Proof of Work mining (the protocol underpinning Bitcoin and many others) uses as much energy as the nation Denmark. It’s a costly and lengthy process, and with the user base growing traditional blockchains are struggling.
This is because every single transaction needs to be ‘mined’ by powerful computers solving complex mathematical problems. It’s a process that ensures the security of the network, preventing double spends and other malicious actions. Whilst effective, the energy inefficiency of this process is truly staggering. And that’s not all. With each transaction needing a lengthy confirmation process, the blockchain cannot scale easily as more and more users join the network. Bitcoin transactions are now unbearably slow and expensive, with long backlogs of transactions waiting their turn.
Ethereum too is suffering from the same issue. Although the network can currently handle around fifteen transactions per second, significantly more than Bitcoin, we need only look at the recent Cryptokitties mania to see the crippling effect of high network load. Backlogs of transactions quickly built up and transaction prices skyrocketed as users fought to get included in the next block. With the severe limitations proof of work seen, it seems impossible for real-world use cases to succeed. VISA and other non-blockchains handle thousands of transactions per second, and if the many projects emerging in the crypto space are to compete, something needs to change.
Vitalik Buterin, mastermind of the Ethereum system, aims to introduce what is known as a Proof of Stake this year. The upgrade to the network is known as Casper, and it promises to be a game changer. Instead of powerful miners verifying transactions on the network, users will be able to ‘stake’ their Ether. If the stakers act honestly, confirming legitimate transactions, they will be rewarded with interest proportional to their stake. If the stakers act maliciously and try to cheat the system, their stake will be lost. The chief developer behind Casper is Vlad Zamfir, who has been working on the upgrade since 2014. It has been live on the Ethereum testnet since January and currently requires 1500 eth to participate. It’s likely that this number will be lowered when the mainnet release happens, and if you’re worried you still might not be able to participate, don’t be! Staking pools will work similarly to current mining pools, where users pool their resources and share the rewards.
Casper could bring huge changes to the Ethereum economic model, and consequently the price of Ether. Not only will transactions be confirmed much faster, enabling the growth of the network whilst saving polar bears,it will also cap the total number of Ethereum available. Currently, new Ether is generated through a mining process similar to Bitcoin’s. With Casper, stakers will be rewarded from the transaction fees generated. A fixed amount of Ether will mean no inflation. Combined with the increased demand Casper will generate (to stake, a fixed amount of Ether is required), we can surely expect an increase in price as users buy up and lock away Eth in stake.
With this change, will we see the fabled flippening, with Ethereum dethroning Bitcoin to become the most valuable cryptocurrency? It remains to be seen.
This prophecy might be narrow-focused, as it’s not only Ethereum that is drawing eyes through plans to introduce Proof of Stake. In the last week, Cardano updated it’s roadmap, setting out its plans to switch to a proof of stake model as early as Q2 of this year. Created by early Ethereum developer Charles Hoskinson, Cardano is hoping to tackle the blockchain’s many issues through a focus on academic research and rigor.
Meanwhile, other projects are escaping the limitations of proof of work in entirely different ways. IOTA, frontlined by David Sønstebøs moving away from Blockchain entirely. Instead, the protocol offers a system where transactions are arranged in a tangle, a so-called Directed Acyclic Graph, with each transaction working to verify other transactions.
New technology is asking serious questions of what are seen as outdated Proof of Work systems, offering various solutions to the problems of and efficiency. Proof of Stake is one likely candidate in the running, and this year could be its make or break moment.
Whilst the limitations of Proof of Work are well documented, many continue to put their faith in protocols such as the Bitcoin network. It needs to be stated that developments within these systems are ongoing as well, with Lightning Network and block size change in the contention. However, whether these upgrades can truly tackle the limitations proof of work systems face remains to be seen, and other projects aren’t hanging around.
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Last modified: May 20, 2020 9:06 PM UTC