Ethereum Proof of Stake explained

So you might have heard that Ethereum is considering changing its distributed consensus system to something called proof of stake. Here, we will try to explain what this is as well as how it may affect you.

Ethereum logo 2014.svg

What is Proof of Stake

To truly understand proof-of-stake (PoS) it is easier if we also explain the current system being used by Ethereum, and that is proof of work (Ethereum Mining). So basically when Ethereum is transferred, miners group that up into a ledger called a block chain and to do this they have to solve a puzzle. In creating this blockchain, a lot of computational power is also used. The amount of reward you get for creating a blockchain is a transaction reward. However, this depends on how much work you ie. how fast you can calculate and solve the puzzle.

So this is all going to go away once proof of stake comes along. With proof of stake, you don’t actually solve any puzzles. You remove the puzzle solving element from the system and thus change the way the reward is distributed. So instead of proving how fast you can calculate with hashrate, you need to prove how much Ethereum you own. You do this with something called a master node. When you create a master node, you have to lock up a certain amount of Ethereum to prove that you have it and rewards are distributed according to how much proof of stake you have. One can create multiple master nodes with a lot of Ethereum inside and you’ll earn more through this method.

How does this affect me?

So that’s going to be extremely interesting for everyone. We’ve seen proof of stake currencies before. Dash is one example where 50% of the rewards is done by mining and the other 50% is done by proof of stake. And there is PIVX which is 100% proof of stake. The advantage of proof of stake is huge. One benefit is that you no longer have to do the calculations which mean you save a lot of computational power. Another one is that you actually lock up Ethereum. By locking up Ethereum you effectively create more scarcity which means the price should go up.

So hopefully, it’s going to happen sometime this year. To do so, the people in charge of Ethereum have to make sure the code is ready and stable. And they also have to make sure they have the support of the miners. That’s going to be an interesting thing to see in the coming months because if the miners don’t support this move then what can happen is that it might break up Ethereum again just like last year.

But there are mechanisms to help along this process. Ethereum actually has kind of a ‘time bomb’ that would blow up if the switch is not made. The switch has always been planned and it’s in a sense been hard coded to happen sometime so that’s kind of interesting to see how this will progress.

Miners also do not need to worry they will be without a job. There are other currencies that can be mined with the current hardware. For example, if you use AMD GPUs, you can start mining Zcash which is also extremely profitable right now. So I do see this as being very exciting for everyone.

11 comments

  1. Sorry, I’m a bit slow and that didn’t really help me. So, am I right in thinking that the ledger showing my stake is still shared across the distributed network but it’s not updating with every single transaction ever made with that stake?

    1. The core of the issue is how a distributed network achieves consensus – an agreement of what transactions are valid and whats invalid. This is done by creating “blocks” every few minutes. Proof of Work and Proof of Stakes are different methods of deciding who gets to create the next block – Proof of Work (solve puzzle), Proof of Stake (Prove you hold ETH).

  2. you need to prove how much Ethereum you own. You do this with something called a master node. When you create a master node, you have to lock up a certain amount of Ethereum to prove that you have it and rewards are distributed according to how much proof of stake you have. One can create multiple master nodes with a lot of Ethereum inside and you’ll earn more through this method.

    So you proving a transaction between two strangers. the miners below are not in the transaction. The miners below is just doing the proof of stake.
    So the more Eth I own as a miner the more I can make. So if as a miner I only own 1 eth in my master node and another miner owns 100eth in his master node then they have an advantage over me just because they own more eth.

  3. Hi. I’d like to add a few sentences regarding Proof of Stake vs Proof of Work.

    PoW (Proof of Work) was proposed as means to protect network connections and systems from the denial of service attacks. One of its first implementations was hashcash – the technology that is still being used to secure the mining process on Bitcoin. So basically, PoW is just a piece data that’s both hard to produce, computing wise, and easy to verify on the receiving end.

    PoS (Proof of Stake) takes labor work out of the mining process. Instead of electricity and time – the external resources validators are used to putting into generating Proof of Stake – the algorithm enables miners with most coins to write to a blockchain’s history. The underlying principle behind PoS is that the more invested a validator is in the network (the bigger stake they possess) and, therefore, the more validating rights they should be given.

  4. So with proof-of-stake the rich will have more rights and priveledges but the poor will have fewer? Eh, I don’t like it.
    Bill

    1. I saw it like that too at first. But after thinking about it a little more; I see it more as rewarding dedication to the network vs. dedication to oneself. It is relatively easy for someone to buy one coin and sit on it, waiting for the price to go up-profiting when it inevitably does, without actually putting any skin in the game. Not that there’s anything wrong with that, but it is probably more ‘fair’ to give higher rewards to those who have been with ether since the beginning, have supported the network since its inception and as a consequence own more coins(not necessarily because they are rich, but because they are either rich, lucky, loyal, or risk takers; all of which can benefit the network). Instead of those like me, who have just joined(proud owner of 1.2 coins), and although an enthusiastic supporter, have either not been around long enough to accumulate a ton of coins or risked what many others are currently risking financially to see this technology change the world.

  5. Sounds terrible for anyone who didnt get in before and since they have already split once seems just like some greedy guys who pre mined a ton trying to make themselves super rich. Think this could turn people off but maybe not. Sounds like some elitist behavior though

  6. Is there any way to know a formula that tells you how much you can make? First of all, from what I understand, you have to have at least 10 ether to be part of proof of stake. So if I own10 how much would that earn? Any way to know? Very little incentive to do so if it’s only making like $1 or something! lol

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