Review on Ethereum Casper Protocol

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What is the Ethereum Casper Protocol

Today we will discuss the long-awaited Ethereum network update, which will allow the platform to move from the PoW protocol to the upgraded PoS protocol. In the review, we learn what the update will include, how it will work, what will it mean for miners, owners of ETH and the Ethereum network as a whole? Let’s take a closer look.

Casper is a hard fork of Ethereum, with the help of which it is planned to overcome several key obstacles, such as: scalability; Constant risk of centralization, energy-intensive mining. Before you understand why Casper is needed, it’s important to have a basic understanding of the differences between the health check and bid rights systems.

Ethereum, like Bitcoin, and many other popular cryptocurrencies, currently operates on the basis of the PoW consensus, according to which network members, known as miners, solve cryptographic puzzles to verify transactions and create new blocks. Although PoW was a popular and effective choice for many cryptocurrencies, it is an old system that has some significant drawbacks. PoW mining not only consumes a huge amount of electricity, which makes it extremely inefficient, but also raises the problem of centralization.

People and organizations that can afford faster and more powerful mining equipment have more opportunities, as a result of which the bulk of Ethereum mining is concentrated in a small number of mining pools. As you can see in the chart below, Ethereum mining is dominated by several selected pools – the four largest miners account for a whopping 70% of Ethereum hash speed.

This has several key implications:

  • Unfair distribution. Large players are more likely to get blocks and receive rewards than the rest. This means that they will always be able to afford the best equipment and will receive higher profits – in other words, the rich will become richer.
  • There is no decentralization, which is one of the main doctrines underlying the cryptocurrency, but, as the graph shows, PoW systems run the risk of becoming centralized.
  • Security risk. Theoretically, large mining pools can join forces to launch a 51% attack on the Ethereum network, which will allow them to double costs, cancel transactions and generally cause chaos.

Ethereum is not the only PoW cryptocurrency that faces these issues. Take a look at the following bitcoin hash rate distribution graph, which shows that 70% is split between five large pools.

How can Casper update solve problems

According to the PoS mechanism, miners are replaced by validators. To reach a consensus, they take turns proposing and voting for the next block, and the weight of the vote depends on the size of the deposit (rate).

That is, the blockchain monitors a set of candidates, and anyone who owns the base cryptocurrency of the blockchain can become a validator by sending a special type of transaction that blocks their coins in the deposit cell. The process of creating and coordinating new blocks is then carried out through a coordinated algorithm in which all existing validators can participate. Simply put, ETH holders will be able to block their tokens in special wallets.

In turn, they will be rewarded for servicing the network – this process is somewhat similar to how the bank pays interest on assets that are stored in a savings account. And the more coins are blocked, the greater the reward. At the first stage of the Casper upgrade, a hybrid of PoW and PoS systems will be introduced.

This will allow Ethereum to operate as normal while the PoS system is tested by periodically checking the “checkpoints”.

Two proposed versions of Casper

Casper is not just one protocol, but a combination of two research projects that the Ethereum team is working on.

  • Casper the Friendly Finality Gadget (FFG). Existing PoW mechanics are used to create new blocks, while Casper the FFG is superimposed on top with a smart contract. The goal is to create a smooth transition to PoS.
  • Casper the Friendly Ghost: Correct by Construction (CBC). CBC Casper relies on the oracle of security (which Ethereum calls the “ideal adversary”) to constantly build on the partially-built PoS protocol until the system is complete.

According to preliminary data, the first stage of the transition is scheduled for early 2020.

 Benefits of proof of stake versus proof of work

Ethereum’s transition to PoS will offer several key enhancements to the current PoW system:

  1.  Less power consumption. Ethereum consumes about $ 1 million in electricity and hardware per day due to its consensus mechanism.
  2. Reduced centralization.
  3. Reduced attack risk 51%. Validators in the PoS system will have their own funds within the network, and since their own wealth is associated with the value of ETH, the validator has no incentive to try to harm the value of the currency. If the validator signs conflicting transactions, tries to use or attack the network, their entire deposit can be destroyed in the process known as “slashing”, and part of the destroyed deposit will be awarded as a reward to anyone who finds these violations.
  4.  Improved scalability. Ethereum currently has an average block creation time of 15 seconds, while the PoS system is designed to reduce this time to a couple of seconds. This should improve scalability and make the network faster and cheaper to use.
  5. The number of coins issued will decrease. Due to the fact that electricity consumption will decrease, there will no longer be a need to issue so many new coins in order to motivate miners to continue to participate in the network. This can even lead to the fact that Ethereum will one day have a negative net issue – that is, part of the transaction fees will be “burned”, so the ETH offer will decrease over time and the cost will increase.

Problems and Risks

Casper may not seem so friendly to Ethereum miners, and there are several other key issues and risks associated with migrating to PoS. The biggest risk is security, since the first integration with Casper will include about 250 validators, and a physical disaster or hacker attack can lead to the destruction of the entire network.

Another key factor to consider is that while PoS can solve the problem of mining centralization, it does not really promise true decentralization, which is a key principle of many cryptocurrencies. Initially, to create bets you will need a minimum deposit of 1500 ETH, which is not available to the average user.

That is, all power will again be concentrated in the hands of commercial giants. Nevertheless, the platform plans to lower the rate to 32 ETH as soon as Ethereum becomes 100% blockchain PoS.

Completion

The transition of Ethereum from PoW to PoS is really very important. Casper is a complex and important update for one of the world’s largest digital currencies, and if successful, it can be the key to overcoming the scalability, energy efficiency and centralization risks that the network is currently facing. Nevertheless, the transition to PoS has certain problems and risks, so it will be very interesting to observe the further development of events.

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