Proof Of Stake: What Does It Mean For Ethereum?

Written by Brian Polanco - Reviewed by Coin Review Team

Published: Jul 17, 2018 | Last Updated: Oct 17, 2018

Ethereum's Casper update shapes the evolution of proof of stake algorithm.

2025-01-22T02:28:55+00:00

Currently, ethereum works by having miners verify transactions with computational power. This is what’s known as ethereum mining. This will change one day(in a future near you). The change will stem from ethereum moving it’s blockchain from a Proof of Work (PoW) mechanism to a Proof of Stake (PoS) hybrid protocol with an update called “Casper”.

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This means that instead of miners being rewarded a fee for verifying transactions, that fee will instead go to ethereum holders who have their ethereum locked up in “stakes” or what’s commonly referred to as a “master nodes”.

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Ethereum isn’t the first coin to implement Proof of Stake algorithms but it is a blockchain that could potentially reap many benefits from switching. Here are some of the biggest facts you should know:

1. Why?

The switch is necessary because mining as we know it today requires a great deal of hardware and electricity. According to Ethereum’s GitHub^[1], it’s estimated that ethereum mining costs an upwards of $1 Million dollars per day.

Proof of Stake based validating would reduce the amount of electricity that is required to run the network. Thus increasing its’ efficiency overall and lessening its impact on the environment in the long run. This is obvious as the future favors the gree

2. Consensus

Proof of Stake (PoS) aims to be more decentralized than the current model. PoS based consensus is basically an algorithm that will allow ethereum stakeholders or validators to “vote” on new blocks. The bigger your stake is, the more voting power you will have more than likely.

3. How do you become a stakeholder or validator?

Ethereum users can become validators by locking up ethereum in what’s called a “stake” similar to a deposit. Instead of calculating how much hashrate you have, validations will be based on how much ethereum is being staked. When you validate, you use part of your stake to basically “bet” on new blocks. There’s a risk and that’s why there is a reward.

The more ethereum you have, the better your chances of validating transactions but you have to have your stake online. Of course, too much power to top ethereum stakeholders would be a bad thing so a thing so voting on new blocks favors availability. With staking, your basically using existing ether to make new blocks in the ethereum blockchain.

4. How would Casper affect ethereum’s price?

Because PoS would eliminate power thirsty mining, it would lessen the need for as many new coins and could possibly reduce the number of circulating ether. Which would likely improve the speed and number of transactions across the ethereum network.

5. What will happen to miners?

Miners will still be able to mine ethereum but at a reduced block reward of 0.6 ETH. It will become far less profitable to mine once Casper is released. This means that there could be a likely sell off of mining equipment or many miners will simply mine on a different blockchain.

It’s been noted that additional Proof of Stakes models will be added in the future. It’s also a possibility that stake pools will be formed much not unlike mining pools.

6. When will Proof of Stake be implemented?

There is not an official date on it’s release but it’s been speculated that it could as early as this summer (2018). Vitalik Buterin has said possibly Q1 of 2019 just to be safe.

7. How much Ethereum will you need to stake or run a master node?

It’s been speculated that the minimum amount of ethereum you’ll need to validate transactions is 1000 ETH. Which at the time of this publication costs $432,670.

Of course, there’s not a for sure way to know until the network actually becomes PoS but it’s best to assume that becoming a validator will require a good amount of resources especially in the beginning.

8. Security

Casper is an essence is a security deposit or stake based economic consensus algorithm. As mentioned before, validators are ethereum holders who have locked up their ether into a stake. The risk that validators face is that if they misbehave or conduct malicious activity, they will lose their stake.

This prevents big players from manipulating the system. Proof of Stake gives attackers less incentive because they would have more to lose than to gain. In order to maximize profits, validator stakes will need to be online as much as possible.

Casper solves a problem that occurs in the Proof of Stake protocol that’s known as “nothing at stake”. A coordinated attack with PoS would require a large amount of funds to begin with.

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9. Will PoS implementation increase the number of Transactions Per Second (TPS)?

More than likely, the casper update would allow faster block times than would be possible with PoW. This is because of how a light-client could be integrated along with Casper and a user wouldn’t have to use the entire blockchain to be secure. In other words, a light client would reduce latency without compromising blockchain security.

10. Who will be the validators?

Validators are likely going to be cryptocurrency veterans and whales who have had ethereum since ICO or former miners who have accumulated large sums of ether. In order to effectively validate, stakeholders or “bonded validators” will likely have large servers.

Best crypto exchanges often hold the biggest crypto wallets. Although many resources will be required to form a stake, it could be very profitable and could improve the entire blockchain ecosystem overall.

11. Benefits for DApps and Users.

As mentioned before, the lower latency will improve user experience and would effectively increase the chances of mass adoption. Ideally, Casper would allow transactions to settle rapidly. It’s possible that with an update like PoS, we could see more decentralized applications will come to life.

To Sum it all up.

It could be beneficial for Ethereum to move away from proof of work because in the long run, PoW isn’t very sustainable. A PoS solution would improve efficiency. We can expect that at first a hybrid PoS/Pow system will be implemented and eventually ethereum could run on a full PoS system. With Casper implemented, ethereum core developers could focus on scalability.

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References

[1] https://github.com/ethereum/wiki/wiki/Proof-of-Stake-FAQs#will-exchanges-in-proof-of-stake-pose-a-similar-centralization-risk-to-pools-in-proof-of-work

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Feature Image: Shutterstock.com
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Disclaimer

The writer’s views are expressed as a personal opinion and are for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.