Since publishing Crypto TREND, we have received numerous questions from our readers. In this edition, we will address the most frequently asked one:
What significant changes are forthcoming that will impact the cryptocurrency sector?
One of the most significant changes is the Proof of Stake (PoS) alternative method of block validation. It is essential to grasp a conceptual understanding of its difference for it being a significant factor.
Remember that the underlying technology for digital currencies is called blockchain, and most digital currencies use a validation protocol known as Proof of Work (PoW).
Traditional payment methods require trust in a third party, such as Visa, Interact, a bank, or a check clearinghouse to settle transactions. These trusted entities are centralized and keep their private ledger, containing transaction history and account balances. They present the transactions to you, and with your agreement, the transaction completes; otherwise, you could initiate a dispute. Only the transaction parties could see the record.
However, in Bitcoin and other digital currencies, the ledgers are decentralized, meaning everyone on the network gets a copy of the transaction, and no third party is required, as each transaction is verified. This verification process is called distributed consensus.
With PoW, miners require “work” to validate a transaction by solving complex algorithmic problems. The more complex the problems, the more low-cost computers miners need to solve them. Only the first miner to solve the “proof of work” problem receives a reward in cryptocurrency. After verification, transactions are stored in the public blockchain across the entire network. As the number of transactions and miners increase, the difficulty of solving hashing problems increases.
However, the increase in the number of miners and transactions necessitates more electricity, and with PoW, miners consume considerable electricity to solve transactions apidly. According to the Bitcoin Energy Consumption Index, Bitcoin miners use more electricity than 159 countries, including Ireland. With the rise in the value of Bitcoin, more miners strive to solve transactions, leading to even greater energy consumption.
All of this power consumption has prompted many in the cryptocurrency industry to seek an alternative method of validating blocks, and PoS is the frontrunner.
In PoS, no miners are involved, and validators verify transactions based on trust and knowledge that they have invested in the currency. Instead of energy consumption, a PoS validator can validate a percentage of transactions through ownership stake. For instance, a validator with 3% ownership can verify 3% of the blockchain.
The higher the equity ownership, the higher the chances of solving the block, and the validator receives transaction fees instead of cryptocurrencies. Validators “lock up” a portion of their fund tokens to enter their bet. Attempting to perform a malicious act, such as creating an “invalid block,” will forfeit the stake or deposits. However, if the validator does not violate the network and fails to win the right to verify the block, they will refund their stake or deposit.
PoS requires an understanding of the difference between PoW and PoS, and only those who plan to mine or verify transactions should be familiar with the details. The majority of the public interested in owning cryptocurrencies would purchase them through an exchange platform and not participate in mining or validation of transaction blocks.
Most in the cryptocurrency marketplace believe that cryptocurrency tokens must transition to PoS to survive long-term. Ethereum, the second-largest digital currency after Bitcoin, is developing its PoS algorithm called Casper, and it is likely to launch in 2018, putting Ethereum ahead of the other major cryptocurrencies.
If Casper is successfully implemented, it may push prices for Ethereum higher. Stay tuned for updates in future issues of Crypto TREND.
Keep watching!
By Martin Straith.