The Ethereum cryptocurrency has long held the second place after Bitcoin by capitalization. But this fall, Ethereum will launch a transition to the POS mining, which is forever gonna change this cryptocurrency.
We are gonna tell you how Ethereum was created, how it will change in a near time and what will it cause.
History of Ethereum
The author of the idea for the Ethereum cryptocurrency is Vitalik Buterin, who in 2013 proposed the new blockchain generation called Bitcoin 2.0, where users can create and run smart contracts and decentralized applications. To realize his plans, Buterin assembled a team of like-minded people and raised funds with the help of the crowdfunding in the second half of 2014. In total, 31 591 Bitcoins were raised for Ethereum development, which at a time amounted to $18M. Ethereum was launched in July 2015, while the stable version of the platform arrived in March 2016.
An important moment in the history of Ethereum was the split of a chain as a result of the network hardfork in the summer of 2016. In June, ICO DAO was held. It was powered by the Ethereum network. The idea was to develop a platform for automated investment management. A total of $100M were collected in Ethereum, but due to a smart contract error, an unknown hacker managed to steal more than half of that amount. The stolen money was eventually found and transferred to a blocked account, but it was impossible to return the funds back to investors without the network hardfork. Thus, with the support of Vitalik Buterin and the majority of the Ethereum community, the blockchain was rolled back to the point before the hack occurred. A process for returning the funds back to DAO investors was also launched. Nevertheless, some of the Ethereum users did not support the idea of the hardfork for the sake of satisfying the financial interests of a particular group. As a result, they continued to use the original blockchain, calling this project Ethereum Classic.
An important challenge for Ethereum was the appearance of Crypto Kitties in December 2017. This simple game of breeding unique kittens powered by blockchain was so popular that the Ethereum network couldn’t cope with a sharp increase in transactions, and the commission fee soared from 20 cents to 4 dollars. The popularity of crypto kitties did not hold for so long, and the network resumed the standard operation mode. But in July 2018, Ethereum was hit by a spam attack. According to Vitalik Buterin, the attack cost $15M to execute, and at its peak, the commission fee for the transaction jumped to $5
These events indicate that Ethereum has serious scalability problems, but they can be resolved this fall when the transition to the Casper protocol begins as well as the introduction of the Sharding technology.
Casper and Sharding
How does Buterin and his team plan to solve the scalability issue of Ethereum blockchain?
First, a transition to the Proof-of-Stake mining will be made or PoS for short. In this algorithm, transactions are confirmed by those who already own a cryptocurrency and don’t need powerful equipment to create a new block. Such mining is also called forging.
The Ethereum developers originally planned to eventually switch to the PoS mining, and for this purpose, a "difficulty bomb" is embedded in the cryptocurrency code. This is a software restriction that will make ordinary mining unprofitable over time. The transition to forging is scheduled for the fall of 2018 when there will be a hardfork called Casper.
This process will take a step-by-step approach. At first, the Ethereum blockchain will be powered by the hybrid mining, which will combine classic Proof-of-Work algorithm with the all-new Proof-of-Stake one. Meanwhile, the reward for the ordinary miners will decrease five times to 0.6 Ethereum per block.
After the Casper update, Ethereum network will be introduced to the sharding technology, which is basically a network of several blockchains. Each segment of such network processes the transactions on its own, thereby increasing the overall bandwidth a lot. At the same time, individual blockchains are synchronized with each other, allowing you to send money from one network to another. And in the case of hacking one of the blockchains, other networks will block the changes made by the hacker and restore the correct data. According to Vitalik Buterin, the successful application of sharding will allow the Ethereum network to be brought to the same level as the Visa payment system.
How will Ethereum change
The implementation of the announced Ethereum updates will change it beyond recognition, and this will be sure to have its consequences. The transition to the hybrid mining algorithm will not be liked by those who are already producing the Ethereum with their own mining farms. A likely development of events is that part of the miners will switch to mining another cryptocurrency, and most likely it will be Ethereum Classic. How much the hash rate will fall due to this, and what’s gonna happen to the Ethereum network security is difficult to assess. But the developers expect to compensate for the difference in security through the PoS mining.
But if the Ethereum Classic users are eager for Casper update, then it would be the right time for the EOS cryptocurrency to begin worrying because the updated Ethereum will work by a similar concept, but it will offer a much greater level of decentralization. If EOS has a strong point such as transactions speed and Ethereum has a bigger userbase, then the updated Ethereum will work no slower, meaning its users won’t have to search for a faster and more scalable blockchain.
Ethereum: Looking into the Future
Let’s summarize things. Executing Buterin's team plans will move Ethereum to a whole new level of technological development. This will strengthen its position as the top second cryptocurrency and the most popular blockchain for smart contracts and ICOs.
But this path is going to be challenging because one cannot exclude problems with code errors, the emergence of new blockchain spinoffs, as well as a foul play on the part of competitors, implying new spam attacks on the Ethereum network and fake news distribution.
Today, Buterin and the Ethereum developer team have passed the point of no return, when it is too late to give up their promises.