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 will occur that could change the game in the cryptocurrency sector?
One of the most important changes that will affect the world of cryptocurrency is an alternative method of block validation called Proof of Stake (PoS). We will try to keep this explanation at a fairly high level, but it is important to have a conceptual understanding of what the difference is and why it is an important factor.
Remember that the underlying technology with digital currencies is called blockchain, and most current digital currencies use a validation protocol called Proof of Work (PoW).
With traditional payment methods, you need to rely on a third party, such as Visa, Interact or a bank, or a check clearing house to settle your transaction. These trusted entities are “centralized,” that is, they maintain their own private ledger that stores the transaction history and balance of each account. They will show you the transactions and you must accept that it is correct or start a dispute. Only the parties to the transaction ever see it.
With Bitcoin and most other digital currencies, ledgers are “decentralized,” meaning everyone on the net gets a copy, so no one has to rely on a third party, like a bank, because anyone can verify. directly the information. This verification process is called “distributed consensus.”
PoW requires that “work” be done to validate a new transaction for entry in the blockchain. With cryptocurrencies, this validation is done by “miners”, who have to solve complex algorithmic problems. As algorithmic problems become more complex, these “miners” need more expensive and more powerful computers to solve problems ahead of everyone else. “Mining” computers are usually specialized, typically using ASIC (application-specific integrated circuits) chips, which are more skillful and fast to solve these difficult puzzles.
Here is the process:
- Transactions are grouped into a “block”.
- The miners check that the transactions within each block are legitimate by solving the hashing algorithm puzzle, known as the “working test problem.”
- The first miner to solve the “work test problem” of the block is rewarded with a small amount of cryptocurrency.
- Once verified, transactions are stored in the public blockchain across the network.
- As the number of transactions and mining increases, so does the difficulty of solving hashing problems.
While PoW helped pull the blockchain and decentralized and untrusted digital currencies out, it has some real shortcomings, especially with the amount of electricity these miners consume trying to solve “work test problems” as quickly as possible. possible. According to Digiconomist’s Bitcoin energy consumption index, Bitcoin miners are using more energy than 159 countries, including Ireland. As the price of each Bitcoin increases, more and more miners are trying to solve the problems, consuming even more energy.
All this energy consumption just to validate transactions has motivated many in the digital currency space to look for an alternative method to validate blocks, and the main candidate is a method called “Participation Testing” (PoS).
PoS is still an algorithm, and the purpose is the same as in the job test, but the process for achieving the goal is quite different. With PoS, there are no miners, but we have “validators”. PoS is based on the trust and knowledge that all people who are validating transactions have their skin on the game.
Thus, instead of using energy to answer PoW puzzles, a PoS validator simply validates a percentage of transactions that reflect their ownership stake. For example, a validator that owns 3% of the theoretically available Ether can only validate 3% of the blocks.
At PoW, the chances of solving the job test problem depend on how much computing power you have. With PoS, it depends on how much cryptocurrency you have in “play”. The higher your bet, the more likely you are to settle the block. Instead of earning cryptocurrencies, the winning validator receives transaction fees.
Validators enter their participation by “closing” a portion of their background tokens. If they try to do something malicious against the network, such as creating an “invalid lock”, they will lose their share or security deposit. If they do their job and do not infringe the network, but do not earn the right to validate the blog, they will regain their share or deposit.
If you understand the basic difference between PoW and PoS, this is all you need to know. Only those who plan to be miners or validators need to understand all the advantages and disadvantages of these two validation methods. Most of the general public who want to own cryptocurrencies will simply buy them through an exchange and will not participate in the actual mining or validation of block transactions.
Most of the crypto industry believes that for digital currencies to survive in the long run, digital tokens need to switch to a PoS model. At the time of writing, Ethereum is the second largest digital currency behind Bitcoin and its development team has been working on its PoS algorithm called “Casper” for the past few years. We expect to see Casper implemented in 2018, putting Ethereum ahead of all other major cryptocurrencies.
As we have seen earlier in this sector, important events such as a successful implementation of Casper could make Ethereum prices much higher. We will keep you informed in future issues of Crypto TREND.