The way blockchain-based cryptocurrencies are governed could soon change

Blockchain distributed ledgers work by linking together a chain of electronic records, each inextricably tied to the one before it; each new set of entries or “blocks” is completed and time-stamped with a hashtag only after passing through a consensus process.

The two most popular mechanisms or protocols for authenticating new entries on a blockchain and governing changes to the networks are Proof of Work (PoW) and Proof of Stake (PoS).

As the name suggests, PoS consensus models enable those with the most digital coins (the greatest stake) to govern a cryptocurrency or business blockchain ledger. To date, however, the most popular blockchain-based cryptocurrencies – Bitcoin, Ethereum (Ether) and Litecoin – have used PoW as their consensus mechanism.

But that may soon change.

The Proof of Work protocol

Here’s why. PoW algorithms force computers to expend CPU power to solve complex cryptographic-based equations before they’re authorized to add data to a blockchain-based cryptocurrency; those computer nodes that complete the equations the fastest are rewarded with digital coins, such as bitcoin. The process of earning cryptocurrency through PoW is known as “mining,” as in mining bitcoin.

The problem: the PoW process chews up a lot of electricity, both from running processors 24/7 and the need for cooling server farms dedicated to mining operations. Those mining operations are siphoning off so much electricity that cities and even countries have begun clamping down on mining operations.

PoW protocols can also be extremely slow due to the lengthy process involved in solving the mathematical puzzles; so approving a new entry on a business distributed ledger or cryptocurrency network, such as bitcoin, can take 10 or more minutes.

Imagine waiting 10 minutes for a financial transaction to clear on a network.

The Proof of Stake protocol

In contrast, PoS algorithms can complete new blockchain entries in seconds or less.

“Proof of Stake algorithms definitely have the potential to overtake Proof of Work,” said Vipul Goyal, an associate professor in the Computer Science Department at Carnegie Mellon University (CMU). “However, there are still some significant research challenges that need to be overcome before that happens.”

For example, last year Ethereum introduced a PoS mechanism on a testnet called “Casper” (as in Casper the friendly ghost). The PoS consensus protocol creates “bonded validators,” or users who must place a security deposit down before being allowed to serve as part of the blockchain consensus or voting community. As long as bonded validators act honestly on the blockchain, they can remain in the consensus community; if they attempt to cheat the system, they lose their stake (their money). Ethereum’s Casper PoS system would enable a consensus mechanism to process new transactions in about four seconds.

While PoW algorithms are relatively simple to employ, PoS protocols face a number of subtle challenges, the most difficult of which is what is known as “posterior corruptions,” according to Goyal. Those corruptions could undermine the authenticity of a blockchain.

Suppose a set of a parties on a blockchain held the majority stake, and then sold that stake. In a PoS system, those entities could still hold the cryptographic keys that gave them governing power in the past and use that authority to create a new blockchain off the current one (known as a fork). In effect, they would still have their money stake as if it had never been sold, Goyal said.

“This problem only arises in Proof of Stake and seems very hard to deal with. Because of such issues, Ethereum has repeatedly delayed switching to Proof of Stake until they can find a satisfactory solution,” Goyal said.

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