Interest in and enthusiasm for blockchain waxes and wanes with the market capitalization of cryptocurrencies. During 2018, the market value of all cryptocurrency assets dropped from more than $700 trillion to slightly more than $110 trillion, resulting in pessimism around cryptocurrencies and blockchain technologies.
Nevertheless, virtually all analyst firms, industry experts, and technology authorities still believe that blockchain is a key innovation in computer science and expect blockchain to have a massive impact across multiple industries over the next 10 years. The same authorities also agree that the ultimate success of blockchain technology depends on significant advancements to overcome the limitations inherent in the current implementations. In particular, the environmental impact of the public blockchain is too high, and the throughput of the public blockchain is too low.
Bitcoin remains the most established and widely recognized blockchain and has a deserved reputation for being highly secure and stable. But this stability comes at a cost—innovations in the Bitcoin blockchain come very slowly. By contrast, Ethereum takes more of a “move fast and break things” philosophy. Consequently, it is in the Ethereum blockchain that we expect to see the more interesting innovations in 2019.
Ethereum already expanded on the Bitcoin concept by providing a Turing complete programming language that allowed for the creation of “smart contracts.” Smart contracts in turn allowed for the creation of “tokens”: special-purpose coins that can be created and managed on the Ethereum blockchain. These tokens powered the ICO (initial coin offering) craze of 2018. Although the ICO craze was in the main an irrational investment bubble, ICOs provided a glimpse of what might be possible from smart contract technology.
In 2019, two major innovations are expected in the Ethereum architecture: Proof of Stake and Sharding.
Proof of Stake is an alternative to the Proof of Work algorithm pioneered by Bitcoin and implemented in the existing Ethereum blockchain. In Proof of Work, “miners” or “validators” compete to add the next block on the blockchain by attempting to find a sort of magic number derived from a complex mathematical calculation. The first validator to solve the mathematical puzzle is rewarded with Bitcoin. The electricity consumed by the network attempting to find these magic numbers is massive: By some estimates, the Bitcoin network burns more electricity than Ireland.
Proof of Stake avoids the environmental cost and, theoretically, allows for a faster system. Instead of requiring each validator to prove that they have expended computing power, each validator is required to prove an economic “stake” in the network. Validators take turns in voting on the next block in the chain, and the size of the vote is proportional to the amount of cryptocurrency (in this case, Ether) that they have deposited (e.g., “staked”). Validators get a share of the profits involved in validating blocks, providing they vote for blocks that are accepted as valid by the rest of the network. Validators that attempt to process bad transactions can be penalized by losing their stake.
The core concepts of Proof of Stake are relatively easy to understand. But in practice there are many obstacles to overcome. While Proof of Work has proven to be resistant to network attacks, Proof of Stake is at least theoretically susceptible to a variety of vulnerabilities.
Vitalik Buterin, inventor of Ethereum, and his team have worked through these problems over the last 4 years and have unveiled an architecture named “Casper” in honor of the friendly ghost of the children’s cartoon—that they believe can solve these problems. When unveiled this year, Casper will provide our first real-world test of Proof of Stake.
Casper will be implemented in 2019 in combination with the sharding scalability enhancement. If successful, these two innovations may catapult Ethereum into the position of the dominant public blockchain. At “stake” is not just the future of the Ethereum network, but the possibility of a viable, performant, and ecologically responsible blockchain.