As we expected, since the publication of Crypto TREND, we have received many questions from readers. In this edition we will answer the most common.
What changes are expected that could be players in the field of cryptocurrencies?
One of the biggest changes to the cryptocurrency world is an alternative method of block validation called Proof of Stake (PoS). We will try to keep this explanation at a fairly high level, but it is possible to have a conceptual understanding of what the difference is and why it is a significant factor.
Keep in mind that the underlying technology for digital currencies is called blockchain, and most current digital currencies use a validation protocol called Proof of Work (PoW).
With traditional payment methods, you have to trust a third party, such as Visa, Interact, or the bank or check-in center to handle your transaction. These trusted organizations are “centralized”, which means that they keep their personal log, which keeps the history of the transaction, the balance of each account. They will show you the deals,: you have to agree that it is right or start an argument. Only when do the parties to the transaction see it?
In the case of most Bitcoin և other digital currencies, accounting is “decentralized”, which means that everyone on the network gets a copy, so no one should trust a third party, such as a bank, as anyone can directly check the information. This process of verification is called “distributed consensus”.
The PoW is demanding that “work” be done to validate the new deal to enter the blockchain. In the case of cryptocurrencies, this validation is done by “miners” who have to solve complex algorithmic problems. As algorithmic problems become more complex, these “miners” need more expensive, powerful computers to solve problems first. Mining computers are often specialized, usually using ASIC chips (Application Specific Integrated Circuits), which solve these difficult puzzles more skillfully and quickly.
Here is the process.
- Transactions are united in a “block”.
- The miners check that the transactions inside each block are legal, solving the puzzle of the hashing algorithm, which is known as the “work problem”.
- The first miner to solve the block “proof of work” problem is rewarded with a small amount of cryptocurrency.
- Once approved, transactions are stored in the public blockchain throughout the network.
- As the number of transactions and miners increases, so does the difficulty of solving hashing problems.
Although PoW helped bring out the blockchain և decentralized, unreliable digital currencies, it has some real drawbacks, especially with the amount of electricity these miners consume in an attempt to solve “proof of work problems” as quickly as possible. According to Digiconomist’s Bitcoin Energy Consumption Index, bitcoin miners consume more energy than 159 countries, including Ireland. As the price of each bitcoin rises, more and more miners are trying to solve problems by consuming even more energy.
All this power consumption just to validate transactions has prompted many to look for an alternative method of block validation in the digital currency area; the leading candidate is the method called Stake Proof (PoS).
PoS is still an algorithm, the goal is the same as in the proof of work, but the process of achieving the goal is completely different. There are no PoS miners, instead we have “certifiers”. PoS relies on the knowledge that all people who ratify transactions have a face in the game.
In this way, instead of using energy to respond to PoW puzzles, the PoS certifier is limited to the percentage of transactions that reflect his or her ownership package. For example, a validator with 3% of the available Ethernet could theoretically validate only 3% of the blocks.
The ability to solve the problem of proof of work in PoW depends on how much computing power you have. In the case of PoS, it depends on how much cryptocurrency you have “at risk”. The higher your bet, the more likely you are to win the block. Instead of winning cryptocurrencies, the winning certifier receives transaction fees.
Ratifiers enter their stock by “locking in” some of their fund tokens. If they try to do something malicious against the network, such as creating an “invalid block”, they will lose their share or security deposit. If they do their job, do not break the net, but do not gain the right to ratify the block, they will get their share or deposit back.
If you understand the main difference between PoW and PoS, that’s all you need to know. Only those who intend to be miners or ratifiers should understand all the nuances of these two ratification methods. Most people who want to own cryptocurrencies will simply buy them through exchange and not engage in real-world mining or forex trading.
Most cryptocurrencies believe that digital currencies need to move to the PoS model in order for digital currencies to survive. At the time of writing, Ethereum is the second largest digital currency after Bitcoin, and their development team has been working on their PoS algorithm called Casper for the past few years. We expect to see Casper invest in 2018, putting Ethereum ahead of all other major cryptocurrencies.
As we have seen before in this section, major events such as the successful implementation of Casper could push Ethereum prices even higher. We will keep you posted on future issues of Crypto TREND.
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