Ethereum (ETH), the largest altcoin and second largest cryptocurrency (based on market cap) will be moving to a proof of stake (POS) model by the end of the year. Over the past few months, ETH has been getting a bad rap due to the rapid rise of ICO’s. (Initial coin offerings). The ICO model is a game changer and offers businesses owners the opportunity to secure funding without having to resort to traditional funding models like bank loans or venture capital.
The problem with this model is that it’s currently unregulated and this leaves the door open for abuse. There has already been a few ICO’s that were pie in the sky, pump and dump business models. Sadly, a handful of “bad apples” creates a bad impression on the industry as a whole. This can make it challenging for legit ICO’s to secure funding as investors become cautious and weary. The other issue is the increase in security breaches and hacks that have led to several millions worth of ETH being stolen. The Ethereum blockchain itself is secure, the problem comes in with ICO’s piggybacking off the Ethereum blockchain and not securing their platforms properly. I’m more than confident that in due time these “teething” issues will be resolved. These factors coupled with the upcoming shift to proof of stake has created uneasiness among some investors, this can be expected.
Currently, ETH mining runs on a proof of work (POW) model which relies on resource intensive and power-hungry GPU mining rigs. The key function of these rigs is to process massive amounts of data with a low probability of producing the piece of data that is required. Finding this data is basically a “guessing game” but verifying if the data is correct is relatively easy. Miners can not cheat the system because the entire environment is dependent on actual physical resources.
With the rate ETH is growing, coupled with the number of new miners trying to get in on the action, it would be irresponsible from an environmental perspective to continue using a POW model. Furthermore, it creates an unbalanced distribution of wealth, allowing those with money and resources to mine the most ETH. The average person can not afford to set up and maintain a mining rig. This model is in direct conflict with the ideals of a decentralized economy.
The proof of stake (POS) model will address this issue by making the mining process accessible to the average person allowing the mining environment to be adapted for community participation. POS takes the mining power away from a few and distributes it to the masses, the essence of a decentralized economy. The basis of POS is that in order to mine ETH you would need to own a certain amount of ETH which you would stake for your mining operation. The amount of ETH you are able to mine would be based on the amount you stake. The calculations that need to be processed in POS are considerably simpler to solve and does not require power-hungry GPU based miners.
Off course, POS may not be a perfect solution because it still leaves those who currently own a considerable amount of ETH with a distinct advantage over people just getting in on the action. None the less, it is a step in the right direction and part of the evolutionary process. Hold on to your seat folks, exciting times ahead!
Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
Disclosure: The author has positions in Bitcoin and other cryptocurrencies.
- The S.E.C. is now regulating ICO’s and you can read more here