On the 8th of May, a planned improvement to the Ethereum network is being released by the developers. This upgrade is a new and improved version of Casper, the Hybrid Friendly Finality Gadget. This update intends to move the network away from mining-related issues as was becoming increasingly frequent with the old implementation.
These issues exist because of the excessive dependence on Proof-of-Work for platform security and immutability, and they include;
increased centralization of mining pools
energy consumption issues
a massive influx of ASICs onto the market
The ultimate goal is to eventually move the Ethereum network from a Proof-of-Work to a Proof-of-Stake based system, massively reducing the computational burden on the net.
Let’s take a look at some of the more delicate details of possibly the most significant Ethereum network upgrade to date.
Energy consumption and transaction fees
Although 2017 was an excellent year for cryptocurrency owing to their meteoric growth, it was revealed that neither Ethereum nor Bitcoin in their current iteration would be capable of competing with fiat on a global scale due to their limited transaction throughput.
Another concern that was highlighted is the massive amount of energy it takes to run the mining networks of these cryptocurrencies. Because of this, researchers, journalists, and analysts have taken it up themselves to compare mining costs with the average energy cost in each country in an attempt to find the most profitable country to mine in.
As of 2018, the scaling problem facing most, if not all cryptocurrencies, is yet to be resolved. Ethereum, in particular, has repeatedly been blasted for scaling very poorly despite the size of its mining network. It seems common logic that as the size of the mining network grows in hashing power and number of miners that the number of transactions the system can handle per second should increase linearly in tow.
However, the reality is that because all of these miners simultaneously process one block and because the difficulty increases periodically, the relative hashing power of the network does not increase.
Unfortunately, this means that it will still take 10 seconds to produce a block, and the cost of electricity noticeably increases despite the fact that the number of miners on the network has increased drastically.
One of the significant consequences of poor scalability is high network commissions. Miners can choose to prioritize transactions offering higher commissions to increase their return on investment (ROI) and hence maximizing their profit. This leads to the accumulation of thousands of low commission transactions which are left waiting to be accepted onto the next block, which can take hours, several days, or possibly infinitely long if the fee is low enough.
The advent of incredibly power new ASIC miners also threatened the Ethereum network, as they increase the odds that one of the mining pools will attain a significant share of the network hashing power, hence increasing the centralization of Ethereum.
An adapting system
There have been several attempts to solve these problems, most of which are hard forks aiming to improve the transaction speed by creating “the new Bitcoin.” Since then, other cryptocurrencies have experienced the same phenomenon, with several forks occurring with some of the more popular cryptocurrencies, such as Ethereum, Monero, and Litecoin. The overall movement behind this has been termed the “ASIC resistance” and has been gathering support as the threat of ASIC mining to the long-term viability of cryptocurrency becomes recognized.
One of the most reasonable approaches to solving this cascade of issues was demonstrated by the team behind Ethereum, who took it upon themselves to combine both the Proof-Of-Stake (PoS) and Proof-Of-Work (PoW) algorithms into a combination of the two they term ‘Casper – Friendly Finality Gadget (FFG).
This new system radically changes the principles of creating and distributing blocks in Ethereum, while also reducing the complexity of the blockchain as a whole. Ethereum developers are confident that the PoW principle is the root of all problems cryptocurrencies face. They believe that despite its effectiveness in achieving decentralized consensus, PoW also causes a tremendous energy burden, has no economic finality and no effective cartel resistance strategy. Furthermore, it is widely acknowledged that the PoW algorithm limits the performance of the blockchain, restricting to several dozen transactions per second at best.
Because of these limitations, the Ethereum team announced a plan to move away from the PoW algorithm, instead adopting the more efficient PoS algorithm. For the PoW algorithm, users can directly buy real computers that consume energy and calculate blocks at a rate roughly proportional to the investment level (computer cost). However, for the PoS case, the subject of purchase are virtual coins inside the system which are then converted by virtual computers that calculate the blocks. This approach does not rely on processing power, but instead on the number of coins in the account of a user-validator. If this validator participates in confirming transactions, their funds are frozen with each block awarded.
The Casper protocol is somewhat of an intermediate step in the transition from PoW to PoS, by combining principles from both of these protocols. FFG allows the underlying PoW blockchain to be finalized through the use of Ether deposits, slashing conditions and a modified fork. As the security of the network transitions from PoW to PoS, the rewards for PoW blocks will be reduced.
Besides the Casper update which leads the transition to a PoS system, there is another potentially profound technology being developed with high hopes in mind – sharding.
The idea behind sharding is that only part of the distributed registry is stored on any particular node, but the mathematics underlying the core protocols ensures that each node can rely on the information of other nodes, to provide the transparency and accountability of the system. Vitalik Buterin, the founder of the Ethereum network, compared the elements of sharding with islands belonging to the same archipelago, imagining that even if Ethereum were split into thousands of islands, each island would still be capable of contacting the other islands through some protocol. Also if each of the islands has its particular features and population (e.g., a fraction of the blockchain), the islands can work together to form a fully featured environment.
In layman’s terms, this means that Ethereum’s main chain will be divided into separate chains termed shards. These shards will be associated both with each other and with the main block. Shards function to provide parallel processing of the transaction, whereby each node can process its shard separately, and work in parallel with other nodes to increase the network’s bandwidth and transaction speed by several orders of magnitude while permanently solving the scaling problem.
Miners and Validators to the Rescue
Transactions within each shard will be verified by validators – the main marshals of the Casper system along with the miners. The validators work to ensure the legitimacy of operations with coins, acting as a sort of system escrow confirming transactions with their deposit. The system acts as follows – if the validator finds a block that it believes should be included in the blockchain, they will be able to approve it by placing a deposit on this block. If this block is added to the blockchain, then the validator will receive a reward proportional to the amount they invested in the block, whereas if this block turns out to be invalid, or malicious, they will lose their investment.
Validators are also tasked with creating checkpoints every fifty blocks. Producing checkpoints ensure the completion of the blockchain and increase the security of the network significantly by excluding the possibility of returning transactions before the checkpoint. According to Vlad Zamfir, a prominent Ethereum developer, any manipulation or attempt to attack will be of no economic interest to validators, quoting: “It’s as though your ASIC farm burned down if you participated in a 51 percent attack.”
The minimum deposit size a validator must wager for confirmation is set at 1500 ETH, a significant amount to lose under anybody standards, and a potent deterrent for taking part in any manipulation schemes. The developers also offered a solution to the scaling problem, widely considered to be crucial for the further development the Ethereum network, and required to allow Ethereum to compete with more advanced blockchains such as Graphene.
The increases in processing speed the developers reached is largely due to the participation of fewer nodes and delegation of most of the major work to light clients. Because of this, the transaction processing speed will be much higher than on a separate computer, while the network will be capable of maintaining decentralization while working on a large number of conventional laptops. Additionally, the security of the network is undergoing a significant change from the complex PoW system to the “expensive” PoS system where both miners and validators are provided block rewards. The reward for miners and ether production will decrease fivefold under the new system, reducing from the current 3 ETH to just 0.6 ETH, making the coin less attractive to ASIC miners while concurrently reducing the risk of network centralization.
Under the new system validators are the recipients of rewards, but in smaller amounts with their reward limited to just 0.82 ETH per block (almost four times lower than the current reward level). In future Vitalik Buterin claims Ethereum developers will be able to completely depart from the old PoW system, further reducing the reward for validators to 0.22 ETH per block.
Besides changes in the reward system, the network will also see a significant increase in efficiency for two reasons. The first is due to the PoS algorithm consensus which is achieved without mining, hence reducing energy costs and ensuring the necessary emission of ETH. The second is achieved by reducing the block generation time to a minimum, as it is now easier to check who owns the largest share, rather than determining who has the greatest mining power.
During the Edcon conference in early May 2018, Vitalik Buterin – creator of Ethereum provided some insight about the “friendly ghost’ update. Buterin reported that the validator reward system present in the Casper update would also include a penalty system. In the reward system, the greater the stake is the lower the interest rate earned on that stake, for example, staking 2.5 million ETH will generate an annual fee of 10%, whereas a stake of 10 million ETH would only generate 5% interest.
The penalties a validator is subjected to is dependent on the severity of its faults but can be as high as 100% of its stake. Validators will be subject to fines if they are frequently absent from the network. Additionally, if problems are discovered within a shard or disk on which the wallet has located a punishment of 2% of the deposit amount will be issued. If the shards for a group of validators are simultaneously defective or absent from the network, then the penalties will be much higher, reaching into the double digits. At the same time, Buterin notes that this approach will likely be the target of hacker attacks as collective penalties can leave validators with up to 100% penalty, hence making them vulnerable to malicious hackers with an intention to cause damage.
The most recent news relating to the “friendly ghost” hit on May 8th, when Denny Ryan, an Ethereum developer published the code for the first version of Casper on GitHub:
“v0.1.0 marks us more clearly tagging releases to help clients and external auditors more easily track the contract and changes.” Ryan also noted that client developers can also start writing and testing software in their own languages, rather than being restricted to Solidity as was previously the case.
Casper – What to expect
The Casper FFG launch isplanned for Q3 2018. As this is a significant network upgrade, it will be incompatible with previous versions of the Ethereum software, and as such will be implemented through a hard fork.
Due to its potential in solving the scalability problem, Casper stands as one of the most important blockchain upgrades to date, providing numerous benefits to both developers and ordinary users. It has taken three years of work by the Ethereum Foundation to piece together all the steps necessary to make the Ethereum network decentralized, efficient and competitive in an industry with so many new players looking to usurp it.
With this increase in bandwidth, the Ethereum network is to see much faster transaction confirmations and greatly increased transaction throughput, which will provide the backbone needed for a large-scale decentralized application. The Ethereum platform has a large, talented community behind it contributing to its development and improving its functionality.
Although a lot of work remains to determine how this new reward system will work in practice, one thing is certain – Casper is coming.