Currently, Ethereum is considering a new method for validating transactions within its network, thereby reducing energy consumption and enabling a larger number of transactions per second. As discussed in cryptocurrencies and blockchains, this new option is called Proof of Stake (PoS). However, the consensus algorithm employed by most blockchains, so-called proof-of-work (PoW), has proven itself over time, so the blockchain community is concerned that the adoption of PoS could pose security risks.
PoW is considered a way to verify that you are a trusted source by completing a task, so you can verify a transaction. The algorithm was originally proposed by Cynthia Dwork and Moni Naor in 1993, and was later implemented by Satoshi Nakamoto in 2008 with the release of Bitcoin. PoS allows individuals to hold or “finance†a certain amount of currency as insurance and then gain trust to verify transactions.
We will examine how they can be implemented in a blockchain network, taking into account the risks that their implementation may entail and possible solutions.
From idea to practice
Mentioning PoW is nothing new. When we surf the web, we get annoyed every time we come across it. We are of course talking about CAPTCHA, a smaller version of PoW that can be used to prove that we are human. When you enter the correct answer, you are proven to be a person and can continue your happy life online.
In blockchain, however, this is much more complicated. In a blockchain network, there are many nodes connected to each other. Nodes that share processing power in this network can be called miners, and they perform PoW to validate transactions and find new hashes for the next block in the blockchain. When they successfully complete each calculation, they are rewarded with cryptocurrency, which encourages miners to keep mining.
Over time, these calculations increase the difficulty, which means that individual nodes that want to mine need to be more powerful in order to be the first to complete combat readiness tasks. Miners went from an individual with lots of processors in a basement to a giant mining warehouse with rows and rows of powerful processors. For a while, this seemed to defeat the purpose of decentralization, as only large corporations had such purchasing power. Soon, however, even for them, it became harder to dig fast. Miners now pool their processing power so they can complete POW as a collective and share rewards based on whose calculations are the most correct.
Energy consumption
In the case of Ethereum and Bitcoin, Bitcoin mining operations have risen to absurd levels in terms of energy consumption and pool size. For Ethereum, it is estimated that the total cost of mining ($2,277,959,012) exceeds the potential annual return from mining ($1,378,876,829).
On the other hand, Bitcoin is still expected to be profitable as the estimated mining cost ($3,656,073,069) is still lower than the annual return ($4,769,978,010). Unlike Ethereum, Bitcoin’s estimated energy consumption is similar to the total energy consumption of Austrian residents throughout the year.
Since PoW will only get more difficult and require more processing power to complete, improvements in energy consumption will only be possible if there is some incredible technological achievement in processing power or clean energy production.
PoW can be vulnerable to Distributed Denial of Service (DDoS) attacks, basically hackers control 51% of the blockchain network. Hackers can do whatever they want, including double spending and erasing the history of the ledger. Such an attack would be counterproductive as it would devalue the associated cryptocurrency. The concern, however, is that miners are currently scaling up as they clearly want to join the biggest miners for the chance of higher returns. Currently, in Etherium, only 3 mining pools can reach 51% of the output. Clearly everyone in the pool wants to keep the status quo and be rewarded, but the 51% goal is getting unnerving.
POS
PoS basically verifies transactions based on the reliability of the stake. In the network, miners will become obsolete as complex problems can be solved without computation to be able to validate the next block. Instead, each node can hold a portion of its cryptocurrency in the network. If the transaction is bad, the stake can be considered as collateral. Nodes that hold the stake are called "Staker", and the more stake each node holds, the longer the stake is left untouched, selected to validate the transaction and be rewarded the greater the chance.
Once stakers are selected to validate, they "forge" new blocks. They put their stakes on the line, validate transactions, and forge new blocks. If the transaction is found to be fake, the maker of the forged block loses their stake and the right to participate in the future forging process. Ethereum is designing "Casper" which will perform this function on any quack nodes in the network in preparation for their transition to the PoS algorithm.
Along with a new algorithm comes a new and improved database, one of which is a new method for PoS called sharding. The distributed ledger is decomposed and shared across the network, so the entire network does not need to participate in transaction verification. Sharding inherently speeds up the verification process because the required information is verified without having to check with the entire network.
PoW is well tested and used in many cryptocurrency projects. A DDoS attack on a blockchain using this algorithm is impossible in today's computing technology. However, high energy costs, increased environmental stress, associated adverse media coverage, increased concentration of mining operations, and low transaction throughput may make it unviable in the long term. The community has grown increasingly concerned about the high energy costs of Bitcoin mining, and China has officially banned all such operations.
PoS and Dapps
PoS can essentially eliminate the processing power and energy required to complete a PoW algorithm. As for 51% control of the network PoS, if someone has the highest stake in the network, they have no control. If they were to verify a fraudulent transaction, they would lose their stake and the ability to verify it in the future. It would also be counterproductive for any individual to buy more cryptocurrencies to get more shares, as the more cryptocurrencies they buy, the higher the cost. Overall, PoS seems to be a better solution as it will make the blockchain more secure, drastically reduce its power consumption, and reduce the time it takes to make a transaction.
For dapps, PoS may mean lower costs as transactions increase. The next question is what do we do with this excess mining capacity. We can look at the EOS blockchain and see what the network can do with all the processing power. A possible solution is to take advantage of the excess processing power currently on the network to enable more complex dapps to run smoothly. On EOS, we would like to see users being able to use a certain amount of EOS to hold data in the blockchain network, or use tokens to vote on your articles. In-game wagering is also possible so that everyone can play offline. Unfortunately, these are all guesses, but they all make sense. We are just waiting to see what the end result of dapps will be if PoS consensus is adopted.
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