, that’s all you need to know. Only those planning to become miners or validators should understand all the ins and outs of these two validation methods. Most of the general public who want to acquire cryptocurrencies will only buy them through exchange, and will not engage in actual mining or validation of blockchain transactions.
Most in the crypto sector believe that in order for digital currencies to survive for a long time, digital tokens need to be transferred to a PoS model. At the time of writing this post, Ethereum is the second largest digital currency behind Bitcoin and their development team has been working on their PoS algorithm called “Casper” for the past few years. We expect to see Casper implemented in 2018, ahead of Ethereum among all other major cryptocurrencies.
As we have seen before in this sector, major events such as the successful implementation of Casper could send Ethereum prices higher. We will keep you updated on future issues of Crypto TREND.