Ethereum has long been one of the most important and prominent digital currencies. Although it has yet to topple bitcoin to claim the No. 1 spot among all digital currencies according to market cap, ethereum has arguably had a larger impact on the space overall thanks to initial coin offerings, most of which run on ether. In a similar way, ethereum has been at the vanguard of development because of its constant updates and attempts to improve its underlying ecosystem. One of the most recent of these, the Casper protocol, has been the topic of conversation among many ethereum community members in recent months. Read on to learn more about the latest proof-of-stake (PoS) protocol.

New PoS Mechanism

Cryptocurrencies tend to be governed by either a proof of work (PoW) or a PoS consensus mechanism. Casper falls into the latter category. Under the Casper protocol, as described by BlockGeeks, validators will set aside a portion of their ether as stake. When they discover blocks which they believe should be validated (or added to the ethereum blockchain), they then place a bet on that block in ether. If and when the block becomes appended to the chain, validators are then rewarded based on the size of their bets. There are mechanisms in place within the protocol to ensure that validators cannot game the system; it is for this reason that it is designed to operate in a trustless system. Validators acting in a malicious way will be punished by having their stakes removed.

It is this last aspect of the Casper protocol that supporters believe will set it apart. Previously, some systems have allowed malicious actors with nothing to lose to enter into the validation process. In this way, there is little disincentive to behave poorly in the process. Casper punishes these bad actors. As a result, validators must be cautious about their node uptime.

It's All In a Name

There are at least two different ethereum development projects that are going by the name of Casper at this point, adding confusion to the process. The first, Casper FFG, is a protocol developed by Vitalik Buterin, ethereum's co-founder. Casper FFG is going to be implemented first and is designed as a hybrid of the PoW and the PoS mechanisms. The second protocol, called Casper CBC, makes use of what is known as a correct-by-construction protocol.

Together, developers of ethereum hope that Casper will maximize energy efficiency, further support decentralization, allow for scalability and enhance economic security.

Investing in cryptocurrencies and Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns bitcoin and ripple.