The world of cryptocurrency and blockchain technologies is one of the most popular topics of the 21st century. For most people, crypto is something new and unusual – that is why many approach it with caution. Some people believe that virtual currencies are not backed by anything and are unfounded from an economic point of view. Many think that it is impossible to correctly evaluate the cost of cryptocurrency, so its rate is too unstable. In fact, cryptocurrency provides new opportunities, which form its price. The full anonymity of payments, fast transactions, ability to pay in currencies developed by regular people instead of currencies issued by a government. All of that is waiting for us in the near future, and that is what we should be prepared for.
Today, we are going to talk about a new direction in the development of the Ethereum network and why Casper, the modernized network, is good. We will get to know why it is relevant and why such an update is required.
One of the assets in the field of decentralized finances is Ethereum. The following cryptocurrency is valued for providing access to digital money and various systems allowing to access the data. The essential thing is that it works regardless of a person’s location and origin. The full anonymity without any intermediaries in the form of banks and other financial organizations – that is what you get from Ethereum. Today, this technology allows executing a number of operations. However, it still has some limitations affecting the extension of the project and the implementation of new, relevant features.
For this reason, developers decided to update the network Ethereum is based on. The improved version of the cryptocurrency network is called Casper or Ethereum 2.0.
For starters, currently, ETH operates based on PoW (Proof-of-Work) algorithm. The algorithm is created to protect the system from various DoS attacks (hacker attacks) and diverse spam emails.
PoW is a great helper in protecting the network from various cyberattacks. Carrying out an attack requires sufficient computational power and a lot of time on calculation. Consequently, hackers will spend more resources on the attack itself than receive potential dividends from it. That is possible because PoW works as a platform for miners who solve puzzles on it. After a miner has solved the task, it adds it to the blockchain block, for which he is paid a part of the asset. And this block in the future may protect the crypto itself from cyberattacks. Nevertheless, this algorithm features some disadvantages:
This algorithm operates as a network of nodes connected between each other – that is why each of the blocks must contain information about the overall blockchain. Under such technology, every new block in the chain will be verified by all nodes that are already present. That is why the issues described above are related. If we take Ethereum itself, the network becomes overloaded, and fees for transactions increase exponentially during the periods of peak load. In this regard, a way out of this situation called Serenity was created. It consists of three stages:
In its turn, Ethereum Casper is the modernization of the network and a transition from the PoW algorithm to the PoS one.
PoS, or Proof-of-Stake in other words, will help to convert the initial ETH version into Ethereum 2.0 model. Once the complete transition is over, the Ethereum network will not need mining anymore since the PoW algorithm will take a back seat.
It is safe to say that Casper is a mechanism implementing the staking model into the ETH project. That is a specific contract having in its arsenal several functions to improve bets and their analysis and processing of access to consensus information.
There are two joint implementations of the Casper project, particularly:
Testing of Casper FFG within this year’s summer-autumn period is supposed to decrease ETH inflation. These two phenomena can be easily linked. FFG works as a kind of hybrid type mechanism that will include two algorithms: PoW & PoS. It is done to see how the Ethereum network will take the transition to staking. Due to such a test option of ETH, emission of the cryptocurrency decreased, which led to a small deficiency of Ethereum. Now we are going to tell you what the PoS algorithm is.
The main goal of Casper is to replace the Ethereum algorithm from PoW to PoS. To fully understand what Casper is, you need to find out how the Proof-of-Stake system works.
This mechanism of reaching consensus was implemented back in 2012 for PPCoin cryptocurrency (now it is called PeerCoin). The idea of implementation of this project itself is that a small part (stake) will be used as a resource that can define at what moment the node of the network receives the right to mine one more block.
In Proof-of-Stake, nodes of the network execute the process of data hashing in the result search lower than the required value. The difficulty in such a process is diversified equally according to the node balance.
The node with a bigger number of tokens (having a larger balance than others) will have more chances to generate a new block. This scheme differs from PoW because it does not affect the use of a number of resources: both temporary and power ones.
Using a simple example, we will try to explain the differences between PoW and PoS algorithms. If we take and consider the algorithm of PoW functioning, we can see that the N-number of miners starts a competition between each other. The essence of the competition is that to be able to add a new block to the system, a miner should solve the puzzle faster than the rest of the users does. The solution to such a puzzle is the selection of possible answers. That is, you need to guess a possible answer to solve it.
PoS, in its turn, can choose somebody specific – some user – with a view to verify the content of the block and prevent the creation of any fraudulent transactions by this person. The Proof-of-Stake algorithm itself requires from a participant to invest some part of the sum as collateral.
Thus, the PoS algorithm protects the blockchain of the cryptocurrency from frequent cyberattacks since if the cyberattack is successful, the fraudster himself can lose part of the profit. In doing so, the developers believe there is a 51% chance that the new Ethereum version will face a cyberattack.
The process of transition from Ethereum 1.0 to Ethereum 2.0 is called Serenity. The creation of a new blockchain Beacon Chain that relates to Phase 0 had to implement the Casper FFG update, thanks to which the consensus mechanism in the algorithm working on the basis of Proof-of-Stake will be managed.
The new system on the PoS algorithm is developed primarily to eliminate the mining process from Ethereum cryptocurrency. In the new system, the verification of blocks will be executed by validators, who will be chosen proportionally to their share of locked coins.
It is possible to say a holder of Ethereum cryptocurrency will have a higher chance to create a new block if there are many tokens of this asset in his account. All the sum of cryptocurrency will be equal to the total number. If you have 5% of the overall number of the cryptocurrency, the chances that you will be the one to create a new block are also 5%.
The higher number of ETH in the user’s account there is, the higher chance that he precisely will generate a new block. There are some rules provided by developers. To become a potential validator during the first phase of Serenity, you need to stake the number of 32 ETH in crypto. This sum will be a conditional deposit on a specific smart contract that was created for the Ethereum of the first generation. Respectively, if a person deposited more than 32 ETH, his chances to be chosen for block validation (its generation into the chain) increase proportionally.
If the update goes successfully, then validators (users chosen to generate a block) can be picked randomly. After the block validation, the users will receive a reward consisting of fees on transactions of this cryptocurrency since the block subsidy will be absent. The block subsidy was included in the mining system of Ethereum 1.0. It consisted of coins that were just created. The subsidy was the bigger part of the reward for solving the puzzle, while fees were only a tiny part of the overall sum. The algorithm of PoS technology is absolutely new variations of remuneration to the mechanism of block validation. It should be pointed out that Casper is only being developed – that is why we can expect a lot of updates and news in the future.
Talking about the advantages of the Casper network, we can begin with the staking that will help Ethereum become more ecologically pure. The transition from the PoW algorithm to PoS significantly reduces the consumption of electricity and various resources related to calculation. The systems working on Proof-of-Work are very demanding to the resources compared to Proof-of-Stake systems. After the PoS is fully implemented in the Ethereum network, miners will no longer provide safety of the blockchain: there will not be a need for that. In this regard, the demand for resources reduces greatly.
One more potential advantage is safety. The Casper network will be used in the form of a selector responsible for distributing all blocks in the common chain. If a validator acts with malicious intent, he will be fined. If the validator does illegal actions, he will lose a part of his collateral in staking.
Casper will also ensure better decentralization for the Ethereum network. If today those who have all the resources for mining are considered to be the most powerful ones, in the future, these will be users who will stake as much ETH as possible.
To date, developers will have a lot of work to complete before they bring this update to life. The full efficiency and safety of such a solution have not been proved yet – that is why all the drawbacks and controversial issues will be solved in the process. Now we can talk only about possible drawbacks the Casper network may have. In case the system of Ethereum block confirmation is disabled for any reason, there is a possibility that Casper will not be able to verify all blocks.
Besides, there is a strong possibility that the Casper network will not be protected perfectly from cyberattacks. It is interesting how this network will work in the field of a fork. Will Casper be offered to other projects in the future, like it was with Ethereum 1.0?
Let us remind that fork is a codebase of one project, based on which another project is executed.
Ethereum makes a smooth transition from mining to staking. Casper will execute the function of block verification in blockchain and serve as a final step in the chain of block approval.
This network will be used for the further development of Ethereum 2.0. In addition to that, Casper will help to gradually switch from PoW to PoS algorithm. The Casper technology can be easily used to improve other networks and their implementation in the cryptocurrency market.
If Casper becomes successful, the Ethereum network may become leading for other new assets.
The use of the new ecologically pure blockchain may attract the attention of users, but PoS blockchains are very sensitive to cyberattacks. According to the predictions of developers, there is a 51% possibility for Ethereum 2.0 to become subject to a cyberattack. When Ethereum fully switches to this network, we all will be able to evaluate how successful this project is. Currently, we can only talk about possible pros and fails that await the project.