As we expected, we have received many questions from readers since the publication of Crypto Trends. In this version we will give the most common one.
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 validation called Proof of Stake (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 cause.
Note that the underlying technology of digital currencies is called blockchain and most of the current digital currencies use a validation protocol called Proof of Work (POW).
Payment With fixed payment methods, you will have to rely on 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 accounts that balance the history of transactions and each account. They will show you the transactions and you must agree to it or initiate a debate only the parties to the transaction can see it.
With Bitcoin and most other digital currencies, leaders are “decentralized”, meaning everyone on the network gets a copy, so no one has to rely on a third party, such as a bank, because anyone can verify information directly. This verification process is called “delivery consent”.
PoW needs to “work” to validate new transactions in order to enter the blogchain. With the help of cryptocurrency, this validation is accomplished by “miners” who must solve complex algorithmic problems. As algorithmic problems become more complex, these “miners” need more expensive and more powerful computers to solve problems first and foremost. “Mining” computers are often specialized in using ASIC chips (application specific integrated circuits), which makes them more efficient and faster at solving these difficult puzzles.
Here is the process:
- Transactions are bundled together in a ‘block’.
- The miners verify that the transactions within each block are valid by solving a hashing algorithm puzzle known as “proof of work problem”.
- The first miner is rewarded with a small amount of cryptocurrency for solving “proof of work problems” in the block.
- Once verified, transactions are stored in public blockchains across the entire network.
- As the number of transactions and miners increases, so does the difficulty in resolving hashing problems.
While the WWC has helped blockchain and decentralization, freeing unsuspecting digital currencies from the ground, it has some real flaws, especially with the amount of electricity these miners are trying to solve “evidence of work problems” as quickly as possible. According to DigiconMist’s Bitcoin Energy Consumption Index, bitcoin miners are using energy from more than 159 countries, including Ireland. As the price of each bitcoin rises, more and more energy users try to solve the problem by consuming more energy.
All of this power consumption to justify transactions has prompted the search for alternative methods of validating many blocks in digital currency spaces, and the top candidate is a method called “Proof of Stack” (POS).
POS is still the same as an algorithm and proof of work, but the process of reaching the goal is quite different. P.O.S. Including, there are no miners, but instead we have “legitimizers”. POS relies on trust and knowledge that all the people who are legitimizing the transaction have skin in the game.
Thus, instead of using force to answer the PoW puzzle, a POS verifier is limited to legitimizing a percentage of its transactions that are reflective of its or its owned portion. For example, a validator who owns 3% of the available ether can only theoretically validate 3% of the blocks.
In WW, the probability of solving proof of a work problem depends on how much computing power you have on POS. It depends on how much cryptocurrency you have “at risk” on. The more risk you have, the more likely you are to solve the block. Instead of winning a crypto currency, the winner accepts a legitimate transaction fee.
Validators enter their partnership by ‘locking up’ a portion of their fund tokens. If they try to do something malicious against the network, such as creating an ‘illegal block’, their share or security deposit will be confiscated. If they do their work and do not violate the network but do not win the right to legitimize the block, they will get their partner or deposit back.
If you want to know the basic difference between POW and POS, you just need to know it. Only those who plan to become miners or legalizers need to understand all the ins and outs of these two validation methods. Most ordinary people who want to acquire cryptocurrencies will only buy them through an exchange, and will not participate in the legitimacy of actual mining or block transactions.
Most in the crypto sector believe that digital tokens must move to a POS model in order for digital currencies to survive in the long run. At the time of writing this post, Etherium 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’ll see Caspar implementation in 2018, putting Ethereum ahead of all the other larger cryptocurrencies.
As we have seen before in this sector, big events like the successful application of Caspar could send Ethereum prices higher. We keep you updated on future numbers of crypto trades.