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 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 quite high, but it is important to have a conceptual understanding of what change is and why it is an important factor.
Remember that the basic 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 trust a third party, such as Visa, Interact, or a bank, or a check-in house to settle your transaction. These trusted units are “centralized”, meaning that they keep their own book, which preserves the transaction history and balance of each account. They will tell you the transactions, and you must agree that it is correct, or start a dispute. Only the parties to the transaction ever see it.
With Bitcoin and most other digital currencies, the main books are “decentralized”, which means that everyone on the network gets a copy, so no one should trust a third party, such as a bank, because anyone can directly verify the information. This verification process is called “distributed consensus”.
PoW requires “work” to be done in order to validate a new blockchain access transaction. With cryptocurrencies, that certification 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 in front of everyone else. “Mining” computers are often specialized, typically using ASIC (Specific Integrated Application Circuits) chips, which are more adept and faster at solving these difficult puzzles.
Here is the process:
- Transactions are merged together into one ‘block’.
- The miners verify that the transactions within each block are legitimate by solving the riddle of the disconnection algorithm, known as “work problem proof”.
- 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 block across the network.
- As the number of transactions and miners increases, the difficulty of solving hashed problems also increases.
Although PoW helped remove decentralized, insecure digital blocks and coins, it has some real drawbacks, especially with the amount of energy these miners are consuming trying to solve the “test of work problems” as soon as possible. possible. According to the Digiconomist 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 problems, consuming even more energy.
All that energy consumption just to validate transactions has motivated many in the digital currency space to seek alternative method of valuing blocks, and the main candidate is a method called “Proof of Stake” (PoS).
PoS is still an algorithm, and the goal is the same as in job authentication, but the process to achieve the goal is quite different. With PoS, there are no miners, but instead we have “appraisers”. PoS relies on the belief and knowledge that all people who are evaluating transactions have skin in play.
In this way, instead of using energy to respond to PoW puzzles, a PoS estimator is limited to estimating a percentage of transactions that reflect part of his or her ownership. For example, an appraiser who owns 3% of the available Ether can theoretically prove only 3% of the blocks.
In PoW, the chances of you solving the job test problem depend on how much computing power you have. With PoS, it depends on how much cryptocurrency you are at “risk”. The higher the stock, the higher the chances of you choosing the block. Instead of winning cryptocurrencies, the winning appraiser receives transaction fees.
Appraisers enter their shares by ‘blocking’ a portion of their funds. If they try to do something malicious against the network, such as creating an ‘invalid block’, their shares or security deposits will be confiscated. If they do their job and do not violate the network but do not gain the right to validate the block, they will take their share or deposit again.
If you understand the fundamental difference between PoW and PoS, that’s all you need to know. Only those who plan to be miners or appraisers should understand all the details of these two appraisal methods. Most of the general public wishing to own cryptocurrencies will simply purchase them through an exchange and will not participate in the actual issuance or certification of block transactions.
Most in the crypto sector believe that in order for digital currencies to survive long-term, digital tokens need to switch to a PoS model. 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 the past few years. It is expected that we will see Casper implemented in 2018, putting Ethereum ahead of all other major cryptocurrencies.
As we’ve seen before in this sector, big events like a successful implementation of Casper could lead to Ethereum pricing much higher. We will keep you updated on future issues of Crypto TREND.