As we expected, since the release of Crypto TREND we have received many questions from readers. In this version we will give the most common answer.
What kind of change is coming that could be a game changer in the cryptocurrency sector?
One of the biggest changes that will affect the cryptocurrency world is an alternative method of block verification called Proof of Stack (PoS). We will try to keep this explanation fairly high, but it is important to have a conceptual idea of what the difference is and why it is a significant factor.
Note that the underlying technology of digital currency is called blockchain and most of the current digital currency uses a validation protocol called Proof of Work (PoW).
With the traditional method of payment, you need to trust a third party to settle your transaction, such as Visa, Interact, or a bank or a check clearing house. These trusted companies are “centralized”, meaning they keep their own personal ledger that stores the transaction history and balance of each account. They will show you the transaction, and you must agree that it is correct, or start a dispute. Only the parties to the transaction see it.
With Bitcoin and most other digital currencies, lasers are “decentralized”, meaning everyone on the network gets a copy, so no one has to trust a third party, such as a bank, because anyone can verify information directly. This verification process is called “distributed consensus”.
PoW needs to “work” to verify a new transaction in order to enter the blockchain. With cryptocurrencies, that legitimacy is accomplished by “moneymakers” who must solve complex algorithmic problems. As algorithmic problems become more complex, these “miners” need more expensive and more powerful computers to solve problems ahead of everyone else. “Mining” computers are often specialized, usually using ASIC chips (application-specific integrated circuits), which are more efficient and faster in solving this difficult puzzle.
Here is the process:
- Transactions are bundled together in a ‘block’.
- The miners solve the hashing algorithm puzzle and verify that the transaction is valid within each block, which is known as “proof of work problem”.
- The first miner to solve the block’s “proof of work problem” is rewarded with a small amount of cryptocurrency.
- Once verified, transactions are stored in public blockchains across the entire network.
- As the number of transactions and mines increases, so does the difficulty of resolving the hashing problem.
While PoW has helped blockchain and decentralized, trusted digital currencies get off the ground, it has some real flaws, especially with the amount of work these miners are trying to solve “evidence of work problems” as quickly as possible. According to Digiconomist’s Bitcoin Energy Consumption Index, Bitcoin miners are using more energy than 159 countries, including Ireland. As each bitcoin price rises, more and more miners try to solve the problem, consuming more energy.
All those energy expenditures just to validate transactions have led many to look for alternative ways to verify blocks in place of digital currency, and the leading candidate is a method called “Proof of Stack” (PoS).
PoS is still an algorithm, and the purpose is the same as the proof of work, but the process of reaching the goal is quite different. With PoS, there are no miners, but instead we have “balidator”. PoS relies on the belief and knowledge that all the people who are legitimizing the transaction have skin in the game.
Thus, instead of using the power to answer the PoW puzzle, a PoS verifier is limited to verifying the percentage of transactions that reflect its ownership partnership. For example, a verifier who owns 3% of the available ether can theoretically verify only 3% blocks.
In PoW, the probability of solving your work problem proof depends on how much computing power you have. With PoS, it depends on how much cryptocurrency you have, the more you share, the more likely you are to solve the block. Instead of winning crypto coins, the winner receives a verified transaction fee.
Verifiers enter into their partnership by ‘locking up’ a portion of their fund token. If they try to do something malicious against the network, such as creating an ‘illegal block’, their shares or security deposits will be confiscated. If they do their job and do not violate the network, but do not win the right to legalize the block, they will get their partnership or deposit back.
If you understand the basic difference between PoW and PoS, this is all you need to know. Only those who plan to become miners or verifiers need to understand all the ins and outs of these two legalization methods. Most of the general public who wish to own cryptocurrencies will only buy them by exchange and will not participate in the legitimacy of actual mining or block transactions.
Most in the crypto sector believe that in order for digital currency to survive in the long run, digital tokens must move to a PoS model. At the time of writing, Ethereum is the second largest digital currency behind Bitcoin and their development team has been working on their PoS algorithm called “Casper” for the past few years. Hopefully we will see Caspar implemented in 2018, putting Etherium ahead of all other major cryptocurrencies.
As we have seen before in this sector, big events like the successful implementation of Caspar could send the price of Ethereum much higher. We will keep you updated on future issues of crypto trends.