As expected, we have received many questions from readers since the release of Crypto TREND. In this issue, we’ll respond to the most common ones.
What changes can change the rules of the game in the cryptocurrency industry?
One of the biggest changes that will affect the world of cryptocurrencies is an alternative method of checking the block, called Proof of Stake (PoS). We will try to make this explanation high enough, but it is important to have a conceptual understanding of what the difference is and why it is an important factor.
Remember that the technology behind the digital currency is called blockchain, and most digital currencies today use a verification protocol called Proof of Work (PoW).
Traditional payment methods require you to trust a third party, such as Visa, Interact, or bank or checkout, to complete your transaction. These trusted objects are “centralized,” which means they maintain their own personal book that stores the transaction history and balance of each account. They will show you the transactions and you have to accept that it is right, or start a dispute. Only the participants of the deal see it.
In bitcoins and most other digital currencies, ledgers are “decentralized,” which means that everyone on the network gets a copy of them, so no one needs to trust a third party, such as a bank, because everyone can check the information instantly. This verification process is called “distributed consensus.”
PoW requires “work” to verify a new transaction to enter the block chain. In the case of cryptocurrencies, this check is carried out 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 common problems. Mining computers often specialize, as a rule, on the use of specialized integrated circuits (ASIC), which better and faster solve these complex puzzles.
Here’s what the process looks like:
Transactions are grouped into a block.
Miners check that transactions in each block are legitimate, solving the hash algorithm puzzle, also known as the “work proof problem.”
The first miner, who solved the problem of proof of the block’s operation, is awarded with a small amount of cryptocurrency.
Once verified, transactions are stored in a public chain of blocks on the network.
As the number of transactions and miners increases, the difficulty of fixing hash problems increases.
Although PoW has helped bring blockchain and decentralized and reliable digital currency from scratch, it has real drawbacks, especially with the amount of electricity these miners consume to solve the problem of proof work as quickly as possible. According to the Digiconomist Bitcoin Energy Consumption Index, bitcoin miners consume more energy than in 159 countries, including Ireland. As the price of each bitcoin grows, more and more miners are trying to solve problems and use even more energy.
All this energy consumption just to verify transactions has prompted many players in the digital currency space to look for an alternative method of block verification, and the leading candidate is a method called “Proof of Stake” (PoS).
PoS is still an algorithm, and the goal is the same as in Proof of Work, but the process of achieving the goal is very different. There are no minors in PoS, but there are validators instead. PoS is built on trust and the fact that everyone who checks transactions has an in-game skin.
Thus, instead of using energy to respond to PoW puzzles, the PoS validator is limited to checking the percentage of transactions that reflect its ownership share. For example, a validator that has 3% of the available ether can theoretically only test 3% of the blocks.
In PoW, the chances that you solve a problem with proof of work depend on your computing power. With PoS, it depends on the number of cryptocurrencies on the “bet.” The higher your bet, the more chances you have to lift the lock. Instead of earning cryptocurrency, the winning validator receives a transaction fee.
Validators enter their share by “blocking” part of the tokens of their fund. If they try to do something malicious against the network, such as creating an “invalid block,” their bet or deposit will be lost. If they do their job and do not break the network, but are not allowed to confirm the lock, they will receive their bet or deposit back.
Understanding the fundamental difference between PoW and PoS is all you need to know. Only those who intend to become minors or validators should understand all the intricacies of these two validation methods. Most people who want to own cryptocurrencies simply buy them on the stock exchange and do not participate in mining or verification of block transactions.
Most players in the crypto industry believe that digital tokens should switch to the PoS model to ensure that digital currencies survive in the long run. At the time of writing, Ethereum is the second largest digital currency after Bitcoin, and their development team has been working on their PoS algorithm called “Casper” for several years. It is expected that Casper will be released in 2018, which puts Ethereum ahead of all other major cryptocurrencies.
As we have seen before in this industry, major events, such as the successful implementation of Casper, can lead to higher prices for Ethereum. We’ll keep you updated on the upcoming releases of Crypto TREND.