Saturday, 11 July 2020

Why Ethereum is Switching to Proof of Stake (PoS)

As one of the industry’s leading cryptocurrencies, Ethereum is tasked with combating industry issues in order to stay ahead of the curve.

In the past, the effectiveness of Ethereum transactions has been crippled by things as innocuous as digital kittens. When an Ethereum-based game known as CryptoKitties reached a peak in popularity, the network as a whole slowed down.

This network congestion in many ways represents the issues with scaling and power consumption that plague some of the industry’s largest cryptocurrencies. One solution to help make Ethereum a faster and more robust platform for financial services is a protocol known as proof-of-stake (PoS).

Currently, Ethereum is limited to processing approximately 15 transactions per second. This proves problematic at times when the platform is in demand. In comparison, Visa, the popular credit card provider, claims to be able to handle upwards of 24,000 transactions per second.

To gain a competitive edge and serve as a more practical financial implement, Ethereum is making a gradual transition to adopting the PoS protocol. Doing so will allow the platform to implement what’s known as sharding, which splits up the network’s workload. This is expected to increase Ethereum’s transactions per second exponentially, though the exact number of transactions the network will be able to handle has not been yet determined.

How the traditional proof-of-work (PoW) protocol functions

Many of the industry’s leading currencies use a protocol known as proof-of-work (PoW) in order to carry out transactions securely, without relying on middlemen like banks. Since its inception, PoW has been the model behind Ethereum, but many of the platform’s leading figures want this to change.

PoW can be thought of as a governance model that both incentivizes users to partake in maintaining the integrity of the network, and treats all users as equal.

Effectively, this a peer-to-peer system where transactions can occur without requiring verification from any outside source, which is why it’s often called a “trustless” payments platform. When a transaction is sent, a verification process enlists the help of network-connected devices.

These devices are operated by users that volunteer to temporarily donate their computer’s resources for the purpose of verifying transactions. These users are known as ‘miners,’ and their computers race to solve complex mathematical equations. These miners can then earn the transaction fee as a reward for their participation.

Why scaling is a major issue for many cryptocurrencies

Proponents of proof-of-work site numerous benefits with the protocol, such as its commitment to treating all miners as equal and its heightened level of security.

However, currencies that employ PoW like Bitcoin and Ethereum face severe hurdles in achieving adoption. As more people use these currencies, they become slower due to network congestion. Further, transaction fees rise during times when the network is under stress, which often makes it unreasonable to use these cryptocurrencies for everyday purchases.

Another major issue regards the environmental impact of proof-of-work, as it is severely power intensive. For example, a report this year found that Bitcoin was using approximately as much power as the entire country of Ireland.

Ethereum aims to employ proof-of-stake to deliver needed solutions

Leading Ethereum innovators have long explored the possibility of replacing the platform’s current PoW protocol with what’s known as a proof-of-stake (PoS) solution.

The reason this protocol is called ‘proof-of-stake’ is because it is designed around the idea of considering the ‘stake’ that participants hold. PoS considers a variety of factors when determining how to verify transactions.

In the PoS model, miners are given a ranking based on how many tokens they own in the ecosystem and how long they’ve held their stake. Miners that hold a large quantity of a cryptocurrency and do not access their funds often are more likely to be selected to verify transactions, though other miners still have a chance to be chosen randomly by the network.

The result is a system that allows a network to take a deterministic approach to verifying transactions. Proponents of PoS believe that it will improve the scalability of cryptocurrencies like Ethereum and allow them to fulfill growing demand.

Further, PoS is much less power exhaustive than PoW, since less devices are involved in the verification process. As a result, it is seen as an important solution to combating the amount of resources that major cryptocurrencies are consuming.

Other industry solutions continue to emerge

Proof-of-work and proof-of-stake are not the only two ways of facilitating a cryptocurrency. While PoW remains the standard thanks to its function in the world’s leading cryptocurrency, Bitcoin, proponents are actively challenging its role in newer digital currencies.

For example, while Bitcoin seems to be sticking with PoW for the foreseeable future, many of its proponents are championing a protocol known as the Lightning Network. This protocol could improve transaction speeds and lower costs through handling some transactions outside of the blockchain.

Another leading solution is known as delegated proof-of-stake (DPoS), which uses a model where users elect representatives to verify transactions.

The fact is, the cryptocurrency industry as a whole is still in an early stage of development. Innovators are continually investigating and presenting new solutions to improve scalability. With these solutions, the hope is for cryptocurrencies to be sustainable and even serve as a competitor to the modern payment methods that most people use in their everyday lives.

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