Everything you need to know about Blockchain: Part Two
By: Amit Ashwini
Tags: Startup, Blockchain, Blockchain Technology, Cryptocurrency, Bitcoin

The currently popular blockchain networks, including Bitcoin and Ethereum, use a proof-of-work method to verify a transaction as genuine. A huge amount of computational effort is needed to solve puzzles to add a new set of verified transactions or blocks to the network (blockchain). In return for that work or computational effort, the entity that executes the work stands a chance of being awarded additional tokens on the network, ether in the case of Ethereum and bitcoins in the case of Bitcoin.

An entity receives new bitcoins or ether only if it correctly solves the puzzle. Solving these puzzles correctly takes so much computational power that the “miners” don’t have the computing power to try to influence the result of the network to birth the blocks most advantageous to any particular miner. Rather, they have to focus on solving the puzzle as fast as possible to increase the chances of getting the next block and so capturing the network’s reward. It gets more and more difficult and energy-intensive to generate the next block, as each new block generates. In practice, this, unfortunately, leads to scaling problems over two dimensions: speed and energy use. The Ethereum and Bitcoin networks together consume more electricity than a few countries like Iceland, Jordan, and Syria.

Further, the puzzles miners need to solve get harder as nodes in the network use more computing power to generate new blocks. This way more and more computing power is consumed by the network. However, no new benefits are generated as miners work harder. The power is being consumed to stop individual miners from influencing the network for their own advantage and recording those transactions that will be most beneficial to anyone miner as the next block on the chain. However, the computational power consumed by the network will not generate any independent value.

Proof-of-work system to a roof-of-stake system.

The creator of Ethereum, Vitalik Buterin, has proposed transitioning Ethereum to a proof-of-stake system from a proof-of-work system. In a proof-of-stake system, entities can choose to stake a portion of their tokens in the system on any new block. The block added to the blockchain, is the one with the most stake behind it. The network that chooses to validate the latest block the network adds to the blockchain, is rewarded with network tokens given to a random sampling of nodes. To stand a chance of getting a reward once you’ve validated the genuine block, all participants on the network are persuaded to validate the genuine version of the network. Theoretically, proof-of-stake networks shouldn’t see increasing energy needs as miners compete for cryptocurrency using computational resources, that could make it more scalable. Nevertheless, transitioning from one system to another isn’t a straightforward process.

For Ethereum to move from a proof-of-work system to a proof-of-stake system, the network’s code will have to be updated by a group of Ethereum developers that are centralized. Then the users on the Ethereum network will choose whether they want to continue to use the old version or shift to the newer version of Ethereum. If some decide to use the old version and some the new, then the chain undergoes a split or a hard fork, and both versions of Ethereum are available. The Bitcoin protocol is extremely difficult to change, but this summer, the Bitcoin network became too crowded to process all of the demands on the network. To aid the Bitcoin network’s ability to process further transactions, updating the Bitcoin protocol led to a hard fork and Bitcoin split into Bitcoin Cash and Bitcoin.

So where are we going from here?

Picture all the value captured currently by centralized authorities, from the networks of music rights holder to the banking industry to the judicial system. If it’s possible to share this value with participants from the dominating blockchain, then how much will the tokens underlying the dominant blockchain be worth?

The blockchain is going to become increasingly more normalized as the gold standard for at least, security. However, it will face some challenges as a base for currency. But many big banks today have departments that are specialized in cryptocurrencies. Few are even thinking of building their own private blockchains. A few countries are, too. In fact, some states in the U.S. are reportedly thinking of a pilot scheme involving moving voting onto the blockchain.

There’s still a long way to go. But eventually, bitcoin will become the main source of money. Blockchain will be used to capture identity and secure contracts. It will become so prevalent that we won’t even notice it but use it nevertheless. That could be a long way off. Meanwhile, bitcoin’s value could continue to increase , or it might plummet the day after, sending the market crashing, forcing regulators to react. The future is bright for the blockchain , but getting there might prove to be a bumpy ride.