Right now, the conversations being had by the major players in blockchain (developers, entrepreneurs, money managers, etc) all start like this: “How do we fix ‘Proof of Work’?”
If you’re new to cryptocurrency and don’t know what that means, getting yourself up to speed on cryptocurrency terminology is by far the best use of your time. This newsletter will help get you pointed in the right direction. This week, we’ll focus on the backbone of any good blockchain, the quality that sets it apart from a typical Internet protocol: Consensus.
A ledger that runs on unanimous consensus is the central tenet of a Blockchain. If computers running the blockchain disagree on the data, the blockchain will either split, or become worthless.
Proof of Work (PoW) is the formal name for first and most successful model for logically ensuring consensus. It’s also the only one that’s ever been tested at a large scale. Bitcoin,
Ethereum, and 90% of others use it. Why? Well, because it’s the one Bitcoin uses. So, why not?
Proof of Work works by incentivizing people to devote their processing power to the network. The more power you put in, the greater your chance of receiving the next newly-“mined” Bitcoin.
(A finite reserve of Bitcoin is locked up by the blockchain for this purpose, and is designed to be fully paid out to miners sometime in the year 2040).
This system worked great in the beginning, when Bitcoin was in low circulation and one in every few hundred users was contributing their processing power. The problem is that Proof of Work (PoW) wasn’t designed with enormous surges of demand in mind, as is what happened in 2017.
Suddenly, millions of people were buying and selling Bitcoin and Ethereum, but none of them wanted to self-teach about Bitcoin’s inner workings. The result was a period of enormous transaction fees and high latency, until an industrious few poured their capital into Bitcoin and Ethereum processing power.
Most people have realized by now that “consensus by blockchain” no longer means what it used to. If Proof of Work is the best we can do, then it seems Blockchain’s true technological value-add, decentralization, is lost.
For the blockchain enthusiast’s global decentralized economy of tomorrow, something else needs to step up to the plate.
This is where the investor’s thought process should begin: What does Proof of Work’s solution look like?
The 2017 price surges led to a frenzy of inspired developers, clamoring to get their horses in the race.
At this early stage, anything that doesn’t use Proof of Work will have to fight an uphill battle to win the kind of trust among users that took BTC and ETH years to build. But if even one of them proves viable—that is, if it can scale indefinitely, without sacrificing integrity—then there is no limit to the possible market implications.
As you set out doing your own research, hone in on the specifics: Why did Proof of Work fail? What are its advantages? If a new project sacrifices some of these, does it compensate in some other way?
Here are just a few contenders we’ve selected to help you get started in the process:
Casper- From the inventor of Ethereum, who foresaw his creation’s demise as far back as a year ago and intends to seamlessly transition all of Ethereum onto this new and improved version. Casper uses a new architecture called “Proof of Stake,” which swaps out the requirement for processing power in favor of a game-theoretic approach. Critics point out that the inventor himself retains a disturbing level of control over the entire Casper ledger, as he still does with Ethereum—but that didn’t stop Ethereum from enabling last year’s $400 billion ICO craze.
EOS– From the inventor of Steemit (a blockchain-based reddit alternative that pays you for the “likes” on your posts), EOS takes a similar approach to Casper, with three notable differences: 1. A “delegate” system for users to elect representative governance amongst each other; 2. “Asynchronous verification,” enabling transactions to occur immediately, without waiting for nodes in every corner of the Earth to approve; and 3. No all-powerful inventor overseeing everything, as in Ethereum/Casper.
Google CEO Eric Schmidt personally invested $50 million of his fortune into seeing this one through, making this one far-and-away the popular favorite.
IOTA- Built from scratch with an entirely different architecture, not called a blockchain at all but instead referred to as “the Tangle.” Their whitepaper asserts, through mathematical proofs, that the Tangle will get exponentially faster, cheaper, and more secure the more it is used. A lot of controversy surrounds this one, it being so raw and untenured on top of being so different. They’ve recently entered into partnerships with giants in every continent, including Microsoft and Volkswagen.
We’ve compiled a set of links for further reading on this subject. As always, feel free to reach out to us at firstname.lastname@example.org