Ethereum uses a Proof of Work (PoW) consensus algorithm to run its blockchain. Miners compete to mint the next block, and earn a reward. Proof of Work is computationally difficult to do, yet easy for others to prove that you have done the work, hence the name.
Proof of Stake (PoS) is different from PoW. Nobody competes with a PoS consensus algorithm. Instead, the algorithm chooses who receives the reward based on the total coins owned. If you own more coins, you are more likely to get a reward. Ethereum’s upcoming switch from PoW to PoS is called Casper.
If you’d like to learn more about consensus algorithms in general, then take a look at our Proof of Work vs Proof of Stake comparison.
How Will Ethereum’s Proof of Stake Work?
With PoS, validators (anyone wishing to confirm transactions) bet on blocks not yet on the chain. Should this block get added to the chain, then everyone who bet on it receives a share of the reward in proportion to their bet. If a block does not get added to the chain, you don’t lose your bet. It’s important to note that you can’t spend any funds currently placed as a bet. These funds get frozen, and it’s an essential part of staking.
With PoS, there is no penalty, and you will never lose your funds. Staking is free, and even if disaster strikes or you make no money, you still have all your original funds. Herein lies the problem. Like 51 percent attacks which can plague PoW networks, it’s possible to control or buy your way into a PoS network. If you own more than 51% of the coins in circulation on a PoS network, you can control it, as you have a majority share. Nobody owns more coins than you, so you can never get outvoted, and can dictate which blocks get validated or not.
This is bad news for the network, as it’s no longer decentralized! With control over 51% of the network, you can imagine how a malicious character could damage everything. You could validate bad blocks, fake transactions, or steal everyone’s money. Once networks suffer a 51% attack, it’s often hard to recover.
Casper aims to prevent this problem very simply. It implements a security feature to punish bad behaviors. Anyone who acts undesirably (such as by voting for malicious blocks) will lose their whole stake. This makes it an expensive business manipulating the network. This also means that nodes can accidentally fall foul of this rule. By staking coins you become a validator. Should your node go offline during this time (even accidentally), you will also lose your funds.
This rule may seem harsh, but it’s for the benefit of everyone on the network. Not only are you safe from malicious actors, but every node on the network is likely to remain there, ensuring a reliable and consistent service.
Will Ethereum Still Be Profitable with Proof of Stake?
Going back to Ethereum’s current PoW consensus algorithm, miners who solve the puzzle first earn a healthy reward. With PoS, how will anyone make any money, and what’s the incentive to process transactions?
Each new block creator earns a transaction fee for processing the block. This is lower than the money earned when mining PoW blockchains, but the effort required to confirm PoS is much lower than PoW. You don’t need hundreds of computers or fancy ASIC miners to join in, neither do you need deep pockets to fund a massive electricity bill. You can get started contributing to PoS almost immediately by purchasing some PoS tokens.
When Ethereum switches to Casper the only thing you need to worry about is keeping you validator running well and available when staking, so as not to lose your stake.
There’s More than One Casper
Casper is the collective name for two ongoing research projects.
Casper the Friendly Finality Gadget (FFG) is the solution to bridge the current PoW algorithm to the new PoS algorithm. It’s not perfect, but it will make the transition easier. In basic terms, FFG is a hybrid of PoW and PoS, designed to make Ethereum’s transfer easier.
FFG will continue to run the PoW blockchain, but every 50 transactions the network will check the results using PoS. This is like an extended test before launching the full PoS network. It will help to ensure the PoS algorithm is strong and stable, and any bugs or big issues can get resolved.
Casper the Friendly GHOST: Correct-by-Construction (CBC) is the full-blown move to PoS. With this, the network is running 100% on PoS. There is no more mining, and no going back.
When Will Ethereum Switch to Casper’s Proof of Stake?
Casper is expected to finish transitioning sometime in 2019 – 2020. It’s impossible to give a concrete timeline, as it’s a challenging problem. Change management is a huge task for this project, and moving everyone to what amounts to a brand new blockchain is a big challenge. Those involved in malicious activities will be resistant to change, as will those who own a significant amount of mining hardware or make a decent profit right now.
Learn More About Ethereum and Casper
Now you know what it is, are you excited about Casper? If you’d like to stay involved with the discussion, then take a look at these Ethereum communities:
Let us on Twitter @blocksdecoded your thoughts on Casper.
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