Ethereum: Permission, Access, and Consensus? Better than Bitcoin?

Due to several challenges in the Bitcoin blockchain protocol related to the limited capabilities of its scripting language, second generation blockchain ledgers such as Ethereum implement their own version of a decentralized ledger.

The Ethereum blockchain has an underlying goal similar to the Bitcoin blockchain’s, which is

“to facilitate transactions between consenting individuals who would otherwise have no means to trust each other” — Wood 2016

It does so by establishing a transaction-based state-machine in which participants can expect that agreements between them will be enforced autonomously.

In order to do so, Ethereum provides a quasi-Turing-complete virtual state machine, the Ethereum Virtual Machine (EVM). It allows developers to deploy complex smart contracts that are compiled in this machine and autonomously enforce agreements when the programmed conditions are met.

This possibility is one of the fundamental differences to the Bitcoin blockchain. In the following posts, the blockchain characteristics defined in the post “Bitcoin, Ethereum, and Hyperledger Fabric — Which one wins?” will be assessed for the Ethereum blockchain. To remain digestible, the first three of the eight characteristics will be explained here, namely: Permission, Access, and Consensus.

Permission & Access

With respect to permissioning, Ethereum is a public, permissionless blockchain. This means, everyone can download an Ethereum client, view the transaction data and participate in transaction validation (mining). Permissioning is however possible on higher development layers, namely on the application layer.

Some groups, mostly industry consortia, have adapted Ethereum’s open-source protocol to run their own permissioned, private instance of Ethereum. In such an instance, only nodes that are allowed to enter the network can view transaction data. Among those, only nodes that are granted special rights can participate in transaction validation (mining).

Consensus

Like Bitcoin, Ethereum’s network nodes have to arrive at consensus about different versions of the Ethereum ledger. To do so, Ethereum also uses a Proof-of-Work (PoW) consensus mechanism. Ethereum has adopted the GHOST protocol that brings some efficiency gains to the PoW mechanism.

An important difference to the PoW-algorithm used in Bitcoin is that Ethereum implements a PoW-algorithm that is ASIC-resistant. This means, that, unlike in the Bitcoin blockchain, it does not make sense for miners to invest in highly expensive special purpose computing hardware, such as application specific integrated circuits (ASICs), as these will not be able to efficiently solve the mining algorithm.

Instead, to solve Ethereum’s mining algorithm, the use of less costly general purpose hardware such as CPUs and GPUs is more efficient.

The idea is to keep the costs to participate in mining low and thus allow many users to participate without requiring large initial investments. That way, Ethereum aims to keep up a more decentralized network than Bitcoin’s.

This seems important when considering that in the Bitcoin network a rather limited number of 10 large mining pools dominate the mining process. Such a concentration of computing power can be a risk for a decentralized system, especially when one mining pool gains more than 50% of the total computing power in the network. Such a mining pool would be able to conduct so called “51% attacks” and insert faulty transactions into the network. To prevent a concentration of expensive ASIC computers in mining pools, Ethereum uses a different mining algorithm than Bitcoin’s.

However, waiving ASICs does not solve the issue of a high environmental impact through high electricity consumption for mining. Because of this and some other security challenges of PoW, the Ethereum community is discussing the switch to an alternative consensus mechanism, called Proof-of-Stake (PoS).

Proof-of-Stake (PoS)

In order to understand, how PoS works, it is important to remember that PoW makes “voting” on a block expensive because “voters”, miners, need to invest in computing hardware and power consumption. Only when “voting” is tied to some cost, Sybil attacks, in which nodes can replicate votes at low cost, are prevented.

In PoS, these costs are not a $1000 investment in physical hardware, but rather the miner invests this amount in ether coins and deposits them in the PoS mechanism. The mechanism then pseudo-randomly assigns the owner the right to create the next block. The higher the deposit, the higher the probability to earn this right.

The community states that higher security against 51% attacks as well a reduced environmental footprint would be important results after the switch to PoS. The Ethereum project “Casper” is currently working on the specific technical details for the switch to PoS.

To sum it up, compared to Bitcoin, Ethereum shares the same openness, but implements its PoW consensus differently to avoid mining concentration. It is impossible to judge what is the best way to go. Both blockchain networks are highly successful. But can they both scale in the future?

This brings us to the question whether Ethereum faces the same scalability issues as Bitcoin. To find out, see here.

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