What is Proof of Stake?
Proof of Stake in simple terms, is a consensus whereby validation of blocks is done by a person (node) participating in the “mining” process by “staking” a given amount of their coins. The staking acts like a miner, and will validate transactions throughout the chain. Although this is a more scalable method of validation and more ecological in that electricity costs are not needed, however this does create a more centralized power structure, so people with the most Ether will control more of the networks validation – allowing them to take advantage of decision making.
A dustrubuted system expert and founder of VMware researher Dahlia Malkhi said the following when asked about the Casper update on the Ethereum blockchain:
I think proof-of-stake is fundamentally vulnerable. You’re giving authority to a group to call the shots […] In my opinion, it’s giving power to people who have lots of money.
Ethereum’s Proof of Stake Model
The Ethereum Proof of Stake Model will pay out based on an inverse proportion of the amount of Ether you stake and the square of the total amount staked on the chain. There are a few methods to stake, and when POS rolls out most pools will have a staking option, which will allow you to profit more if you have smaller amounts, whereas solo staking will require larger amounts.
Casper’s Proof of Stake was initially commenced by Vlad Zamfir who is often credited as being the “Face of Casper.”
The interest amount will most likely be calculated like the following:
This may not be completely accurate so definitely keep that in mind if you are trying to come up with some future predictions. However, it was stated by Vitalik that assuming you staked around 1600 etf, and the grand total deposits on chain are 8000 eth, your interest rate will be around 8%.
If you would like to get more information on the exacts of the calculations, again the “rescale” factor will change, you can check out this GitHub Blob based off Simple_Casper.
What does Proof of Stake solve for Ethereum?
Scaling has always been an issue for fintech developments. Ethereum especially was created to become a network, an infrastructure for future growth within the digital assets/cryptocurrency space. Casper is focused on long-term sustainable scaling. In order for Ethereum to become adopted mainstream it needs to be able to handle very very large amounts of transactions per second (Tps.) With more “miners” the network can verify more quickly, but the question with scaling miners is that in order to have more people purchase mining systems they would need to spend much larger amount of capital, as well as have expenditures in electricity costs – and really how far can that go? How much energy would be needed to compete with our current financial systems, and how can we scale mining to the point in which trillions of transactions can be verified every day?
Casper also solves a few other problems:
- Costs: Dynamic is the keyword in this case. With the Proof of Work protocol, security can only be made based off the miners, and this required higher operation costs than staking coins on a waller. This dynamic by making the switch over to Casper is their main focus, honest validation will need to be made on a Proof of Stake protocol, this will allow attacker’s costs to increase.
- Censorship: Proof of Stake will allow a network shift, so that more stakers become “coordinated” or “synced” within the dynamic network, which allows all the miners blocks to be included on the chain and prevent any blocks from being lost due to censorship or just getting lost.
Here is a graph as to why Proof of Stake is much more sustainable for long term:
Although this is Bitcoin – ethereum mining difficulty has exponentially rose as well (meaning this is going to be a similar pattern as Ethereum’s chart):
And here is why scaling TPS (Transactions Per Second) is key in times of high volume, like we had in late December and early January:
The Implications of Proof-of-Stake
One of the main implications as mentioned above, is the advantage of removing the need to solving heavy duty computations, which require large energy requirements. Any Ethereum miner will understand that mining any cryptocurrency will require large expenses due to electricity costs. Even on average a 12 GPU AMD rig will require around 1,200+ watts of electricity, and if you are in areas with above .10¢/kw then you run the risk of experiencing lower profitability as Casper rolls out.
Even as stated on a Reddit thread:
You’ll notice, the two main concerns are:
- Selling your graphics card before the shift to Casper occurs
- Accumulating Ether
However, I would keep in mind and look at the discussion as many people will disagree on these conclusions.
In terms of the increase in value for Ether, this is also very speculative – which is what this whole market is based upon. Since the supply of Ether will significantly decrease, this could increase its value. Also, since staking will be accessible to validate blocks, earning interest will also lead to greater adoption.
The greatest worries are that whales within the Ether market, as well as holders or miners who have been able to accumulate larger amounts of Ether will disproportionately have an advantage with the process of proof-of-stake.
Proof-of-Stake probably won’t be released until June/July this year, at least that’s what the developers and contributors have been aiming for. There has already been advancements for Casper within the testnet, and still hasn’t been released to the mainnet. Here is a list of all the commits that developers have made in changes to the Casper code, you can also see all the issues, and someone stay up-to-date with the advancement of Casper within the testnet and when it will be released to the mainnet. Casper is currently in Alpha and only supports Pythereum. Before it can ever be implemented on the main net, they’ll have to build support for Geth and Parity. There’s a lot of obstacles to overcome still, and mining should be safe for some time to come. The best way to stay up to date would be to follow several of the developers on Twitter. They post regular updates on Casper, sharding, and other technical achievement.
I do believe long term focus on Proof-of-Stake is definitely more viable, in my opinion it is very early stages is still has a lot of major improvements to be made. The initial phase will only include 1 block out of every 100 blocks being verified, this it is very minimal. Interest rates I believe are something that need to be focused on strongly, as the market is still very speculative focused and demand/supply still truly drive this great blockchain technology. With that being said, here is a post on ethresear.ch that Vitalk had posted on the “rent fees” or interest rates in regards to the proof of stake model:
If you are looking for more information in regards to the Ethereum POS Switch and you aren’t really interested in the complete details rather just a brief overview, I highly recommend watching BuriedONE’s video here: