Crypto TREND – Fifth Edition

As we expected, since we published Crypto TREND, we have received many questions from readers. In this edition we will respond to the most common.

What kinds of changes are coming that could change the rules of the game in the cryptocurrency sector?

One of the biggest changes to affect the world of cryptocurrencies is an alternative block validation method called Proof of Stake (PoS). We will try to keep this explanation at a fairly high level, but it is important to have a conceptual understanding of what the difference is and why it is a significant factor.

Remember that the underlying technology with digital currencies is called blockchain and most of today’s digital currencies use a validation protocol called Proof of Work (PoW).

With traditional payment methods, you must rely on a third party, such as Visa, Interact, or a bank, or a check clearing house to settle your transaction. These trusted entities are “centralized”, which means that they maintain their own private ledger that stores the transaction history and balance for each account. They will show you the transactions and you must accept that they are correct or initiate a dispute. Only the parties to the transaction see it.

With Bitcoin and most other digital currencies, the ledgers are “decentralized,” which means that everyone on the network gets a copy, so no one has to trust a third party, like a bank, because anyone can. directly verify the information. This verification process is called “distributed consensus”.

PoW requires “work” to be done to validate a new transaction to enter the blockchain. With cryptocurrencies, this validation is carried out by “miners”, who must solve complex algorithmic problems. As algorithmic problems become more complex, these “miners” need more expensive and powerful computers to solve problems before everyone else. “Mining” computers are often specialized, typically using ASIC (Application Specific Integrated Circuit) chips, which are more adept and faster at solving these difficult puzzles.

Here is the process:

• Transactions are grouped into a “block”.
• Miners verify that the transactions within each block are legitimate by solving the hashing algorithm puzzle, known as the “proof-of-work problem.”
• The first miner to solve the block’s “proof-of-work problem” is rewarded with a small amount of cryptocurrency.
• Once verified, the transactions are stored on the public blockchain across the network.
• As the number of transactions and miners increases, the difficulty of solving hashing problems also increases.

Although PoW helped get the blockchain and decentralized, trustless digital currencies off the ground, it has some real shortcomings, especially with the amount of electricity these miners consume in trying to solve “proof-of-work problems” as quickly as possible. . According to Digiconomist’s Bitcoin Energy Consumption Index, Bitcoin miners are using more energy than 159 countries, including Ireland. As the price of each Bitcoin increases, more and more miners try to solve the problems, consuming even more energy.

All that power consumption just to validate transactions has motivated many in the digital currency space to seek an alternative method of validating blocks, and the leading candidate is a method called “Proof of Stake” (PoS).

PoS is still an algorithm and the purpose is the same as in proof of work, but the process to reach the goal is quite different. With PoS, there are no miners, instead we have “validators”. PoS is built on trust and the knowledge that everyone who is validating transactions has skin in the game.

In this way, instead of using energy to answer PoW puzzles, a PoS validator is limited to validating a percentage of transactions that reflects your ownership interest. For example, a validator that owns 3% of the available Ether can theoretically validate only 3% of the blocks.

In PoW, the chances of you solving the proof-of-work problem depend on the computing power you have. With PoS, it depends on how many cryptocurrencies you have in “play”. The higher the bet you have, the greater the chances that you will resolve the block. Instead of earning crypto currencies, the winning validator receives transaction fees.

Validators enter their stake by ‘blocking’ a portion 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 and do not violate the network, but do not earn the right to validate the block, they will get their bet or deposit back.

If you understand the basic difference between PoW and PoS, that’s all you need to know. Only those who plan to be miners or validators should understand all the ins and outs of these two validation methods. The majority of the general public who want to own cryptocurrencies will simply buy them through an exchange and will not participate in the actual mining or validation of bulk transactions.

Most in the crypto sector believe that for digital currencies to survive in the long term, digital tokens must switch to a PoS model. At the time of writing this post, Ethereum is the second largest digital currency behind Bitcoin and its development team has been working on its PoS algorithm called “Casper” for the past few years. We are expected to see Casper rolled out in 2018, putting Ethereum ahead of all other large cryptocurrencies.

As we have seen previously in this sector, major events such as a successful Casper implementation could cause Ethereum prices to go much higher. We will keep you posted in future editions of Crypto TREND.

Stay tuned!