Bitcoin’s often overlooked sibling, Ethereum is finally making plans to come out of the shadows and make it bigger than before. Ethereum’s market capitalization of 10 billion USD is just as big as its energy footprint.
Compared to Bitcoin, Ethereum mining consumes only 1/4th or ½ of what Bitcoin does but one Ethereum transaction uses what an average US household uses in a day. Believing this to be a huge waste of resources, Ethereum’s inventor Vitalik Buterin is prepping to ditch PoW in favour of PoS.
Here’s what you need to know:
Just like Bitcoin, Ethereum has a blockchain that is essentially a digital ledger to keep tabs of the transactions. However, Ethereum is a step ahead of Blockchain in that you can also create smart contracts. But, even with that advantage, the mining is holding it back. Ethereum mining relies on Proof of work or PoW.
The problem with PoW
PoW is a winner-takes-all contest and is a race to validate the transaction. Thus favoring miners with more computational power. PoW is designed to be difficult to prevent any one miner from controlling the entire blockchain or perpetrating fraudulent transactions. This would be a real problem because miners remain anonymous. So, while in theory PoW sounds like a good plan, the emergence of mining pools and application-specific ICs (ASICs) have in fact turned it on its head.
Ethereum’s fight against PoW
To prevent the concentration of power, Ethereum’s algorithm to mine Ether punishes the use of ASICs but it could not prevent the growth of resources completely devoted to the mining of Ether.
Now, this is a real problem given that cryptocurrency is a volatile market and makers of such technology can go bankrupt overnight.
Pushback against mining
Given the increase in energy demand but no real increase in jobs, higher prices are being set for miners which means the security of PoW-based transactions is on the decline. Restricted access and higher energy costs can limit the number of miners which in turns leads to a concentration of power which could lead to fraud and collusion.
Replacing PoW with PoS
Slashing energy use to 1% of the current use is one of Vitalik Buterin’s main reasons for the switchover form PoW to PoS or Proof of Stake. PoS has been successfully tested with Peercoin. In PoS, it is not a race. One processor is randomly picked to verify a transaction. In PoS, the participants are dubbed validators not miners.
PoS keeps validators honest
But, can’t a random processor still commit fraud? The trick here is to keep them honest by having them put up collateral – a pile of Ether which they can lose if they are caught cheating.
PoS also has a financial benefit
Fresh ether does not have to be generated at the same rate to encourage validators which means the value of Ether in your Ethereum wallet will not get diluted. This also means that if you were to convert your Ethereum to Bitcoin using a ETC/BTC converter, you get more bang for your buck.
The move to PoS is definitely beneficial but has to be heavily tested for glitches before it is rolled for public use. This is why Ethereum hasn’t made an overnight jump to PoS and is straightening out all the kinks.