Will Ethereum Replace Bitcoin?
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Backed by Greenpeace USA, a group of environmentalists wants bitcoin to switch from its current method of mining to a more energy-efficient model.
An upgrade of the cryptocurrency Ethereum is planned for next summer. The big question here is whether it will be possible to switch to a more environmentally friendly scheme for mining. The only thing stopping bitcoin from switching from its energy-intensive method of consensus known as Proof of Work (PoW) to the less energy-intensive Proof of Stake (PoS) procedure is the cost of transitioning, supporters of the campaign Change the Code Not the Climate, say.
If only it were that simple.
PoS is not a perfect substitute for PoW, Professor for distributed ledger technology & fintech at the University of Basel Fabian Schaer, says. PoS is an alternative way to reach a consensus, he says. But what does that actually mean?
Unequal Consensus Methods
Both PoW and PoS are so-called consensus protocols used to maintain Blockchains in a decentralized way. While efficiency is an important metric in this process, it’s certainly not the only one. Framing PoS and PoW as being equivalent, except for their energy consumption, is problematic, Schaer says.
PoW has the disadvantage of requiring immense computational resources, yet it also has the benefits of being extremely simple and open to anyone who wants to join in the verification process. There is no need to get permissions, nor to hold specific assets to be able to start proposing blocks, Schaer says.
The PoS method, where owners stake their digital assets as locked-in collateral for the consensus process, is extremely complex. Although there has been impressive progress in the past ten years, PoS is certainly more prone to unforeseen security issues than PoW, Schaer says.
Bitcoin vs Ethereum
Since Bitcoin was launchged in 2009, all cryptocurrencies have been based on the PoW concept. Crypto miners operate and secure the network and in return are compensated with the fees paid by the users of the network. At the same time they receive new Bitcoins, but this dilutes supply.
“PoS is not a perfect substitute for PoW, Professor for distributed ledger technology & fintech at the University of Basel Fabian Schaer, says.”
Ethereum is a cryptocurrency used on the blockchain. If the PoS method is used, the participants will also be compensated with fees and new digital assets, thus not diluting the supply of Etherum. The downside, is there are still many technical issues to be resolved with this system.
Market-Driven
There are indications that if Etherum succeeds in introducing the PoS method, Bitcoin would lose massive importance.
In the end, the market will decide as bitcoin exists in an ecosystem where companies, users and developers choose the system which suits them best. More likely than a fully-fledged shift, the blockchain road will arrive at a fork on which both consensus methods continue to co-exist.
VHS vs Betamax
The current debate calls the mind the video cassette recorder (VCR) battle in the 1970s between Sony’s Betamax and VHS formats. Betamax was arguably the better system and was initially the leader. As prices for VCRs came down, the VHS format pulled ahead and eventually won, because they were more attuned to the market.
In the end, it comes down to preferences and the question what is an open database worth? Schaer says.
Questions & Answers
Q.What is the main obstacle preventing Bitcoin from adopting the more energy-efficient Proof of Stake method?
What is the main obstacle preventing Bitcoin from adopting the more energy-efficient Proof of Stake method?
Supporters of the campaign 'Change the Code Not the Climate' state that the only barrier to Bitcoin switching to Proof of Stake is the cost associated with this transition.
Q.According to Professor Schaer, what are the key differences between Proof of Work and Proof of Stake beyond energy consumption?
According to Professor Schaer, what are the key differences between Proof of Work and Proof of Stake beyond energy consumption?
Proof of Work is simple and open to anyone for verification, despite requiring immense computational resources. Proof of Stake, conversely, is extremely complex and potentially more susceptible to unforeseen security problems.
Q.How do the compensation methods for network participants differ between Bitcoin's current system and Ethereum's planned Proof of Stake?
How do the compensation methods for network participants differ between Bitcoin's current system and Ethereum's planned Proof of Stake?
Bitcoin miners are compensated with user fees and new Bitcoins, which dilutes supply. With Ethereum's planned Proof of Stake, participants would receive fees and new digital assets without diluting the supply of Etherum.
Q.What analogy is used in the article to describe the potential market competition between Bitcoin and Ethereum's consensus methods?
What analogy is used in the article to describe the potential market competition between Bitcoin and Ethereum's consensus methods?
The article likens the current debate to the 1970s VCR battle between Sony's Betamax and VHS formats. Betamax was initially superior but VHS ultimately won due to being more attuned to the market.
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