Recently you might have heard that Ethereum will move Ethereum consensus from a Proof of Work system to one based on the so-called Proof of Stake. You may wonder about the differences between these two systems and what this change means. In this article, we will explain what is proof of stake and proof of work and What will Ethereum’s proof of stake change.
Proof of Work Mining
As we all know, mining is a process of validating blocks filled with transactions. Each time there is a new transaction, it is put in a block which in turns needs confirmation by miners. To do so, they are required to solve a mathematical puzzle, and the first one to solve it is rewarded a certain amount of Ethereum as a mining reward as well as a transaction fee. It is difficult for miners to cheat in this process. There is no way to fake this work and come away with the correct puzzle answer and still be the first to solve it. That’s why the puzzle-solving system is called Proof of Work mining.
It is necessary to point out that the biggest advantage of Proof of Work mining is a trustless and distributed consensus system. If you transact money outside the cryptocurrency world, you have to complete it through a trusted third-party with may interfere in the process and that party will also consider such things as your debit and credit. The money is handled by and within the third party. Ethereum’s trustless nature allows for a peer-to-peer exchange without the need for third-party interference.
Besides the benefits of this system, PoW has its own downside. As more miners join the consensus and the puzzle difficulty increases, this system requires more electric power and high computing power hardware that can be extremely expensive. What’s more, it restricts the possibility of miners moving their hardware to mine a different coin if the reward is better. Meanwhile, with more and more coins getting released, the reward for miners will become less as the coins are scarcer to mine.
Proof of Stake Mining
Proof of Stake mining is a different way to validate transactions on the distributed consensus. It is still an algorithm, and the purpose is the same as the proof of work, but the way the goal is accomplished is quite different.
The idea was first suggested on the bitcointalk forum back in 2011, but the first digital currency to use this method was Peercoin in 2012, together with ShadowCash, Nxt and some other coins. Unlike the Proof-of-Work, where the algorithm rewards the first miner who solve mathematical problems with the goal of validating transactions and adding new blocks in the chain, with the proof of stake, the creator of a new block is chosen in another way, depending on its wealth, or so-called stake, and time.
The mechanism of Proof of Stake mining is that a set of miners take turns validating blocks, and the weight of each miner depends on the weight of its deposit, meaning that more coins you have and the longer you hold them, the higher the chance you will have to participate in the next block . Significant advantages of the system include security, reduced risk of centralization, and energy efficiency because there is no need to consume large quantities of electricity in order to secure a blockchain with an increasingly hard puzzle.
How does this work exactly? In Proof of Stake, the blockchain tracks of a set of validators, and anyone who holds Ethereum can become a validator by sending a special type of transaction that locks up their Ether into a deposit. Then through a consensus algorithm, all current validators can participate in the process of creating new blocks.
With some of the benefits described above, we assume you can now understand why Ethereum’s consensus has to change from Proof-of-Work to Proof-of-Stake. Now, Developers plan to abandon Proof-of-Work, the algorithm that the network currently uses to determine which transactions are valid and protect it from being tampered and to use proof of stake where the network is secured by the owners of tokens.
The upcoming upgrade called Casper aims to do just this. The main purpose of its launch is to introduce a newer Proof-of-Stake mining system than the one we talked about above. In Casper, validators put the coins in their wallets for staking and then place bets on the next block. If the block they bet on is added. They receive a proportional reward. Moreover, if a validator maliciously tries to validate two versions of the blockchain to gain profits, the entire stake will be depleted.
What will Ethereum’s proof of stake change? In Casper’s case, its staking minimum will be 32 Ether, a relatively low requirement. For those normally hodling with no benefits, they can hodl and gain benefits now, which is a huge change financially. And let’s not forget about the other advantages mentioned before.
This concludes today’s article on what is proof of work mining and proof of stake mining, and what will Ethereum’s proof of stake change. We hope you learned a lot, enjoyed the read, and stay tuned for more great content.