The cryptocurrency Ethereum is currently based, just like Bitcoin, on "proof of work." This means that machines solve difficult mathematical problems to verify transactions. But the Ethereum network is about to be updated and will in the future be based on "proof of stake" instead.
This means that those who validate transactions deposit cryptocurrency instead of using computing power as proof of legitimacy. In return, they receive Ethereum as there are some fees associated with transactions in the system. The update is expected next year.
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The advantage of "proof of stake" is that less computer power is needed, leading to less energy consumption. The energy consumption in, for example, the Bitcoin network has been the subject of strong criticism. Something we wrote about earlier.
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Another advantage of "proof of stake" is that more people can participate in the validation of transactions, and when more people participate, the risk of 51 percent attacks diminishes. A 51 percent attack means that a person or organization controls and accounts for more than 51 percent of the computing power in the blockchain network. If this happens, transactions can be tampered with, and the security of the system is lost.
Why decentralized?
It may seem paradoxical that a decentralized system needs to be governed by centralized agreed conditions – so-called consensus mechanisms. But it is virtually impossible to create a functioning system without some type of centralization.
Vitalik Buterin, one of the founders of Ethereum, explains why a cryptocurrency needs "proof of anything"; In a blockchain, it may happen that, for example, two blocks are published simultaneously. In such a case, there needs to be a mechanism that determines which transaction will be the first. Some type of voting must take place. In "proof of work," the determining factor for the "weight" of the vote has been the computer power used, but in "proof of stake," it is the amount of coins you have in the system.
Another new update of Ethereum that is expected to come is what is called "Sharding." Sharding means that each node in the network only needs to handle and store a certain amount of information, and not all information as is the case now. The fact that every node today needs to handle all data slows down transactions, and therefore sharding can be an advantage.
