As we expected, we have received a lot of questions from readers since the publication of Crypto Trends. In this version we will give the most common one.
What kind of change is coming that could be a game changer in the cryptocurrency sector?
One major change that will affect the cryptocurrency world is an alternative method of block validation known as Proof of Stack (PoS). We will try to keep this explanation fairly high, but it is important to have a conceptual idea of what the difference is and why it is an important issue.
Note that the underlying technology of digital currency is called blockchain and most of the current digital currency uses a validation protocol called Proof of Work (PoW).
With traditional custom payment methods, you will have to rely on a third party to settle your transaction, such as Visa, Interact, or a bank, or a check clearing house. These trusted companies are “centralized”, meaning they keep their own personal ledger that preserves the transaction history and the balance of each account. They will show you the transaction, and you must agree that it is correct, or start a debate. Only the parties to the transaction see it.
With Bitcoin and other digital currencies, lasers are “decentralized”, meaning everyone on the network gets a copy, so no one has to rely on a third party, such as a bank, because anyone can verify information directly. This verification process is called “distributed sensing”.
PoW needs to “work” to verify a new transaction in order to enter the blockchain. With cryptocurrencies, that legitimacy is accomplished by “mining” who have to solve complex algorithmic problems. As algorithmic problems become more complex, these “miners” need more expensive and more powerful computers to solve problems than anyone else. “Mining” computers are often specialized, usually using ASIC chips (application specific integrated circuits), which are more efficient and faster in solving this difficult puzzle.
Here’s the process:
- Transactions are grouped together into ‘blocks’.
- The miners verify that the hashing algorithm known as the “block of work problem” solves the puzzle by validating the transaction within each block.
- The first miner is rewarded with a small amount of cryptocurrency for solving the block’s “proof of work problem”.
- Once verified, transactions are stored in public blockchains across the entire network.
- As the number of transactions and mines increases, so does the difficulty of resolving the hashing problem.
While PoW has helped blockchain and decentralized, unreliable digital currencies to the ground, it has some real flaws, especially since these miners are trying to solve “evidence of work problems” as quickly as possible. According to DigiconMist’s Bitcoin Energy Consumption Index, bitcoin miners are using more energy than 159 countries, including Ireland. As the price of each bitcoin rises, more and more miners try to solve the problems, consuming even more energy.
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All of this power consumption to verify transactions alone has inspired many to look for alternative ways to legalize blocks in the case of digital currency, and the leading candidate is a method called “Proof of Stack” (POS).
PoS is still an algorithm, and the purpose is the same as proof of work, but the process of reaching the goal is completely different. With PoS, there are no mines, but instead we have “verifiers”. PoS relies on the belief and knowledge that all the people who are verifying the transaction have skin in the game.
Thus, instead of using the power to answer the PoW puzzle, a PoS verifier is limited to verifying the percentage of its transactions that reflect its ownership partnership. For example, a validity that owns 3% of the available ether can theoretically verify only 3% of the blocks.
In PoW, your chances of proving problems at work depend on how much computing power you have. With PoS, it depends on how much cryptocurrency you have in your “stack”. The more partners you have, the more likely you are to solve the block. Instead of winning crypto coins, the winner gets a legitimacy transaction fee.
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Verifiers enter their portion by ‘locking up’ a portion of their fund tokens. If they try to do something harmful against the network, such as creating ‘illegal blocks’, their partnership or security deposit will be forfeited. If they do their job and do not violate the network, but do not win the right to verify the block, they will receive their share or return the deposit.
If you can understand the basic difference between PoW and PoS, this is what you need to know. Only those who plan to mine or legalize should understand all the ins and outs of these two validation methods. Most ordinary people who want to own cryptocurrencies will only buy them through an exchange and will not participate in the actual mining or the legitimacy of block transactions.
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Most in the crypto sector believe that in order for digital currencies to survive in the long run, digital tokens must move towards a PoS model. At the time of writing this post, Ethereum is the second largest digital currency behind Bitcoin and their development team has been working on their POS algorithm called “Casper” for the past few years. It is expected that we will see Caspar implement in 2018, putting Ethereum ahead of all other major cryptocurrencies.
As we have seen before in this sector, big events like the successful implementation of Caspar can send the price of etherium much higher. We will keep you updated on future issues of crypto trends.
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