One of the most prevalent blockchains in the world, Ethereum, is poised to switch from a proof-of-work (POW) algorithm to a proof-of-stake (POS) algorithm, likely in 2017, with the release of the Casper codebase. Why does this matter? Because blockchain technology is becoming increasingly relevant and prevalent in businesses across the globe. It holds great potential to disrupt how businesses perform basic transactions, from payments, to programmable, self-executing contracts, to identity verification.
In the latest issue of Harvard Business Review, Harvard Business School Professor Marco Iansiti and Harvard Business School Professor and Cutter Fellow Karim Lakhani discuss the transformative potential of blockchain technology, comparing it as it stands today to the TCP/IP protocol in its early stages. ARPANET (the Advanced Research Projects Agency Network) was using TCP/IP for interoffice emails in the 1970s, and now, nearly 50 years later, lives around the world depend on this fundamental, open source protocol that gives the Internet its ability to transfer data.
TCP/IP adoption didn’t happen overnight, even though it was clear the technology had many powerful use cases. It took us until now to realize the potential and to construct fundamental business processes upon this protocol. As Iansiti and Lakhani point out, the technology adoption path that TCP/IP followed is something to consider as blockchain continues to make its way into the business sector.
POW = Proof of ... Waste?
One of the main issues to be overcome as Bitcoin and blockchain increase in popularity across the globe is blockchain’s sheer wastefulness. A POW blockchain such as Bitcoin requires high-powered computers that endlessly process transactions and solve algorithms, rewarded upon discovery of the right solution. This creates an extreme draw on electricity, with data centers producing excess heat into the atmosphere and hardware turnover well above average. Considering only Bitcoin, the largest of roughly 800 cryptocurrencies, there is currently as much running hardware as material used to build the Eiffel Tower. By 2020, the electricity consumption of the Bitcoin network alone will exceed that of the entire country of Denmark. Chip technology improves, and application-specific integrated circuits (ASICs) become more efficient in their electricity consumption as years go on. Nevertheless, the amount of electricity and resources needed to efficiently run the Bitcoin network is becoming increasingly unsustainable.
Casper the Eco-Friendly Blockchain
This isn’t new news. We knew this would happen, and the leading thinkers behind blockchain technology are focused on developing new algorithms to reduce this hardware and infrastructural consumption to make blockchain technology more sustainable and more accessible. Vitalik Buterin, creator of Ethereum, the second biggest blockchain, leads a team of developers that are working to combat some of the deficiencies of this wasteful POW system. This brings us to Casper, the POS fork of the Ethereum blockchain, in development and slated to be released in 2017. This would not be the first blockchain using a POS method, but it would be by far the largest.
The basic idea behind proof of stake is that it eliminates the need for wasteful data centers full of the expensive, power-hungry, environmentally unfriendly machines used to solve and maintain transactions on the blockchain. It replaces them with lightweight algorithms that calculate a worker’s power based on how much currency the worker holds. Think of it as how much mining and calculation power they could theoretically buy.
Fair and Aboveboard
Replacing a POW system with a POS system does more than simply mitigate the electricity and environmental challenges faced by nearly all blockchain systems. It also introduces a fairer system, where anyone can decide to be a miner without having to invest in physical hardware, data center space, electricity, and security.
Another major pro of a POS system is that it mitigates against a 51% attack. In a traditional POW system, any user or group of users could theoretically unite until they possess 51% of the network’s hashing power. At that point, they would have complete control of the network and blockchain, allowing them to modify transactions and double spend currency. This obviously would have a devastating effect on companies, users, and adopters who have become deeply invested in this new technology. Moving to a POS system creates an interesting dynamic where even if someone or some group were able to control 51% of the digital currency on that blockchain, it would not be in their best interest to create an attack on something in which they are already a majority stakeholder. Furthermore, with market caps now in the billions, a majority share in a POS blockchain currency is becoming prohibitively expensive.
Will Your Organization Lead the Charge?
As blockchain systems developers continue to innovate, they are improving the technology by providing new features, enhanced security, and improved ease of access. Companies need to be aware of these developments and adjust their processes in order to incorporate these new features into their fundamental workflow. Basically, companies need to be as agile with their processes as blockchain developers are with their codebases. It’s clear that blockchain technology can be as beneficial to business as TCP/IP has become.
While we move toward this decentralized open ledger, we need to remain cognizant of the obvious hurdles to jump and problems to overcome. But the roadmap has been drawn by trendsetters such as Buterin and his Ethereum project. Blockchain is here to stay, and while it will take some time to perfect as it becomes more mainstream, businesses should be asking, “Do we want to be on the front lines of in this area of technology innovation?”