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Since its creation in 2008, Blockchain has become more widespread than ever, integrating across a myriad of use-cases throughout industries worldwide. Its decentralized ledger technology (DLT) has the unique benefits of added security while, at the same time, decreasing costs of day-to-day transactions. Commonly, DLT has been built on the use of proof-of-work which uses computational power in order to achieve a decentralized consensus. However, recently more and more companies that employ blockchain have considered switching to proof-of-stake. But what is proof-of-stake? And why is Ethereum phasing out proof-of-work in favor of proof-of-stake?

Traditional proof-of-work systems allow miners to use computational power in order to validate transactions. Miners, also known as nodes, add new blocks to the system by correctly calculating computationally intensive puzzles which then get verified by other nodes. Once the calculation has been verified, the node gets rewarded by the system. Because mining is so cost and time intensive, the cost of attacking a blockchain system through mining outweighs the benefits. 

Alternatively, proof-of-stake doesn’t rely on intensive computational power in order to validate transactions on the network. Instead, users can verify transactions by putting forward a stake and becoming a validator. On Ethereum, for example, validators need to stake at least 32 ETH in order to have the opportunity to validate transactions. Once the stake is set, validators are randomly chosen to validate transactions on the network. In turn, other validators can attest those transactions in order to further secure the blockchain. In this system, attacks on the network are disincentivized through potential loss of value, as bad actors would lose the stake they put forward. Since proof-of-stake does not need huge investments into energy and computational equipment, it’s seen as a more decentralized and environmentally-friendly approach to transaction validation. Additionally, as cryptocurrencies become more widespread, the higher transaction costs present in proof-of-work systems may become a potential bottleneck to the sector’s growth. 

For these reasons, Ethereum will start to switch from proof-of-work to proof-of-stake starting in 2021. The company warns, however, that the switch will take a while to come to fruition as it is the largest smart contract network in the world, with billions of assets intertwined with one another.  Nevertheless,  many believe that the switch to a faster more efficient consensus mechanism will open doors to innovations that were previously unimaginable. 

References:

https://ethereum.org/en/developers/docs/consensus-mechanisms/pos/

https://www.investopedia.com/terms/p/proof-stake-pos.asp

https://www.investopedia.com/terms/p/proof-work.asp

https://money.usnews.com/investing/cryptocurrency/articles/what-is-proof-of-stake-and-why-is-ethereum-adopting-it

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As the use of blockchain becomes more widespread, many are starting to establish new ways to leverage distributed ledger technology. Although blockchain has been most traditionally associated with cryptocurrencies like Bitcoin, its core technologies are applicable far beyond finance and investment. Recently, many new companies have started to explore the potential of linking decentralized networks and data and create new platforms that connect IoT devices through the use of tokenization and smart contracts. One of the most prominent companies in the industry is Streamr. But what can these platforms offer that traditional centralized cloud based services can’t? 

To start, decentralized networks also offer similar on-demand scalability, minimal up-front investment and benefits from economies of scale. However, what sets these networks apart is the lack of a centralized party; they are by definition peer-peer, which through the use of blockchain encryption allows added security and an increase in transaction speeds. It also benefits from network effects, as the network grows a shared standard is formed across industries, making it even safer and efficient. What makes the technology really exciting is the potential for transactions to be made in between IoT devices, bypassing human intervention. For example, a self-driving electric car that is connected to the Streamr network can use tokens to purchase real-time traffic congestion data, electricity price data of nearby charging stations and weather forecasts for the area; all the while funding these purchases by automatically selling data back to the network.

Because the implementation of decentralization is so novel and complex, many companies like Streamr are still trying to fully implement the technology and deliver on the promise of full decentralization. However, even with the current limitations, the potential that decentralized data networks hold could fundamentally change how data is produced, monetized and integrated with IoT devices.

Source: https://streamr.network/docs/introduction