The adoption rate of cryptocurrencies into the public at large and into general practices across a huge host of industries has been staggering. Startups have been quick to show up to wedge cryptos into their niches to solve old problems as well as creating new features in their services and way of doing business. The biggest players in this scene, of course, are Bitcoin and Ethereum which seem to represent two distinct camps of cryptocurrency.
Proof of Work and Proof of Stake are two terms that are bandied about a lot within crypto communities, but what do these terms really mean? Both Ethereum and Bitcoin operate on the Proof of Work system, though this may change in Ethereum’s case.
The Proof of Work (PoW) protocol was developed way back in 1993, with the terminology being coined in full in a 1999 publication. The concept was used on a small scale before bitcoin, but it wasn’t until Satoshi Nakamoto came around with the concept of Bitcoin did anything with PoW systems take off.
PoW mainly attempts to deter hacking and DDoS attacks on the system and ensures a way to securely transfer information without the need of a third party. This means PoW is the backbone of everything that bitcoin, and Ethereum currently, have to offer.
The work referred to in PoW comes from miners. To ensure a transaction, and create more currency, a miner has to solve a PoW problem to make sure a block within the blockchain is legitimate. Once this is determined and proven valid, then the block is hashed and any transactions within that block go through.
Over time, the difficulty of these problems is increased requiring more computer power to solve the problems. Herein lies the first problem of the PoW system, that increasing computer power means that miners will be less inclined to solve these blocks as the costs of solving them increases. A solution within the blockchain for this is that there is a reward within each transaction that can be set, a small fraction of the value of the transaction, which will incentivize miners to target your block over another.
This system has already ran into issues, and quickly. Though the blockchain is capable of very quick and low cost transfers, anyone using bitcoin currently will tell you that this is not the case. If one sets a cost of transfer too low these days, the transaction will sit in the ether unsolved and inaccessible for weeks until it is finally kicked by to the wallet of origination.
There is a legitimate fear that this is an unsustainable system that will only increase in cost of transfers until the only real option is hoarding the bitcoin, like gold. In fact, a good chunk of the holders of bitcoin see the currency like this already. As a commodity this isn’t an issue, but to use it as a legitimate currency this PoW system is already hitting snags.
A proposed solution to this issue, though it would only have been temporary, was the SegWit2X hard fork. The gist of this idea was to increase the size of blocks on the chain from 1MB to 2MB. Though it would have effectively double to capacity of the network’s transaction availability, it was also similar to creating a second currency. As of November this idea has been suspended as the majority saw this as Bitcoin dividing into two different currencies, and feared that it would create a schism over what the “real” bitcoin is.
Ethereum, as well, is planning on its own fork though the idea is slightly different than that of Bitcoin’s. Ethereum is planning a shift from PoW protocols to that of Proof of Stake (PoS).
The main reason for this change is the increasing cost of electricity which hurts the value of any cryptocurrency that uses the resource heavy PoW systems on multiple fronts.
Currently one single bitcoin transaction costs as much in electricity as powering about 1.5 American houses for a day and due to the nature of PoW, this will only increase. Certain forecasts for the power consumption for Bitcoin project that transactions will be taking up the same amount of power as a small country by as early as 2020.
Though it is not a good thing to use that much power for multiple environmental and sustainability reasons, the fact that most electricity is purchased via fiat currencies mean these numbers put a downward pressure on the value of the crypto that is using it.
Ethereum’s solution will potentially be their PoS hard fork. This protocol is known as Casper, and the idea is that instead of mining a coin a group of validators will.
These validators are randomly selected by anyone who throws a stake into the validation pool. This pool locks down a chosen amount of ETH, that rewards those who put their ETH in based on the amount they put in, and solves transactions without an equation. Instead of computing power, random chance determines when someone is rewarded by this so the cost of electricity is minimal.
To keep these “validators” honest they much make a deposit to be able to validate a transaction, and if they are found via checks and balances to be making fraudulent transactions then that deposit will be forfeit and his ability to be part of the network will be deleted.
Technically, this could also help fix at least one of the network flaws of the PoW system, that is of the 51 percent double spend as it would be quite easy to stop this in its tracks with a group of “validators” overseeing the system.
Still, for a lot of the same reasons that the blockchain was invented in the first place, a system like this may be seen as centralized to some due to the human interference. Beyond that, Ethereum is in a tight spot due to a blockchain rollback in 2016 and potentially another one coming up from another wallet hack in 2017.
A PoS system will require a highly secure network that is resistant to these types of hacks and Ethereum has not proven itself capable in that regards.
Though cryptocurrencies are a highly valuable and irreplaceable technology, the current big players in the industry are facing some very difficult issues. Be on the lookout for the future of these currencies, as big changes will be needed for future-proofing.
One potential option that addresses these issues is that of Directed Acyclic Graphing (DAG) Protocols. This proposed solution to the problems of the blockchain fixes it by ditching the system entirely.
This can be seen currently in the currencies “Byteball” and “IOTA” which operates via a system that allows transactions to confirm transactions.” Each subsequent transaction in a system like this contains data to solve a previous one. This is known as the DAG.
Though the system is still improving, it’s quite refreshing to see a new take on the crypto network. There’s much more to explain about DAG, but it is something to keep an eye on especially as the issues of the old PoW and PoS systems start coming to head as they have been recently.