What does Ethereum’s Proof of Stake algorithm mean for miners?

Ethereum is a cryptocurrency platform that was initially presented by, then 19-year-old, Vitalik Buterin in 2013. The official launch of Ethereum occurred in 2015 after a very successful initial crowd sale. Ether, the token currency fueling Ethereum, is very similar to Bitcoin in that it is a decentralized cryptocurrency that publishes all transactions on the public ledger or blockchain and is generated by “mining” or computationally solving cryptographic puzzles. However, Ethereum is currently halfway through its development roadmap on the “Homestead” phase with plans for improvements in the not so distant future. One of these improvements is a transition from a proof of work algorithm to a proof of stake (PoS) algorithm. This will happen with the implementation of “Casper” after the “Metropolis” improvement.

Proof of Work vs. Stake?

Proof of work is what most cryptocurrency users are familiar with. It is the transaction validation algorithm that Bitcoin uses. Colloquially, it can be explained as a decentralized array of computers or “miners” around that world solving cryptographic puzzles. Once a puzzle is solved, the queued transactions on the Bitcoin network are posted to the “block” that is unlocked with the solution. The solution is distributed to all the Bitcoin protocol hosting computers such that everyone is aware of an confirms the latest block. The entirety of all the blocks and their ledger of transactions within them is known as the blockchain. Since a new block is difficult to create because it takes a lot of computation power to solve the next puzzle, the network is highly secure and extremely difficult to invalidate.

For proof of stake, instead of solving puzzles, transactions are validated by “staking” one’s own funds as collateral. The funds are then frozen for a period of time while consensus on the validity of the transaction is reached. Once the funds are un-frozen, the staker receives their original funds back as well as a “tip” in the form of transaction fees. This consensus algorithm deters malicious actors due to the risk of losing your staked funds for falsely validating a transaction.

Ethereum is switching to proof of stake for a variety of reasons. Some of the included incentives for this transition are higher scalability, easier implementation of sharding protocols, improved protocol economics, and environmental friendliness.