Ethereum: Casper and the Emergency at Stake Problem

Ethereum programmers have been looking for a viable alternative to energy-intensive consensus building by proof-of-work for almost four years. The Casper Protocol, (for the time being) a hybrid of Proof of Work (PoW) and Proof of Stake (PoS), is intended to enable the Ethereum network to switch from PoW to PoS. An overview of the underlying problems of consensus building and the current state of Casper development.

To date, the proof-of-work method is the most common way to build consensus in blockchains. The mechanism is not only used by Bitcoin, the mother of all crypto currencies. Ethereum, the second largest crypto currency in terms of market capitalisation, also uses PoW. However, they wanted to prepare themselves early on for the eventuality that PoS would become more popular with miners or other reasons would make a change mandatory. Thus, research into alternative mechanisms of consensus building began as early as 2014.

Weaknesses of the proof-of-work process

The proof-of-work process is notorious for its catastrophic energy efficiency. This is partly in the spirit of the inventor. After all, high computing costs are intended to deter malicious miners from carrying out illegitimate transactions or forking the blockchain at their discretion. From this point of view, the process has proved its worth, but the environmental balance remains catastrophic. As mining difficulty increases, the cost of computing and energy increases quasi-proportionally. According to estimates by digiconomist.net, the current energy consumption for Bitcoin mining alone is around 73.12 TWh per year, and the trend is (inevitably) rising. With this energy quantity one could supply nearly seven million US households. At over 200 million kilowatt hours, the daily energy requirement for Bitcoin’s mining is currently so high that it could cover 31 households a day. Bitcoin mining is responsible for 0.33 percent of global energy consumption.

However, there is also criticism of the proof-of-work process outside of energy consumption. This allows financially strong individuals and organizations to obtain more and better mining hardware, which gives them an advantage over other, less liquid miners. In other words, the “big players” tend to receive more block rewards, can buy better hardware from the profit, can mine more blocks, and so on. What at first glance may seem questionable from a socio-romantic perspective, but ultimately legitimate, has tangible consequences for the degree of decentralization of the network.

As an individual Miner hardly has a chance of winning a slice of the Block Reward cake, many join together to form Mining Pools. The four largest mining pools after Hashrate are BTC.com, Antpool, BTC.TOP and SlushPool. Together, they currently account for 58.2 percent of the total hashrate of the Bitcoin network. In theory, they could join forces to launch a 51 percent attack and manipulate the block chain in their favor. Decentralization looks different.

Proof of Stake

These weaknesses of the POW process have been known for some time. And so it is not surprising that Ethereum has been working on an alternative for a long time. The developers focus on the implementation of a Proof-of-Stake-Mechanism (PoS). In PoS, the mining process is virtually virtualized. So-called “validators” replace the miners. These validators must first set aside part of their coins as “stake”. The following applies: the larger the stake, the higher the probability of being appointed as validator for the next block. For example, if you “risk” coins worth 100 euros, you have ten times less chance of being selected as a validator than if you had clocked 1,000 euros.

Once a validator has confirmed a block, it becomes the newest member of the blockchain and the validator receives the transaction fees as a reward. Conversely, a validator is penalized for fraudulent transactions by losing part of its stake. As long as the deposited stake is higher than the sum of the transaction fees of a block, manipulation by the validator is not worthwhile.

In terms of energy use, PoS has clear advantages over Proof of Work, since energy-intensive mining is practically eliminated.