Blockchain 2.0 and Ethereum [Blockchain Basics Part 3]
What is Blockchain 2.0?
Blockchain 2.0 builds upon the idea of exchanging value in a peer-to-peer and decentralized manner. With Blockchain 1.0, the value being transferred on the network is in the form of a currency. With Blockchain 2.0, the valued being transferred is programmable transactions in the form of smart contracts. Smart contracts, in short, are programs that self-execute when certain conditions are met. This notion is certainly not new, but combining smart contracts with blockchain creates a powerful network of computing power that is decentralized and censorship-resistant. It creates a network of self-executing contracts that is immutable.
Ethereum was proposed in late 2013 by Vitalik Buterin, a world-leading cryptocurrency researcher. The network currently uses Proof-of-Work (PoW) to verify transactions, which is the same consensus mechanism as Bitcoin. Ethereum’s native token is known as ether, which, unlike Bitcoin, is not simply used as a currency to be sent from one person to another. Ether is the fuel used to power the decentralized world computer that is Ethereum. This is because each program on the Ethereum network consists of transactions. That means each time a program wants to be executed on Ethereum, the program has to pay Ethereum to the miners who verify transactions. The revolutionary aspect of Ethereum allows developers to program transactions and make them execute only under specific circumstances. These smart programs combined can virtually allow any program that exists today to be adapted for the Ethereum network.
What is PoS and how does it work?
However, there is currently a problem with the Ethereum network: its low transaction speed. The PoW mechanism is slow and costly to maintain and all networks that use PoW face a slow transaction speed (this includes Bitcoin and Ethereum). To solve this, Vitalik Buterin, the founder of Ethereum, has pushed for Ethereum to switch its consensus model from PoW to Proof-of-Stake.
Proof-of-Stake (PoS) is quite different from PoW in terms of how it reaches a global consensus. Instead of letting miners compete for the block reward, PoS requires the network validators to provide a certain amount of funds as insurance against malicious behavior. With these funds stored safely, the network validators can start verifying transactions. If they choose to lie about the validity of a transaction, the other validators will find out and the network would take away the lying validator’s staked funds. This creates an incentive for network validators to refrain from verifying false transactions and, with a big enough network, would ensure the security of the network at nearly the same level as PoW. Unlike PoW, however, it does not have miners intensely competing with hashing power and thus, would have much faster transaction speeds and be more economically viable.