The Ethereum blockchain currently uses a Proof-of-Work consensus mechanism to verify transactions and to produce new ether coins. That means that ether miners require large amounts of computational power to process and verify transactions to receive new coins. Running a blockchain using a Proof-of-Work consensus mechanism, however, creates the problem of scalability as can currently be witnessed by the Bitcoin block size debate.
Circumventing scalability issues and the potential centralization of mining operations, the Ethereum development community has decided to switch the Ethereum blockchain to a Proof-of-Stake (PoS) consensus mechanism in the future. By switching to a PoS protocol, substantially less computational power is required, and miners will be rewarded in relation to the amount of ether they hold. Ethereum’s PoS protocol, called Casper, is still in development.
The Ethereum ‘Ice Age’
To prevent a hard fork that splits the Ethereum blockchain in two (for the second time), developers have implemented a difficulty time bomb also known as an ‘ice age.' The Ethereum ice age is a mining difficulty adjustment scheme that was created to incentivize miners to switch to the new PoS blockchain. Once the fork is executed, the mining difficulty rises exponentially to a point where it would be impossible for miners to keep up with the difficulty increase that would hike block time and make the blockchain effectively freeze. Hence, the term ‘ice age.'
Ethereum Community Votes on (EIB) #186 Proposal
Currently, the Ethereum community is voting on a proposal brought forth by developer Matthew Light who recommends reducing mining rewards to reduce the current level of ether issuance, which would most likely boost ether’s price and lead to increasing investments in the platform. A reduction in the mining reward is also presumed to help ward off speculative attacks on Ethereum’s cryptocurrency by competitors who offer reduced token inflation rates, according to Light’s proposal.
Light wrote in his (EIB) #186 proposal, “There is widespread interest within in the Ethereum community to reduce the current rate of ETH issuance. Uncertainty about the future total ETH token supply is a significant factor in reducing the market value of ETH which has negative externalities on the Ethereum ecosystem, by reducing the capital available by current investors to make investments in new Ethereum-based projects and by reducing the Ethereum Foundation's funds available for spending on salaries."
"Reducing ETH issuance in advance of Proof-of-Stake (PoS) would provide a measure of reassurance to investors that their holdings of ETH will be diluted to a much lower degree. It would be helpful in the crypto platform marketplace for Ethereum to reduce issuance given that various competing platforms have or are planning lower issuance levels, such as Ethereum Classic,”
Furthermore, Light believes that reducing block rewards would also take the pressure of the Ethereum network’s developers to rush into finishing the implementation of the new PoS protocol, which could potentially lead to errors due to the time constraint.
The current issuance level for ether is five ETH per block. Light recommends reducing the mining reward to two ETH per block:
“The terminal reward value of two ETH per block was chosen to reduce token supply inflation to around four percent annually, gradually reducing over time until PoS is launched. This is in line with the current Bitcoin token inflation rate of approximately four percent. In comparison, current proof-of-work ETH token inflation rate is a bit less than 13 percent per year.”
Light’s proposal also suggests pushing back the ‘ice age’ to a later date, which should be determined by the Ethereum Foundation in relation to the planned Casper PoS protocol release.
The vote is currently underway and being held on the CarbonVote platform, which allows Ethereum community members to cast a vote on matters regarding the Ethereum project using ether. The platform was set up in the aftermath of the Ethereum DAO hack of June 2016 and was used to vote on whether to rewrite the Ethereum blockchain’s transaction history to retrieve some of the stolen funds.
The motion that community members are voting on states: “The ice age should not be extended without at least some decrease in block rewards,” and voters are given the choice to vote on how high the block reward should be going forward and or whether they only want to vote against the motion.
Anyone holding ether in their wallet can partake in the vote by sending a 0-ETH transaction to one of the corresponding voting wallet addresses. Voters are only required to pay the gas fees of 0.0006 ETH for the transaction to go through and for their vote to be counted.
At the time of writing, the votes cast so far show a clear preference towards a reduction in ether mining rewards with only around 1.5 percent of voters voting against the motion. The majority of voters have voted for a new mining reward in the three to four ETH range per block mined.
Ethereum’s Bumpy Road to a Promising Future
Ethereum is the most promising blockchain project next to Bitcoin. Unlike Bitcoin, though, which functions as a digital transactional currency and a digital commodity, the Ethereum blockchain is a platform for smart contracts and decentralized apps (DApps) that enables developers to build a wide range of different commercial and non-commercial applications. For that reason, several industries have started to work on developing business solutions using the Ethereum blockchain, most notably the financial industry.
The Ethereum project got off to a great start when it had one of the most successful ICOs in history in July 2014 when 60,102,216 ETH coins were issued, raising over $18 million for the Ethereum Foundation. In May 2016, the Ethereum DAO (decentralized autonomous organization) held its ICO and raised around $160 million.
However, in June 2016 a hacker was able to exploit an error in the DAO’s code and was able to steal millions of ether from DAO members. Ethereum developers made the decision to hard fork the Ethereum blockchain to rewrite the blockchain’s transaction history to retrieve the lost funds. However, not everyone in the Ethereum community agreed to this hard fork, which resulted in the creation of Ethereum Classic as some miners decided to continue to mine the original Ethereum blockchain.
Following the hard fork that split Ethereum into two blockchains with two separate digital currencies, the Ethereum network suffered several attacks which brought the security of the network into question.
Nonetheless, both cryptocurrency-focused businesses, as well as corporations, have been building applications on top of the Ethereum blockchain. Given the amount of interest by commercial industries for smart contract solutions and a secure distributed ledger technology, the Ethereum project is looking at a bright future despite the technological challenges that lie ahead.