Summary of the post in three points:
- The fundamental working of Ethereum will be changed for betterment (less electricity consumption, more security, faster process).
- The system will be run by validators instead of miners.
- Only limited amount of Ethers will be available once PoS is implemented
Ethereum is next to Bitcoin on the list of cryptocurrencies in terms of market capitalization. One major reason is Ethereum has more potential in many ways when compared to Bitcoin, if Ethereum had come first, I bet it would top the list.
Proof of Work (PoW)
As of now Ethereum’s token “Ether” is generated through PoW (Proof of Work) method. That means that random miners are responsible for the creation of ethers. This, on the other hand, uses a lot of resources which are computational power and electricity. The brain behind Ethereum - Vitalik Buterin has himself stated that the electricity which is consumed by only Bitcoin and Ethereum sum up to $1M daily.
So, to take Ethereum to the next step, the 23-year-old d inventor has decided to change the fundamental working of the open source project. The plan is simply to use PoS (Proof of Stake) but it isn’t simple.
Proof of Stake
Proof of Stake in simple terms is the process of using “validators” in order to check the transactions. Processing of PoS is much simpler and easier i.e. the user has to prove that he owns a certain amount of the coins which are in circulation. Also, PoS makes the system more secure (because of “Casper”) and robust than PoW.
Vitalik Buterin has said that he has made few announcements. The initial step will be in making a “hybrid system” which the system will be running between PoS and PoW starting from August or September. The full transition is estimated to be completed by the end of this year.
He has already released the PoS repository on GitHub (here)
To make the transition happen there should be some POS protocol in place. Vitalik has decided to go with “Casper”. As said before by August or September the hybrid system will be used – Casper FFG and Casper CBC will be the protocol which might be finally implemented by the end of the year.
What is Casper?
Casper has been around since 2014 and simply put, it is going to be the work protocol for Ethereum’s PoS method. It lets the users of Ethereum bet for which block should be added to the chain. The final result will be taken on a consensus basis. If the user had voted in favour of the consensus then he will receive benefits. If his vote had been against the consensus then his stake will be lost or reduced. Casper regulates these mechanisms of processing the results, determining the result of consensus, granting benefits and nullifying or reducing the stakes.
Three important applications of Casper
- Less Censorship – in Bitcoin, if a miner loses a block/gets censored, remaining miners will be benefited from this. In the case of Ethereum with Casper, everyone will get benefited more if every block is added to the chain.
- Costs – The validator will be undergoing fewer costs than before because of the less electricity and less computing power.
- Scalability – some of the scalability problems can be finally solved.
The system will be more based on stake pools instead of the mining, in the current scenario entire system is based on miners. The liability of the miners is also a huge open threat (read here). The higher the pool the higher the stakeholder will be benefitted.
Also Check: Know what is Block Chain & How it’s Work
What will be the benefits for existing stakeholders?
There will be no requirement for generating new Ethers which means that the existing stakeholders will be getting benefited on a large scale when compared to the new stakeholders in the future. However, the hard number of ether which will be required to stake is not yet released. But based on the working mechanism the number of stakes during the start will be high and eventually it will be reduced.
The problem and the solution
One of the long-discussed problems was that uncertainty of success in PoS system. Many developers were worried that “smart contacts” might not work properly if PoS is implemented due to the “finality” problem. However, the ingenious Ethereum inventor has explained it briefly in this Medium post.
Downside of PoS
It is interesting to note that the biggest advantage of PoS system of Ether is its biggest disadvantage. The major shareholder will be granted the access to more authority and control in both economic and technical areas. This may cause a huge monopoly problem.
With the PoS update, the basic working of Ethereum changes. Cryptocurrencies are one of the recent technologies which work based on a number of novel concepts. Ethereum is one of the very few cryptocurrencies which is on the right path by the right people. One of the advantage for Ethereum is that under its Enterprise Ethereum Alliance program it gets help from the Fortune 500 companies. Added to that it has a lot of developers supporting it due to its potential features.
As said before, users can look forward to the switch from the current system (PoW) to the hybrid system by the August or September. The complete transition is expected to happen before the end of this year.
After the Casper update, the price is expected to grow to an exponential scale not only because of the awesome features but because there will “limited availability” of ether in the chain. This might also bring new stakeholders as the price is expected to roar swiftly as soon as the transition happens.