Understand the upcoming Ethereum Fork (Casper) - PoW v PoS

What is Proof of Work?

Ethereum’s upcoming fork has re-ignited the debate around the concept of Proof of Work (POW) and Proof of Stake (POS). For those of you unfamiliar with these terms I will give you a quick run-down for beginners:

PoW is a consensus algorithm. There are two items that must be satisfied to fulfil PoW. First we must make it difficult to produce the data and second we must make it easy for others to verify that we legitimately produced that data. Let’s dig a little deeper.

In order to create the data (in our context a bitcoin) we must have some barriers in place to make those who wish to be involved have some form of attachment or investment in the technology. This investment can come in the form of the time it takes to complete the POW (in bitcoins case, the time it takes to mine a new coin) and/or the cost of producing the coin (for example bitcoin mining equipment).

So if I want to mine bitcoin, I have to invest in a mining rig (such as an ASIC miner) and I must be prepared to pay the electricity used to run it, whilst waiting a significant amount of time to earn bitcoin (or in the case of bitcoin mining pools, fractions of bitcoin).

Secondly, once the work has been completed to create the bitcoin, others must be able to easily verify that the bitcoin is legitimate. Bitcoin uses a special cryptographic algorithm to allow others to test whether the transaction was completed successfully and that the PoW did occur.

So when bitcoin was first conceived, Satoshi Nakamoto had a list of issues that had troubled cryptographers interested in Digital Currency for a long time. That issue was ensuring users of the system would require an inherent commitment and investment. Therefore PoW was developed as a clever way to create a relative barrier of entry and ongoing checks to avoid malicious attacks.

“However, there are some concerns around PoW. The most mainstream of these is the energy usage of miners”

However, there are some concerns around PoW. The most mainstream of these is the energy usage of miners competing to confirm the next block and be rewarded. Bitcoin network energy consumption is larger than a lot of small to medium sized countries; with many concerned with the negative environmental impact.

What is Proof of Stake?

This is where Proof of Stake (PoS) enters the frame. PoS is another type of consensus algorithm, wherein people who have a stake in the network are randomly chosen to verify a block on the network, without having to use mining equipment to achieve this. Immediately we can see that this would assist in lowering the energy consumption and other concerns within PoW bitcoin mining.

However it also creates the re-emergence of the issue of attachment and investment for network users. If there is no time or monetary barrier to entry, wouldn’t this allow easy entry for malicious actors in the network?

Obviously this is an issue and needs to be re-analysed. To solve this we can look at Ethereum’s upcoming ‘Casper’ implementation of PoS, which they are transitioning to from their existing PoW system. Casper allows users to stake Ether to become a ‘validator’ (the equivalent of a bitcoin miner).

The difference being is that the validators are risking their stake if they act maliciously against the good of the Ethereum blockchain. This occurs through the slashing of the validators stake when they attempt to do the wrong thing (if you want to read more about this problem, look up ‘nothing at stake’).

As an example, say I own 25 Ether and I put this up as a stake to be a validator. Each time my node is chosen to verify a block in the blockchain, I will be paid out relative to my stake. If I wish to act maliciously, I am risking 25 Ether.

If somebody wishes to achieve large scale malicious attacks they would be staking much higher amounts and further risking those amounts. The secondary issue is if they were successful at disrupting the chain to their advantage, the repercussions could be a lowering of the value of Ether due to the trust of the market dropping.

In conclusion, both methods of consensus have their positives and negatives. A lot of weight has been placed on the environmental energy usage of mining PoW, as this is a globally sensitive issue. At this point in time a strong argument could be mounted that Proof of Stake may be the better use case when attempting to push mass adoption long term.