1. What are the “Proof of” systems for?
Cryptocurrencies wouldn’t work without blockchain, a new technology that performs the old-fashioned function of keeping a ledger of time-ordered transactions. It differs from pen and paper records in that the ledger is shared on computers around the world. Blockchain must perform one more task that isn’t needed in a world of physical money – ensuring that no one can spend a cryptocurrency token more than once by manipulating the digital ledger. Blockchains function without a central custodian, like a bank responsible for the ledger: both proof-of-work and proof-of-stake systems rely on group actions to create, validate, and attest the sequential record of a blockchain protection.
In today’s main Bitcoin and Ethereum network, transactions are grouped into “blocks” that are published on a public “chain”, but only after the “Proof of Work” order has been completed. 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 it works.
3. What are the disadvantages of proof of work?
When Bitcoin was worth pennies, mining was cheap. But as the currency’s value rose, an arms race of sorts set in as miners poured in resources to mine new coins. Bitcoin’s software responds to increasing competition by increasing computational difficulty. The resulting sky-high power consumption led to calls from the environmentally conscious to steer clear of bitcoin. The European Union considered banning this practice before ruling that cryptoasset providers should be required to disclose the energy use and environmental impact of the assets they wish to list. The proof-of-work system has also led to growing dominance through huge, centralized mining farms, a development that has created a new vulnerability for a system designed for decentralization. In theory, a blockchain could be rewritten by a party that controls much of the mining power.
4. What is Proof of Stake?
The idea behind the Proof-of-Stake system adopted by Ethereum is that if you give a group of people a set of carrot-and-stick incentives to work together, its blockchain can be secured more easily. Individuals who raise or stake 32 ethers (1 ether traded at around $1,900 in mid-August) can become “validators,” while those with fewer ethers can become collective validators. Validators are chosen to order transactions into a new block on the Ethereum blockchain. When a block is accepted by a committee whose members are called attestors, validators receive ether. But someone who tried to play the system could lose the coins wagered. 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; Ether worth $25 billion has been staked there so far. The two blockchains are expected to merge in September.
5. What are the advantages of the system?
It is believed that moving to Proof of Stake would reduce Ethereum’s energy consumption by 99.9%, which is estimated at 45,000 gigawatt hours per year, or slightly more than that of New Zealand. In terms of its carbon footprint, it would be essentially like any other internet operation whose energy consumption involves nothing more than running a network of computers, rather than being a corporation resembling a collection of gigantic digital factories.
6. What are its weak points?
Proof of Stake is less battle-hardened than Proof of Work, whose security has been under scrutiny for more than a decade. In this way, new vulnerabilities could be found. Its proponents believe that the risk outweighs the gain in terms of environmental benefits as well as involving a wider group of users in the process.
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