DEFINITION of 'Casper'

Casper is a proof-of-stake cryptocurrency protocol designed for use in Ethereum mining.

BREAKING DOWN 'Casper'

Cryptocurrencies rely on miners to add blocks of transaction records to a blockchain. When a decentralized ledger is used, ensuring that data hasn’t been corrupted is critical.

Miners have a financial incentive to process blocks, and may lie about data in order to reap a reward. This is referred to as the Byzantine Generals Problem. One method used to address this problem is called proof of work.

Miners are individuals or companies that use computer software to add transactions to the blockchain. They do this by solving a cryptographic puzzle, which often requires substantial amounts of energy and computer power. (See also: How Does Bitcoin Mining Work?)

The first miner that successfully solves the puzzle is awarded the block, and the block is verified by the network. The miner then receives a reward, which is typically a small number of tokens. This system of work and reward is referred to as proof of work. Both Bitcoin and Ethereum used a proof of work system.

Proof of Work System Criticized

The proof of work system has been criticized as inefficient, primarily because of the resources required to solve the puzzle. This increases the costs associated with mining, and prices out miners who operate in areas with higher electricity costs.

This results in the location of miners being concentrated in areas with low electricity prices, which makes a cryptocurrency system more rather than less centralized. An alternative to proof of work is proof of stake (PoS), which Ethereum has evaluated.

In a proof of stake system, miners are replaced by “validators,” who are rewarded with a transaction fee rather than an amount of tokens. The process begins when validators put in an amount of Ethers as a “stake.” 

If a validator discovers a block, it places a “bet” of a certain number of tokens that the block will be added to the blockchain. If the block is added, the miner receives a reward that is proportional to the miner’s stake. Ethereum’s PoS protocol is nicknamed “Casper.”

Casper is designed to tackle some of the risks that arise in proof of stake protocols. One of the more substantial risks is that miners may force a hard fork by mining on another blockchain, even when other miners are operating on another, longer chain.

This approach is not prevalent in proof of work protocols because it is too expensive, but because miners can place “bets” on different blocks in a proof of stake system there is no downside to trying to back a hard fork that ultimately fails to come to fruition. A malicious validator with substantial resources can muster the large amount of resources to attempt this strategy, which is referred to as “nothing at stake.”

Casper is designed to punish validators attempting to use a nothing-at-stake strategy. It does this by penalizing validators by reducing their stakes. It also penalizes validators who go offline, either intentionally or not, in order to improve network security by reducing nodes.

The development of the Casper protocol was part of two research projects: Casper Friendly Finality Gadget (FFG), and Casper Correct-by-Construction (CBC). The first project to be released was FFG.

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