Ethereum: The Definitive Guide to Investing in Ethereum & Blockchain Cryptocurrency: Includes Blueprint FinTech Contracts (Bitcoin Money Bonus) by Artemis Caro

Author:Artemis Caro
Language: eng
Format: azw3, epub
Published: 2017-09-05T07:00:00+00:00

Chapter 7:

Consensus Algorithms: Proof-of-Work vs. Proof-of-Stake

A significant part of what drives the real-world implementation of blockchain protocols involves conducting secure transactions, whether they are purely financial transactions as with Bitcoin or whether they are transactions of other types of information or data. When one party sends information to another, how does the system guarantee that the information is valid?

We have touched already on the concept of a distributed ledger, and the role of decentralized networks in maintaining a blockchain. As a practical matter, what this means is that many people all over the world need to run software that validates transactions and records those transactions to the blockchain. In some cases, this can get quite expensive in terms of both computer power and electricity. To encourage people to participate, we can imagine that they might need some incentive. This is where “mining” comes in.

Bitcoin miners notoriously require specialized equipment that performs thousands of complex mathematical operations every second. These calculations eat up significant processing power and consume a lot of electricity. We will not go too in depth into how Bitcoin mining works, specifically, but the general idea is that miners compete to solve a complex math problem in order to validate each new block that is added to the blockchain.

The solution to the problem, each time, is basically a random number, and the only way to find it is by trial and error. So, miners use their equipment to try out tons of random numbers as quickly as possible until they find one that matches the criteria set forth by the core code of the Bitcoin software. When a miner thinks they have found a solution, they broadcast this to the entire Bitcoin network and other miners check their solution. When a majority of miners agrees that the solution is correct, the block is added to the blockchain and the miner who found the solution is rewarded with brand new Bitcoin that are generated from the Bitcoin software. For active miners, the potential for earning the reward outweighs the cost incurred by running mining equipment, which encourages participation in the system.

This model is known as “Proof-of-Work.” Because the only way to solve the problem required to validate a block is via trial and error, there is no way for a miner produce a correct result and get the reward other than by doing the work of computation.

Like Bitcoin, Ethereum has historically worked on a “Proof-of-Work” consensus model. However, in early 2017 it was announced that Ethereum intends to shift towards implementing a “Proof-of-Stake” consensus model in the near future. Vitalik Buterin, Ethereum’s creator, released a whitepaper in May of 2017 proposing the implementation of a new Proof-of-Stake algorithm called Casper into the Ethereum protocol. The timeframe remains unclear, but early reports suggest that the Casper algorithm will be phased in over time. Ethereum enthusiasts have met this news with mixed feelings, and there is ongoing speculation as to how Proof-of-Stake will translate into real-world applications.

In order to understand how this might impact Ethereum, let’s explore how Proof-of-Stake generally works.

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