At some point this year, Ethereum is expected to take the first step towards becoming a cryptocurrency that depends less on the time-consuming, processor-intensive calculations commonly called “mining.”
Announced last August, the Casper protocol would allow anyone to claim a stake of a blockchain not by mining, but rather by depositing existing ether (ETH) into a contract that offers in return a proportionate stake in the overall process. While most cryptocurrencies, including bitcoin, are based on “proof of work” (PoW), or mining, to add to the blockchain, this “proof-of-stake” (PoS) approach represents a dramatic shift.
“PoW necessarily operates on a logic of massive power incentivized into existence by massive rewards,” writes Ethereum co-founder Vitalik Buterin. “The one-sentence philosophy of PoS is [that] security comes [not] from burning energy, but rather security comes from putting up economic value.”
Proof of Work: Brute Force
Historically, cryptocurrencies have built transaction blockchains by deliberately making the computations more difficult than they have to be—basically creating puzzles that have to be solved in order for a miner to insert a transaction into the blockchain. As a result of these “proof-of-work” models, brute force computational power has been key to accumulating cryptocurrency, resulting in the creation of massive mining pools and what one researcher calls “an arms race.”
“In order to control the monetary base, mining is made more complex than it could be,” writes Nicolas Houy of the University of Lyon’s Groupe d’Analyse et de Théorie Economique. “And since the probability for each miner to solve the mining problem depends on his computational power … Bitcoin miners have engaged in an arms race to computational power and in the end, much hardware, engineering and power are used in order to solve mathematical problems that are artificially made extremely complex.”
The resulting energy consumption has captured the popular imagination, with news reports famously claiming that cryptocurrency mining already consumes as much energy as small European nations—a claim that has proven difficult to confirm, but that nonetheless illustrates the stakes.
Some economists speculate that miners selling a portion of their cryptocurrency for the traditional currency needed to pay for electricity could result in downward pressure on their value. A greater concern involves the need to scale up the number and speed of transactions as cryptocurrencies become more mainstream, given that PoW methodologies by their very design are intended to limit transactions by slowing them down. And there are concerns about what happens if attackers capture the majority of processing power for any given cryptocurrency, giving them the power to create fraudulent transactions—a so-called “51 percent attack.”
Proof of Stake: Risk and Reward
Conversely, “proof of stake” methodologies largely rid the processor-intensive process of solving cryptographic puzzles to claim a stake of the currency. Instead of committing computational power, PoS cryptocurrencies allow investors to commit their existing cryptocurrency to claim their share.
Called “virtual mining,” “validating,” or “staking,” the deposits offer control of transactions in ways that reflect—and reward—each miner’s ownership stake. A key element of Casper is that a miner’s stake can be forfeited if he or she acts in a malicious manner, creating incentives to behave in the best interest of the community.
Along with reducing the large amounts of processing power required to mine cryptocurrencies in PoW systems, one of the major selling points of the PoS methodology is that it is thought to be less susceptible to a “51 percent attack.” This remains a heavily debated topic among computer scientists, but the general idea is that it is harder to acquire half the existing coins in a cryptocurrency to claim a controlling stake in a PoS system than it would be to acquire half of the mining power to gain control of a PoW system. (One opposing argument, greatly simplified, is that if coin holders in a cryptocurrency believe a credible attacker is likely to accumulate 50 percent of the currency, they would have an incentive to sell off their own holdings at a discount before they became worthless.)
At first, Ethereum’s proposed implementation of Casper would involve a switch to a hybrid system, with only a small number of transaction blocks validated by PoS instead of PoW. But Buterin has repeatedly called PoS the future of cryptocurrency, and other cryptocurrencies, including peercoin (PPC), nxt (NXT) and blackcoin (BLK), possess variations of proof of stake. Regardless of Casper’s ultimate fate, PoS is unlikely to vanish anytime soon.