1. What are “proof of” systems for?
Cryptocurrencies wouldn’t work without blockchain, a new technology that performs the antiquated function of keeping a record of orderly transactions over time. What is different from paper and paper documents is that the ledger is shared on computers all over the world. Blockchain has to take on another unnecessary task in a world of physical money: making sure no one is able to spend a cryptocurrency token more than once by manipulating the digital ledger. Blockchains operate without a central guardian, such as a bank, responsible for the ledger: both proof of work and proof of stake systems rely on group action to create, validate and safeguard the sequential record of a blockchain.
In the core Bitcoin and Ethereum network today, transactions are grouped into “blocks” which are posted on a public “chain”, but only after the “proof of work” order has been executed. With Bitcoin’s software, this happens when the system compresses the data in the block into a puzzle that can only be solved through potentially millions of trial and error calculations. This work is done by miners who compete to be the first to find a solution and are rewarded with free cryptocurrency if other miners agree that it works.
3. What is the evidence of the drawbacks of the job?
When Bitcoin was worth a few cents, mining was cheap too. But when the value of the currency increased, something of an arms race began, as miners poured resources into research to win new coins. Bitcoin’s software responds to increased competition by increasing the difficulty of calculation. The resulting skyrocketing electricity consumption has led to calls from those who are environmentally conscious to avoid Bitcoin. The European Union considered banning the practice before deciding that cryptocurrency providers should be required to disclose the energy consumption and environmental impact of the assets they choose to list. The proof of work system has also led to an increasing dominance by huge centralized mining farms, a development that has created a new vulnerability for a system designed to be decentralized. In theory, a blockchain could be rewritten by a party that controlled the majority of mining power.
4. What is the proof of participation?
The idea behind Ethereum’s proof of stake system is that its blockchain can be secured more simply if you give a group of people a set of incentives to collaborate. People who stake, or bet, 32 Ether (1 Ether trading at about $ 1,900 in mid-August) will be able to become “validators”, while those with less Ether can become joint validators. Validators are chosen to sort transactions into a new block on the Ethereum blockchain. If a block is accepted by a committee whose members are called attesters, the validators are assigned Ether. But someone who has tried to play with the system could lose the coins that were staked. Ethereum’s proof of stake system is already being tested on a blockchain, called Beacon Chain, which is separate from the proof of work system; so far $ 25 billion worth of Ether has been staked. The two blockchains are expected to merge in September.
5. What are the advantages of the system?
The move to proof of stake is thought to reduce Ethereum’s energy consumption, estimated at 45,000 gigawatt hours per year, or just over New Zealand’s, by 99.9%. In terms of carbon footprint, it would be essentially like any other Internet operation whose energy consumption involves nothing more than running a computer network, rather than a business like a set of giant digital factories.
6. What are its vulnerabilities?
Proof of the stakes is less battle-tested than proof of work, the safety of which has been scrutinized for over a decade. So new vulnerabilities could be found. Its proponents believe the risk is worth what it would gain in terms of environmental benefits, as well as involving a larger group of users in the process.
More stories like this are available at bloomberg.com