Proof-of-Stake Consensus Update Coming to Ethereum Network

Ethereum co-founder Vitalik Buterin is about to revolutionise cryptocurrency…again

One of the biggest events on the cryptocurrency horizon is the upcoming Ethereum network ‘Constantinople’ update. The latest scheduled update for the network contains a host of significant improvements. One particular change that has the potential to change the entire ecosystem, the introduction of Proof-of-Stake consensus to the Ethereum network.

The update will be applied to the Ropsten test network at block height 4,200,000. As opposed to traditional software updates, usually applied at a specific date and time, major blockchain updates are applied by ‘hard fork’.

Introduction of Casper, Proof-of-Stake Consensus

With the next update to the Ethereum network, EIP 1013, Constantinople, we will see the first stage of the transition to Proof-of-Stake (PoS) consensus.

Users of the Ethereum network who wish to operate as a validator must ‘lock’ 32 Ether (ETH) tokens within a smart contract. These tokens serve as a literal ‘proof-of-stake’ and will be used to pay penalties in the event that a validator is deemed to be acting maliciously.

In return for staking tokens and contributing to the security of the network, validators will be rewarded. It is estimated that these rewards will be somewhere in the order of 1–5% per annum, with Buterin indicating this is likely to be closer to 5% than the 1% end of the spectrum.

These reward numbers assume 30% of the circulating tokens will be staked. The profitability of staking is directly linked to the percentage of the Ethereum user base who decide to stake their tokens.

Vitalik Buterin discussing PoS architecture at the Ethereum Developer Conference in Toronto, 2018

Penalties for malicious behaviour as a validator, usually in the form of conflicting votes, can range from ~1% to 100% of staked tokens being forfeited to the network.

“Who here wants to successfully attack the Casper Finality Gadget? You can do this at the low, low price of 1.67 million Ether“ — Vitalik Buterin

Mining and Rewards

Traditional ‘mining’ or Proof-of-Work (PoW) consensus will still be a part of the Ethereum network for at least the next 12 months, however, over time Ethereum will migrate to a PoS exclusive environment.

Block rewards for miners will be reduced by one third, reducing the incentive to dedicate power hungry hardware to the network. This is a direct solution to the problem of energy waste, often cited as one of the biggest drawbacks of cryptocurrencies.

Large scale cryptocurrency mining operations employ hundreds, sometimes thousands of ASIC miners, devices specially configured to resolve PoW algorithms. These devices consume copious amounts of energy, it’s generally considered that specialised mining hardware is solely responsible for the public perception that cryptocurrency technology does not align with the vision of a sustainable future.

Hard Fork

You can think of a hard fork as a literal fork in the road, after this event occurs there will be two blockchains, the original Ethereum blockchain and the new blockchain with the Constantinople code changes committed. When developers are able to reach consensus about changes to the network standard practice is to disable the legacy network.

In cases where core development teams were unable to agree about changes to the network, both environments have been maintained. This type of disagreement was the genesis of Bitcoin Cash, created when the Bitcoin core development team could not agree about an increase to the data size of blocks on the Bitcoin blockchain. The extremely vocal Roger Ver was the most notable proponent of the increase to the block size and this disagreement lead to the Bitcoin core team splitting.

A similar failure to reach an agreement occurred within the Ethereum team and lead to the legacy Ethereum network being relabeled as Ethereum Classic (ETC).

A hard fork is also used to create new chains entirely based on existing technology, an example of this is the Stellar Lumens blockchain, created as a fork of the XRP blockchain. This method is used to jump start a project, reducing the initial development time required to get a solution into a usable state.