Casper Upgrade: What’s next for the Ethereum Network?

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On May 8, Ethereum foundation released a new version of Casper the Friendly Finality Gadget (FFG) code. The fifth hard fork, scheduled for the first half of 2018, will help to solve the network backlog like high energy consumption, threat to decentralization and smart contracts vulnerability. Based on the sensational combination of Proof-of-Work (PoW) and Proof-of-Stake (PoS) algorithms Casper is to become the intermediate step to the full transition to PoS. After the testing the developers will resort to the hard fork since the Casper is incompatible with the previous versions of Ethereum core.

Ethereum blockchain backlog

Even though 2017 saw volatile price movements in cryptocurrency market, low-speed processing of Bitcoin and Ether transactions demonstrated that in their current shape they would not be strong alternatives to fiat currencies. The digital currency transaction speed is nothing compared to that of Visa, which is able to process 24,000 transactions per second.

Mining-related problems are another reason for switching to PoS. In the current state of the blockchain, when the network witnesses a huge variety of miners and mining pools, excessive energy is needed to get sufficient rewards. This gave birth to a trend getting more popular in the community -world analysts compare mining costs to the cost of energy usage in a particular country to identify the location where mining would be most profitable.

Despite a vast number of miners, Ethereum scalability is still poor. When one block is simultaneously processed by several miners, the complexity increases. But the network bandwidth stays unchanged, resulting in higher electricity charges. This leads to high costs and forces miners to “cherry-pick” transactions with a higher commission and disregard the ones with a low gas amount. Well, that turns the network into the universe of unprocessed operations.

In addition, the strong presence of super powerful ASIC miners increase the likelihood of the mining pools taking a majority stake of the hash. It concerns not only Ethereum community since may result in the network centralization and destroy all the advantages of the blockchain.

From PoW to PoS

Let’s take a step back and remind ourselves of what the PoW protocol is. PoW algorithm pays miners for solving mathematical problems and subsequently create new blocks. Bitcoin and Litecoin (amongst numerous other coins) use this method and as the result are subject to well-known challenges such as “risk of 51% attack” and irrational electricity costs. The performance of the blockchain dependent on the PoW algorithm provides limited number of transactions per second.

Ethereum developers released a protocol combining two algorithms – PoS and PoW. This fresh approach re-invents the principles of processing the Ethereum blocks and dramatically decrease the complexity of the blockchain. PoW takes advantage of physical computers that consume energy and calculate blocks at a rate that is more in line (proportional) to the costs. On the other hand, PoS, allows virtual coins to be purchased inside the system. The coins are subsequently converted into virtual computers that are tasked to calculate blocks. Under the latter approach, the chance of signing a block becomes dependent not on the processing power, but on the amount of validator’s coins. If the validator wants to participate in the confirmation of transactions, their funds are blocked with each confirmed block.

In essence, the Casper protocol would take a role of a “start point” in the transition from PoW to PoS, incorporating the outcomes of both principles.

Sharding

Sharding is a new concept that has been in development along with the PoS algorithm. The nodes store a part of the distributed registry and each of them is dependent on each other, thus, ensuring the system’s transparency. The Man behind the Ethereum network, Vitalik Buterin, compared sharding with the archipelago of islands. Ethereum’s main chain will be split into separate chains (“shards”) associated with each other and the main block. Nodes will process transactions in parallel with each shard processed independently. The novelty, joint nodes, can work in parallel, thus, resulting in higher processing speed and network’s bandwidth.

Miners and validators

The transactions within each shard will be verified by both validators and miners, thus, improving the network’s security. The reward for the miners for the Ethers production will go down from 3 ETH to 0.6 ETH. The coins will become less attractive to the ASIC miners which will significantly reduce the risks of network centralization.

The reward for validators is set around 0.82 ETH per block, which is almost four times lower than the current amount. Vitalik Buterin is anticipating that the Ethereum developers will no longer use PoW algorithm in future and leave the reward only for validators with 0.22 ETH per block.

The validators are supposed to take the role of an “escrow” in the system, confirming transactions with their deposit. If the validator finds a block they think is worth to be included in the blockchain, they will approve it by allocating a proportion of the deposit on this block. Once included in the blockchain, it gives the validator a compensation that is proportional to the share invested. If an erroneous block is approved, the deposit will be lost. Checkpoints will need to be created every fifty blocks to enable the completion of the blockchain and improve the security of the network.

As mentioned by Vlad Zamfir (one of Ethereum developers), any manipulations will be of less interest to validators due to a minimum deposit size the validator can receive for confirmation being 1500 ETH. Developers were also capable of achieving better processing speed by taking advantage of smaller number of nodes and delegation of large-scale work to light clients.

What can we expect from Casper going forward?

As mentioned earlier, at the Edcon event earlier this month, Vitalik Buterin said that apart from the reward system for validators, the approach to penalties would also be in place. The greater the stake is, the less the interest rate will be. Thus, while the owner of 2.5 mln ETH will receive an annual fee of 10 percent, the owner of 10 mln ETH will be given only 5 percent. The penalty is to be determined by the severity of the validators faults and can go as high as 100 percent. The validators will face penalties if frequently absent from the network. Problems related to the shard or disk where the wallet is stored will carry a fine of 2 percent of the amount deposited. For a group of validators whose shards are concurrently out of order, penalties will be much higher and likely in double digits.

On May 8th, the “0.1.0” update” of Casper has been made available on GitHub and developers can now kick off writing and testing software in different languages.

Please, beware that the Casper FFG’s release is targeted for the second half of 2018 as a “hard fork” due to its incompatibility with the earlier version of Ethereum software. Will this result in emerging of one more coin? Rather no, than yes. But the Ethereum market prices may positively change.