The world’s second-biggest cryptocurrency by market cap, Ethereum, took the tech world by storm when it launched its revolutionary smart contract system in 2015.
Ethereum is a blockchain-based platform that allows developers to create decentralized applications, more commonly known as DApps. The platform is powered by its native cryptocurrency Ether, which can be transferred between users.
The network’s smart contract functionality is operated by the Ethereum Virtual Machine which executes the operations of these smart contracts. The network is maintained by nodes that validate and store transactions on the blockchain.
This massive peer-to-peer network acts like a giant computer, and every node running the Ethereum Virtual Machine plays a vital role, as described by EthDocs.org:
Decentralized consensus gives Ethereum extreme levels of fault tolerance, ensures zero downtime, and makes data stored on the blockchain forever unchangeable and censorship-resistant.
Like Bitcoin, Ethereum is maintained by this network of nodes that constantly works to validate transactions and bundle them into blocks. The process is commonly referred to as mining. It’s not a thankless task either, as miners are typically rewarded cryptocurrency every time they successfully add a block to the blockchain.
In order for their block to be added to the blockchain, miners must solve a cryptographic algorithm which requires some serious computational power. The process is commonly known as Proof-of-Work, and it is the same process used by the Bitcoin network although the two work on entirely different algorithms.
Ethereum was designed to counter the domination of specialized hardware like ASIC miners that dominate the Bitcoin mining ecosystem. Ethereum’s proof-of-work algorithm is known as Ethash, which is a memory-hard algorithm. In layman’s terms, Ethereum mining requires both CPU and memory and favours the general computer.
Nevertheless, the computational demands of a proof-of-work system are staggering. This in turn means that the computers or miners that maintain these networks require a massive amount of electricity.
That has been the main catalyst for a proposal for Ethereum to move away from proof-of-stake.
The first iteration of what is called Casper Friendly Finality Gadget was published by the Ethereum Improvement Project in October 2017. It proposes a hybrid of proof-of-work/proof-of-stake systems that looks to bridge the shortcomings of the mining ecosystem as Ethnews explains:
“Generally speaking, the move from miners to validators will save wasteful electricity expenditures, provide economic finality, and provide greatly increased security – especially against 51 percent attacks and mining cartels.”
The ultimate goal is a move to proof-of-stake consensus system that validates the state of the Ethereum network.
Bitcoin set the standard with the use of a proof-of-work algorithm that requires miners to solve a cryptographic algorithm in order to unlock a block and reap the reward of newly minted Bitcoin. But as we’ve discussed, that is a costly endeavour.
Proof-of-Stake is the preferred alternative which requires miners to be in possession of a certain amount of the networks native token. By having a ‘stake’ in the network, miners are effectively discouraged from undermining the network. These miners are then required to run hashing algorithms to maintain the network.
Casper marries Proof-of-Stake and Proof-of-Work in a sort of hybrid. It is described as a security-deposit based economic consensus protocol.
Nodes, called ‘bonded validators’ must place a security deposit to validate the blockchain and produce blocks. These validators will lose their deposit, as well as the right to produce blocks if they create invalid blocks. This is how the Casper protocol will prevent attacks on the Ethereum network.
While development of the Casper protocol is well underway, it’s not exactly clear when we can expect Ethereum to start utilizing the new protocol. The best case scenario would be a launch in late 2018.