What is Ethereum’s Casper update? Everything you need to know

You may associate the name with a certain friendly ghost, but Casper is also the title of an eagerly awaited update to the Ethereum network. The subject of much excitement within the Ethereum community, Casper will see the platform’s consensus method gradually switch from proof of work (PoW) to proof of stake (PoS).

So, what will this upgrade involve, how will it work, what will it mean for miners, ETH holders and the Ethereum network as a whole? Let’s take a closer look.

What is the Ethereum Casper Protocol?

Casper is a hard fork of Ethereum that hopes to tackle a couple of the key obstacles standing between the platform and mass adoption. Casper aims to provide enhanced scalability and combat the risk of centralisation as well as put an end to energy-inefficient mining.

Why do we need Casper?

Before we can look at why Casper is required, it’s essential that you have a basic understanding of the differences between proof-of-work and proof-of-stake systems. Ethereum, like bitcoin and many other popular cryptocurrencies, currently runs on a PoW consensus mechanism. Under a PoW algorithm, network participants known as miners solve cryptographic puzzles in order to validate transactions and create new blocks.

While PoW has been a popular and effective choice for many cryptocurrencies, it’s an old system that has some important weaknesses. Not only does PoW mining consume a huge amount of electricity, making it extremely inefficient, but it also raises the problem of centralisation.

The people and organisations that can afford faster, more powerful mining equipment have more success, resulting in the bulk of Ethereum mining being concentrated among a small number of mining pools. As you can see in the graph below, Ethereum mining is dominated by a few select mining pools – the four largest miners account for a whopping 70% of the Ethereum hash rate.

This has a few key ramifications:

• Not a level playing field. The big players have a better chance of mining blocks and obtaining rewards than anyone else. This means they will always be able to afford better mining equipment to help them access increased rewards – in other words, the rich get richer.
• Not decentralised. Decentralisation is one of the core philosophies underpinning cryptocurrencies but, as the graph shows, PoW systems are at risk of becoming centralised.
• Security risk. The large mining pools could theoretically join forces to launch a 51% attack on the Ethereum network, allowing them to double-spend, reverse transactions and generally cause chaos.

And Ethereum isn’t the only PoW cryptocurrency facing these problems. Take a look at the following graph of bitcoin’s hash-rate distribution, which shows that 70% of the hash rate is divided between just five large mining pools, only one more than Ethereum.

How does Casper solve these problems?

Casper will see Ethereum switch to a PoS system. Under this mechanism, miners are replaced with validators. To achieve consensus, these validators take turns proposing and voting on the next block, and the weight of each validator's vote depends on the size of the validator’s deposit (ie, stake).

How PoS works is explained in this extract from Ethereum’s PoS FAQ:

The blockchain keeps track of a set of validators, and anyone who holds the blockchain's base cryptocurrency (in Ethereum's case, Ether) can become a validator by sending a special type of transaction that locks up their Ether into a deposit. The process of creating and agreeing to new blocks is then done through a consensus algorithm that all current validators can participate in.

In more simple terms, ETH holders will be able to “stake” their tokens in special wallets. In return, they’ll be rewarded with ETH for their service to the network – the process is somewhat similar to how your bank pays you interest on the money you deposit in a savings account. And the more ETH you stake, the greater your rewards will be.

The first step in the Casper update will feature a hybrid of the PoW and PoS systems, with the PoS system layered on top of the PoW system. This will allow Ethereum to keep running as normal while the PoS system is tested by periodically validating “checkpoints”.

Just getting started? Find out how to buy Ether (ETH) in our step-by-step guide.

The two proposed versions of Casper

Casper isn’t just one project, but an amalgamation of two research projects currently being completed by Ethereum’s development team.

• Casper the Friendly Finality Gadget (FFG). Seen as the first step to transition the Ethereum mainnet from PoW to PoS, Ethereum founder Vitalik Buterin is pioneering this project which uses a hybrid PoW/PoS model. The existing PoW mechanics are used to create new blocks, while Casper the FFG is layered on top using a smart contract. The aim is to create a smooth and seamless transition to PoS, and the first version of the code was released in May 2018 for peer review
• Casper the Friendly Ghost: Correct by Construction (CBC). CBC Casper is led by developer Vlad Zamfir and relies on a safety oracle (which Ethereum labels an “ideal adversary”) to constantly fine-tune a partially built PoS protocol until the system has been completed. At the time of writing (May 2018), the GitHub repository for this proposal had not seen any changes for six months.

The advantages of proof of stake over proof of work

Ethereum’s move to PoS will offer a few key improvements on the current PoW system:

• Less electricity usage. It’s estimated that Ethereum consumes $1 million worth of electricity and hardware costs per day thanks to its consensus mechanism. Casper will most likely put an end to Ethereum mining as developers plan to release a “difficulty bomb” on the PoW fork when Casper is released.
• Reduced centralisation. With Ethereum mining set to go the way of the Dodo, Casper will eliminate the mining centralisation that threatens Ethereum.
• Reduced risk of 51% attacks. Validators under a PoS system will have their own funds tied up as a stake in the network, which means it is in their own interest to act in the best interest of the network as a whole. With their own wealth tied up in the value of ETH, there’s no incentive for a validator to try and harm the value of the currency. If a validator signs conflicting transactions or tries to exploit or attack the network, their entire deposit can be destroyed in a process known as “slashing”, although a portion of the destroyed deposit will be awarded as a finder's fee for anyone who spots this sort of malicious behaviour.
• Improved scalability. Ethereum currently has an average block-creation time of 15 seconds, while the PoS system is designed to shorten this to just a couple of seconds. This should improve scalability, allow sharding and make the network faster and cheaper to use.
• No need to issue as many new coins. Due to the fact that electricity consumption is reduced, there will no longer be a need to issue as many new coins in order to motivate miners to keep participating in the network. This may even see Ethereum have a negative net issuance one day, which means a portion of transaction fees would be "burned" so that the supply of ETH would go down over time.

Proof-of-stake challenges and risks

Casper may not seem all that friendly to Ethereum miners, and there are a few other key challenges and risks associated with the switch to PoS. Perhaps the biggest is the security risk associated with staking. Since the first iteration of Casper will only feature up to 250 validators, a physical disaster or a strict regulatory change occurring in an area that contains all the validators could cause the entire network to be wiped out. The network could also be wiped out if a hacking attack occurred in this situation

Another key factor worth considering is that while PoS may solve the problem of mining centralisation, it doesn’t actually promise the true decentralisation that is a key tenet of many cryptocurrencies. Staking will initially require a minimum deposit of 1,500 ETH, approximately US$1.065 million at the time of writing (May 2018), which puts it out of the reach of the average user and into the domain of collaborative staking efforts and so-called “whales”. Ethereum's creator Vitalik Buterin estimates that, in later stages, the minimum requirement will only be 32 ETH.

Distributed-systems expert Dahlia Malkhi summed up these concerns at Financial Cryptography 2018 in Curacao. “I think proof-of-stake is fundamentally vulnerable. You're giving authority to a group to call the shots [...] In my opinion, it's giving power to people who have lots of money,” she said.

There are plans to lower the minimum stake once Ethereum becomes a 100% PoS blockchain, but it’s not yet known when this change will occur or what the new minimum stake will be.

The bottom line

Ethereum’s shift from PoW to PoS is a very big deal indeed. Casper is a complex and important update for one of the world’s largest digital currencies and, if successful, it could be key to overcoming the scalability, energy inefficiency and centralisation risks currently facing the network. However, the switch to PoS isn’t without its own obstacles and risks, so it’ll be fascinating to watch how it all unfolds.

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Images: Shutterstock

Disclosure: At the time of writing the author holds IOTA and XLM.