Limitations of Ethereum. Issues with Proof-of-Work. Proof-of-Stake as a solution.
Smart contracts that the Ethereum network has introduced open a lot of possibilities in many industries and areas of life, including financial technology, direct communication between smart devices, digital signatures and more.
The biggest problems with mass adoption of smart contracts are proof-of-work as the algorithm to validate the transactions and Solidity as the programming language of Ethereum’s Virtual Machine.
In proof-of-work algorithm, miners come up with a hash that is smaller than a target hash. The notion of hashes and the way they work has been explained in part 1 of the series of articles about Qtum. Coming up with the hash for a set of data, no matter how large the set, even if the set consists of thousands of Bitcoin transactions, is a trivial task for modern computers.
Therefore, if all that was required of miners was to create a hash, anyone could do it. For this reason, the Bitcoin network has the parameter called difficulty, which it changes every 2016 blocks. The more miners the network has, the more difficult it is to create a winning hash. Since one set of data can only have one hash under one cryptography algorithm, miners come up with a winning hash by adding a number to sets of transactions. This number is called nonce, which is short for “number used once.” For this reason, the goal of miners is to randomly pick a nonce that they could add to a set of numbers about Bitcoin transactions to get a winning hash. Once a miner does that, the Bitcoin blockchain accepts the winning block and all the information in the block, including the winning nonce and the hash becomes a part of the Bitcoin blockchain.
In simple terms, difficulty and having to calculate a winning hash mean that a hash for a block on the Bitcoin blockchain needs to begin with a lot of zeros. For example, the winning hash for block Block #516425 of the bitcoin blockchain was 00000000000000000030af5616ac298b83722cc2aaee7414a9ecfe58bd9d592d and the nonce that allowed the miner who created the block to come up with this hash was 754133743. You can see this information for block #516425 and all the other blocks of the Bitcoin blockchain by visiting https://blockchain.info.
Proof-of-work in practical terms
Practically speaking, proof-of-work requires expensive equipment and a lot of electricity. Fundamentally, Bitcoin miners are playing a lottery, it is just that instead of lottery tickets they are buying expensive computer equipment that can quickly generate random numbers (nonces), insert them into the sets of data (information about Bitcoin transactions) and calculate hashes. Another difference is that while with a lottery you may not win anything, because the Bitcoin network is honest and fully transparent, miners that do participate in the creation of the blocks of the Bitcoin blockchain on a regular basis, do win on a regular basis and get their Bitcoin rewards from the network.
Problems with proof-of-work
However, this approach to the security of the network is very expensive and intensive. Other than creating the blocks of the blockchain, the electricity that miners burn does not contribute to anything, and miners do burn a lot of electricity. According to an article in the Guardian (source: https://www.theguardian.com/technology/2017/nov/27/bitcoin-mining-consumes-electricity-ireland), in 2017 Bitcoin miners consumed more electricity than the entire country of Ireland, yet the only results of Bitcoin miners consuming all this power was new blocks on the Bitcoin blockchain.
Just like Bitcoin, the Ethereum network has been using proof-of-work algorithm to create blocks of its blockchain since the inception of the network in 2015. Vitalik Buterin, the creator of the Ethereum Network, has been discussing Casper, which is an update that would replace proof-of-work on the Ethereum network with proof-of-stake, for most of the 2017, yet as of the beginning of 2018, the switch to Casper has not yet occurred on the Ethereum network.
Instead of proof-of-work, Qtum uses Proof-of-Stake 3.0 (PoS 3.0). Instead of holding a mathematical competition in the way that proof-of-work does, PoS 3.0 rewards holders of coins that hold their coins the longest, while providing no incentives to those who do not hold any coins or hold their coins offline.