Disadvantages of Bitcoin and Ethereum and DAG solutions

As cryptocurrency is increasingly accepted by the public, it has been widely used in various innovative practices in the industry. Startups use cryptography to solve many existing problems and create new ways of running services and businesses. Among all cryptocurrencies, the biggest players are of course Bitcoin and Ethereum, which also represent two different cryptocurrency camps.

PoW and PoS are two mechanisms that the cryptocurrency community has been arguing about, but what exactly do these two mechanisms mean? Both Ethereum and Bitcoin run on a PoW-based system, but the operating mechanisms of Bitcoin and Ethereum are different.

The PoW protocol was first created in 1993, and its full name was first announced in 1999. This concept was not widely used before Bitcoin, and people gradually began to understand it only after Satoshi Nakamoto applied the PoW mechanism to the Bitcoin system.

PoW is mainly used to prevent the system from being hacked or attacked by DDoS, and to ensure that information transmission is more secure without the involvement of a third party, which means that PoW is the current backbone of Bitcoin and Ethereum.

The work related to PoW mainly comes from miners. In order to ensure the normal progress of transactions and generate more currency, miners need to solve mathematical problems to ensure that the newly generated blocks on the blockchain are legal and valid. Once the new block is proven to be valid, it will include all the transaction information in it into the blockchain.

As time goes by, the difficulty of solving the mathematical problem becomes greater and greater, which requires more computing power to solve the problem. This also buries a problem of the PoW system, that is, as the cost of solving the problem becomes higher and higher, miners will be reluctant to mine new blocks. The solution to this problem is that users pay extra rewards on each transaction, which will incentivize miners to determine the transactions with higher rewards first.

But the system still suffers from a lot of problems. While the blockchain is fast and transaction fees are low, anyone who has used Bitcoin recently will tell you that this is not true. If a trader sets a reward that is too low for their trade, the transaction will be held up for weeks until it is eventually returned to the originating wallet.

There is a legitimate concern that this will be an unsustainable system because as transaction fees get higher and higher, the only option left for people is to store Bitcoin, just like storing gold. This is not a problem as a commodity, but as a legal currency, the PoW system is in big trouble.

The only proposed solution to this problem is the SegWit2X hard fork. The core of this proposal is to increase the capacity of the on-chain blocks from 1MB to 2MB. Although this solution can effectively double the transaction volume in the network, it will also create a second currency at the same time. Since the vast majority of people do not want Bitcoin to split into two currencies, as this will cause huge disagreements among people about which one is the "real Bitcoin", this idea was shelved in November this year.

Although Ethereum and Bitcoin operate in different ways, a hard fork is also planned, with Ethereum planning to convert the PoW protocol to a PoS approach.

The main reason for this change is that the PoW system relies heavily on various forms of terminals, and the resulting continuous consumption of electricity weakens the value of the cryptocurrency.

Currently, the amount of electricity consumed to complete a Bitcoin transaction is the same as the amount consumed by 1.5 American households in a day, and this trend will increase further. Regarding its power consumption, some people have made reliable predictions that by 2020, the total amount of electricity consumed to support Bitcoin transactions will be equivalent to the total power consumption of a small country. In fact, since the electricity cost of Bitcoin mining is settled in legal currency, this will further have a negative impact on the value of cryptocurrency.

Ethereum’s solution will be to conduct a PoS hard fork. This protocol, called Casper, will replace mining with a verification mechanism.

Ethereum's validators will be randomly selected from people who hold tokens in the validation pool. This validation pool will lock a certain amount of ETH and distribute corresponding rewards based on the amount of ETH invested by the corresponding person. Unlike computing power, selecting validators in a random manner can minimize electricity consumption.

In order for these “validators” to remain loyal, they must first pay a deposit before they can verify a transaction. If they are found to have falsified transaction verification, they will lose their deposit and be permanently excluded from the verification network.

Technically, this mechanism can help fix at least one network vulnerability in the PoW system, which is that if there is a large group of miners overseeing the system, they may launch a 51% computing power attack.

For various reasons, blockchain was invented first, and a system like it is considered centralized because it is subject to interference from various human factors. Ethereum’s situation is not objective after the blockchain data rollback in 2016 and the wallet theft in 2017.

A PoS system requires a highly secure network to resist various types of hacker attacks, but Ethereum has not proven itself to have such capabilities.

Despite the extremely high value of cryptocurrencies and their irreplaceable technological advantages, the two mainstream currencies in the current industry are facing huge problems. One possible solution to the above problems is the directed acyclic graph (DAG) protocol, which proposes a solution to the entire blockchain system problem.

This protocol enables transactions to be confirmed in the current currency systems of "ByteBall" and "IOTA". Each subsequent transaction in the system provides data to resolve the previous transaction, which is the DAG.

Although the system is still being improved, it is exciting to see this new blood in the crypto network. There is still a lot of DAG to explain and improve, but with the problems we have recently realized with the old PoW and PoS systems, this technology needs to get more of our attention.