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Recent revelations showed that Proof of Work mining (the protocol underpinning Bitcoin) uses as much energy as Denmark.

This week, however, attentions within the crypto community shifted to the future, with the first release of Casper, Proof of Stake on the Ethereum  testnet.

 

But what’s the difference between Proof of Work and Proof of Stake?

 

In Proof of Work, powerful computers verify the blockchain network by solving complex mathematical problems (mining). 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.

There are more weaknesses to this approach (which began with the Nakamoto Bitcoin blockchain) than just energy inefficiency. 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.

 

 

Enter Proof of Stake

Vitalik Buterin: We are not opposed to Ethereum Classic ...                                                                                                                                        (Vitalik, taken 2016)

Vitalik Buterin, mastermind of the Ethereum system, aims to introduce what has been dubbed 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.

 

Casper will likely bring huge benefits for Ethereum.

 

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 less supply, and a higher price.

This will likely be amplified by the increased demand that Casper will bring. To stake, a fixed amount of Ether is required to be locked up, with the numbers 1000, 30, and 10 being bandied about.

 

 

Rocket PoolRocket Pool

 

Staking Pools

1000 Eth? I could never afford to stake! Right?

Wrong.

Staking pools will work similarly to current mining pools, where users pool their resources and share the rewards. Early developments are being made in this area with Rocketpool. Currently in ICO stage, the project aims to lower the barrier to enter staking on the Ethereum network, removing the need for high level coding knowledge. Only time will tell whether this project will fill a much needed gap in the market, or be left by the wayside as Ethereum develops it’s own more user-friendly interface.

 

Raising the stakes

It’s not only Ethereum that is drawing eyes with plans to introduce Proof of Stake. In the last week a project named Cardano has jumped to the fifth spot on Coinmarketcap. Created by early Ethereum developer Charles Hoskinson, Cardano aims to introduce its staking update, Shelley, sometime between 2018 and 2019.

Popular project OmiseGo has also hit the headlines for its plans to introduce staking.

 

 

With these developments, and many more, Proof of Stake promises to be the de facto blockchain protocol. New technology is asking serious questions of what are seen by many as outdated Proof of Work systems, offering solutions to the problems of scalability, miner centralisation and energy efficiency.

2018 may be a crucial year for blockchain technology, heralding Proof of Stake systems as the juggernauts of the crypto world.

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