As we expected, since the publication of Crypto TREND we have received many questions from readers. In this edition we will respond to the most common.
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What kind of changes will come that could change the games in the cryptocurrency sector?
One of the most important changes that will affect the world of cryptocurrencies is an alternative method of block validation called Proof of Stake (PoS). We will try to keep this explanation fairly high, but it is important to have a conceptual understanding of what the difference is and why it is a significant factor.
Remember that the underlying technology with digital currencies is called blockchain, and most current digital currencies use a validation protocol called Working Test (PoW).
With traditional payment methods, you have to rely on a third party, such as Visa, Interact, or a bank or check clearing house to resolve your transaction. These trusted entities are “centralized,” meaning 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 all network users receive a copy of them, so no one has to rely on a third party, such as a bank, because anyone can directly verify the information. This verification process is called “distributed consensus.”
PoW requires that a “job” be done to validate a new transaction for blockchain entry. 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 the rest. “Mining” computers are often specialized, typically using ASIC (Application Specific Integrated Circuits) chips, which are more skillful and faster at solving these difficult puzzles.
Here is the process:
- Transactions are grouped into a “block”.
- Miners verify that transactions within each block are legitimate by solving the hash algorithm puzzle, known as the “proof of the job problem.”
- The first miner to solve the block’s “labor problem test” is rewarded with a small amount of cryptocurrency.
- Once verified, transactions are stored in the public blockchain throughout the network.
- As the number of transactions and mining increases, so does the difficulty of solving summary problems.
While PoW helped get decentralized, suspicious blockchain and digital currency chains, it has some real shortcomings, especially with the amount of electricity these miners consume trying to solve the “labor problem test” as quickly 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 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 users of the digital currency space to look for alternative methods of validating blocks and the main candidate is a method called “Stake Testing” (PoS).
PoS is still an algorithm and the purpose is the same as in the working test, but the process for achieving the goal is very different. With PoS, there are no miners, but instead we have “validators”. PoS is based on trust and the knowledge that all people who validate transactions have an important aspect to the game.
Thus, instead of using energy to respond to PoW puzzles, a PoS validator is limited to validating a percentage of transactions that reflects their participation. For example, a validator that owns 3% of the available ether can only theoretically 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 at stake. The bigger the bet, the greater the chances of solving the block. Instead of earning cryptocurrencies, the winning validator receives transaction fees.
Validators enter their participation by “blocking” a portion of their background tokens. If they try to do something malicious against the network, such as creating an “invalid blog”, they will lose their share or security deposit. If they do their job and don’t infringe on the network, but don’t earn the right to validate the blog, they will get 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 aspects and advantages of these two validation methods. Most of the general public who wish to own cryptocurrencies will simply buy them through an exchange and will not participate in real mining or in the validation of block transactions.
Most of the cryptographic 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 this post, 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 the successful implementation of Casper could make Ethereum prices much higher. We will keep you updated on future issues of Crypto TREND.