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What Is Proof-of-Stake, and Why Is Ethereum Adopting It? | Cryptocurrency

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If you just look at the headlines, cryptocurrencies are in a downturn.

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Bitcoin’s price has fallen roughly in half since its peak. More speculative projects like Dogecoin have fallen even further. While this may be daunting for day traders and fast-money types, there are exciting developments in the cryptocurrency for longer-term investors.

For one thing, the trend towards more publicly traded funds and trusts in this sector continues. There is also a key debate in a technical area: does the future of cryptocurrencies lie in proof-of-stake protocols?

The subject of proof-of-work versus proof-of-stake boils down to this question: How can the integrity of a cryptocurrency be ensured. Most legacy cryptocurrencies like Bitcoin are based on a proof-of-work mechanism. If you see a picture of thousands of computers in a mining facility, it is proof of work. The computers solve complex algorithmic puzzles. In return, the miners receive tokens of the underlying cryptocurrency as a reward.

What is a proof of stake?

In contrast, the proof-of-stake relies on validators to maintain the cryptocurrency. In a proof-of-stake model, owners use their tokens as security. In return, they receive authority over the token in proportion to their stake. Generally, these token stakers acquire additional ownership of the token over time through network fees, re-minted tokens, or other such reward mechanism.

In the beginning, proof-of-work was attractive because people only needed an ordinary computer to mine coins. Nowadays, however, special expensive equipment is required to mine leading proof-of-work tokens. Much of the mining is now done by large, well-funded pools, which has taken the general public out of the equation.

In the proof-of-stake versus proof-of-work battle, the former could be more democratic. Anyone with a token can participate as a validator or staker and use the decentralized finance (DeFi) ecosystem. In general, analysts have focused on the environmental impact of proof-of-work protocols. Bitcoin, in particular, has developed a large environmental footprint as it has gained wider adoption. The proof-of-stake drastically reduces these environmental costs by eliminating the advanced cryptographic puzzles.

Proof-of-work advocates are protesting that the proof-of-stake is deviating from the original vision of the cryptocurrency. Bitcoin was different from other financial assets because the database or blockchain record was inherently valuable. The mining process, while inefficient in terms of energy, has created a clear and tamper-proof record of all financial transactions. The proof-of-stake has some weaknesses, at least in its basic forms.

For example, the problem of nothing at stake revolves around the fact that malicious behavior is encouraged when there is no cost to create forks or add bad information to the consensus. The proof of work energy costs inherently limit manipulation; The proof-of-stake, on the other hand, needs to use more sophisticated methods to address these security issues.

The proof-of-stake versus proof-of-work debate has largely remained in the technical realm. Proof-of-stake has a notable forerunner in Cardano, but the biggest projects have stuck with proof-of-work. However, Ethereum’s plans to migrate from proof-of-work to proof-of-stake are putting this issue in the spotlight. Ethereum’s move began in earnest in 2020 when Ethereum launched its proof-of-stake beacon chain. Development continues, with Phase 1 scheduled to start later in 2021 and the full merger for the proof-of-stake for Ethereum taking place over the course of next year.

Switching to proof-of-stake is complicated

Given the benefits of proof-of-stakes, why did it take Ethereum so long to make the switch? “The main obstacle to a faster introduction of Proof-of-Stake was certainly the difficulty of migrating the largest smart contract network Ethereum from Proof-of-Work to Proof-of-Stake,” says Justin Giudici, Product Manager at Telos Foundation . “The challenge of changing the consensus mechanism on Ethereum has been compared to ‘repairing an airplane while it is flying’. This is because the migration challenge is significant with thousands of smart contracts in place in the Ethereum chain and billions of dollars in assets. “

Here are some numbers to put the challenge in perspective. “The development of Ethereum has far exceeded its ability to change and thus scalability. It’s easy to see why, considering the DeFi phenomenon, which saw an industry jump from zero to $ 76 billion in the last year, non-fungible tokens exploded, grossing $ 2.5 billion in 2021. The construction of the Ethereum network has been explosive, while the move from proof-of-work to proof-of-stake is a long, arduous process, “says David Waslen, CEO of Rublix Development, a blockchain and smart company. Contract software.

It’s easy to migrate from one technology to another in a vacuum. However, since Ethereum’s decentralized financial system has already gained wide acceptance, it is important to maintain ongoing network stability. “There may be unexpected critical errors or unpredictable circumstances before the merge takes place. This is a good reason not to rush the transition, ”says Mattias Nystrom, community manager for the Golem network.

“Ethereum’s timeline can be seen as a product of its strength: decentralization. It is a complex project with many stakeholders and, moreover, censorship-resistant and social approval-free. That means anyone can join the project and make their contribution to changes in the network. So you need consensus between the developers who write the code and the wider community to keep things moving, ”says Nystrom.

Proof-of-stake and transaction costs

Another factor is the recent drop in cryptocurrency prices and the resulting amount of mining power used for proof-of-work protocols. Transaction fees for Bitcoin, Ethereum, and other leading proof-of-work projects support the mining network. As crypto has fallen, transaction fees have fallen. But even if the average transaction fee drops from, say, $ 25 to $ 5, it can still be a huge cut in smaller decentralized financial transactions.

With emerging economies like El Salvador adopting cryptocurrencies, fees need to be drastically reduced. El Salvador’s gross domestic product per capita is only about $ 11 per day. So if cryptocurrency is going to be the standard money in this economy, it is important that user fees do not constitute a large part of a worker’s average daily wage.

Additionally, high transaction fees, often found in proof-of-work logs, stifle progress in adopting cryptocurrencies.

“Innovation has a huge impact on the slower and more expensive consensus technology. Historically, the transition from proof-of-work to proof-of-stake and other high-speed consensus models has been similar to the transition from dial-up Internet to broadband, “says Giudici.” Quite simply, the number and types of use cases, the level of adoption and impact of the technology increases by orders of magnitude as entrepreneurs bring products to market that were even unimaginable with slower, more limited technologies. “

Ethereum is expected to adopt a proof-of-stake over the course of next year. But don’t be surprised if the proof-of-stake still takes a while, like when switching from dial-up to broadband. “Even if the switch from proof-of-work to proof-of-stake begins in 2021, the end result is still a long way off. [Ethereum founder] Vitalik Buterin has even pointed out an extended “cleanup process” after the planned hard forks and the eventual merging of the chain, before problems of the Ethereum platform such as lack of scalability, costs and overload can be aggressively tackled, “says Waslen.

Broader influence of proof-of-stake on users

Proof-of-stake has another much-discussed effect: the graphics card market. As Ethereum and other leading crypto projects introduce proof-of-stake systems, this should reduce the demand for graphics cards for cryptographic mining. This could finally break the scarcity in the region. This is great news for gamers.

Jahon Jamali, co-founder of Sarson Funds, agrees that the introduction of proof-of-stakes could increase the demand for graphics cards. However, the best proof-of-stake user benefit comes elsewhere. “The big positive effect is that consumers can participate in the consensus mechanism. It’s more scalable and you can take part in the staking rewards. You will benefit greatly from being able to participate in a wider ecosystem, ”says Jamali.

And it’s no guarantee that graphics card applications will decline in a proof-of-stake world. Giudici suggests that much of this crypto mining infrastructure could range from supporting proof-of-work systems to other crypto-powered applications like distributed research in areas like cancer, Alzheimer’s, and climate change. With a staking model, users could be rewarded with tokens for sharing their computing resources while promoting a greater good beyond simply maintaining the Bitcoin or Ethereum networks.

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Cryptocurrency may be tender of choice in future, but is risky investment now | Opinion

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Cryptocurrency is taking the nation by storm, with digital currency attracting the attention of large companies and meme traders trading based on popular internet trends. Some financial advisors advise their clients to buy in, while others are not as optimistic.

Although crypto is likely to grow in importance in the future, it currently remains a risky investment as it is too unstable and overshadowed by many uncertainties.

Crypto was developed as a payment method that can bypass traditional banking systems. New crypto is created through mining, a process by which computers solve difficult math problems. There are thousands of flavors of crypto, but Bitcoin is dominant, taking almost half of the market share.

One problem with cryptocurrency is that certain coins are available indefinitely, which means that an infinite amount of crypto could be mined at infinite time. This has led to inflation in the crypto markets, which can also happen with physical currency.

This problem alone is not enough to warrant a hold or sell rating, but what is even more worrying is that cryptocurrencies are being propelled by meme trading. This trading style is named after an online community of merchants who have gathered around “stonks” like GameStop and AMC Entertainment Holdings who have supported low-value companies through the Reddit site r / wallstreetbets.

When meme traders focus on one company, they are quick to invest to drive the stock price higher. Then, when the stock appears to have peaked, investors quickly sell their holdings in a process known as “pump and dump”. This type of trading is detrimental to the markets and can result in significant losses for both large companies and individual traders. Crypto has become a preferred investment for meme traders, making it riskier and less reliable.

Another factor to consider before investing is how quickly crypto values ​​can go up and down. When Elon Musk tweeted about the Dogecoin cryptocurrency, the price fluctuated sharply. This is a bad sign for cryptocurrency coins because if negative news got out about them, their prices could go down and the investment would be lost.

Some companies are optimistic about crypto as an investment, including the El Salvador government, which introduced Bitcoin as its national currency. The move showed that cryptocurrencies are likely to be widely used in the future, but it also highlighted some of the risks associated with investing at this early stage.

When El Salvador started using Bitcoin, the government had to take its e-wallet offline for several hours when the server was overloaded, which revealed a bug in the system. Crypto is only good if it can be used, and if the servers are overloaded it cannot be used. In the future, this problem could be resolved, but until then, crypto is still an unreliable and dangerous investment.

Another major problem with crypto platforms was uncovered when they mistakenly gave users nearly $ 90 million worth of various crypto coins during a routine update in late September. The error was caused by a bug in the computer code and prompted the workers to recover the lost coins.

Both incidents show that this technology is too new and unreliable to be a safe investment. There are thousands of other investment options with far less risk and almost the same return, including stocks and options.

For now, investors should stay away from crypto, but it will become a viable investment in the future. Technology is improving rapidly and culture is changing. One day cash may be a thing of the past and crypto may be the king of currencies, but that day is not here yet.

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Bitcoin price: cryptocurrency scams rort Aussies out of $328 million

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Bitcoin is booming again, and thousands of Australians are investing in hopes of making a fortune – but that one factor has caused losses of more than $ 328 million.

If you are careful, bitcoin is everywhere. It’s on the news, on TV, and flooded our social feeds.

And why shouldn’t it be? Bitcoin is widely regarded as the king of cryptocurrencies, accounting for about half of the market capitalization of all cryptocurrencies available worldwide.

The fact that few people really understand how Bitcoin works and what drives its value means that it is ripe for scammers and scammers.

In 2020, Bitcoin investment scams caused losses worth a staggering $ 328 million from Australians alone – and they’re just what we know of.

Despite the fact that almost one in five Australians own some type of cryptocurrency, there is no formal regulation of crypto trading in Australia, so it is important to do some research before committing.

“Anyone can accept Bitcoin payments from anyone, anywhere in the world, anytime. This opens up amazing opportunities for investors, but is also fertile ground for scammers, ”says Adrian Prezlozny, CEO of Independent Reserve, one of Australia’s largest cryptocurrency exchanges.

“As with any financial product, it pays to take the time to protect yourself and your investment. The best way to do this is to know what to avoid and who to trust.

“The most important thing is that you are not guaranteed to get rich quick just because Bitcoin is a digital currency. There is no such thing as free money – if the offer sounds too good to be true, it generally is, ”he says.

How to spot a Bitcoin scam

There are many types of cryptocurrency scams – what to look for and what to avoid.

• Ponzi or pyramid schemes: often sounds tempting because they promise you a regular return. You may be told that money is generated through Bitcoin trading activity, but in reality there is no real investment.

• Bitcoin Flipping: Usually involves the claim that if you pay an initial startup fee to exchange bitcoins for money, you’ll double your money overnight. If it sounds too good to be true, it is.

• Offshore Broker / Investment Sites: Cryptocurrency is a volatile asset. Companies that promise big returns on a small, low risk deposit are lying. As simple as that.

• Large Account Unlock: After an initial investment, scam sites can show you a large amount of credit that they have accrued by “investing” or “trading” your deposit. They will then give you reasons to deposit more money before they can “release” your money.

• Anydesk: A broker or consultant who asks you to install screen sharing software, particularly Any Desk, is almost certainly a scam. It doesn’t require a real company to see your desktop screen. It’s usually a trick to get your account information.

• Blockchain Scam: Do not trust anyone who claims to have “found” a large amount of cryptocurrency that is yours on the blockchain. They usually charge a “release fee” to withdraw your funds, but you can guarantee they will walk away with your money.

• Recovery Services: Cryptocurrency transfers cannot be reversed. Any recovery service that asks for money upfront is almost certainly a scam and should be avoided.

Protect yourself and your investment

“The best way to protect yourself and your investment is to choose an established online trading platform that you can trust,” says Adrian.

“A reputable exchange should be able to easily answer your questions about managing your trades and storing your bitcoins. It’s important to ask about things like security, data integrity, cold storage, fees, consumer protection, and available coins.

“A crypto exchange with a solid track record that many customers trust and that has the right checks and balances is your safest bet,” he says.

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Economics Professor Warns ‘Cryptocurrencies May Contribute to Monetary and Financial Instability’ – Economics Bitcoin News

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Cornell University economics professor and former head of the IMF’s China division, Eswar Prasad, warned that “cryptocurrencies can contribute to monetary and financial instability.” He added that if the industry is not regulated and there is no investor protection, then the risk is compounded.

Economist sees crypto as a risk to financial stability

Eswar Prasad, Nandlal P. Tolani Senior Professor of Trade Policy and Professor of Economics at the Charles H. Dyson School of Applied Economics and Management at Cornell University, shared his opinion on cryptocurrency in an interview with CNBC published on Wednesday.

Prasad is also a Senior Fellow at the Brookings Institution, where he holds the New Century Chair in International Economics, and a research fellow at the National Bureau of Economic Research. Previously, he was Head of Financial Studies in the Research Division of the International Monetary Fund (IMF) and Head of the China Division of the IMF.

He said:

Cryptocurrencies can contribute to monetary and financial instability, especially if they spawned a large and unregulated financial system that lacks investor protection.

His statement echoes a report recently released by the IMF warning that the rising popularity of cryptocurrency could pose a threat to financial stability. In addition, Bank of England Deputy Governor Jon Cunliffe said this week that regulation is urgently needed as the crypto industry is growing rapidly and there are some “very good reasons” to believe it poses risks to the country’s finances could represent stability in the future, even if the risks are currently limited.

Professor Prasad was also asked how cryptocurrencies could increase economic inequality. “Cryptocurrencies and their underlying technology promise to democratize finance by making digital payments and other financial products and services easily accessible to the masses,” he replied. “But with existing inequalities in digital access and financial literacy, they could end up worsening the inequality.”

In addition, he emphasized that “all financial risks resulting from investing in cryptocurrencies and related products could ultimately fall particularly heavily on naive private investors”.

The Cornell Professor of Economics also discussed central bank digital currencies (CBDCs), stating:

I think central bank digital currencies are the way of the future. But every central bank will want to make sure that their money is not used for illegal purposes so that transactions are verifiable and traceable.

However, Prasad noted that “if every payment you make, even for a cup of coffee or a sandwich, can be viewed by a government agency, it is an uncomfortable proposition.” The economist concluded, “In a more dystopian world, you could Let the government decide what kind of goods and services their money can be used for. “

Do you agree with the economics professor? Let us know in the comment section below.

Photo credit: Shutterstock, Pixabay, Wiki Commons

Disclaimer of liability: This article is for informational purposes only. It is not a direct offer or solicitation to make an offer to buy or sell, or a recommendation or endorsement of any product, service, or company. Bitcoin.com does not provide investment, tax, legal, or accounting advice. Neither the company nor the author are directly or indirectly responsible for any damage or loss caused or allegedly caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.

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