One of the biggest criticisms of proof-of-work mining is that it leads to a high level of miner centralization, where a few miners control over 50% of hashing power on the network. On Bitcoin, the top four mining pools contribute over 50% of the hashing power, while on Ethereum, the top three mining pools contribute over 50%.
Ethereum’s planned Casper update is intended to change all that by shifting the network from a proof-of-work to a proof-of-stake consensus mechanism. While most people focus on the energy benefits of proof-of-stake — it’s far less resource intensive than mining — the single most overlooked feature of Casper is that it promises to introduce a greater level of decentralization to the Ethereum network.

What are Casper and Proof-of-Stake?
In the traditional, centralized financial system, there is typically an organization (a bank, or payments company) whose job it is to validate that a sender sent something of value, and that the receiver received it in a transaction. In a decentralized world, this role is currently played by miners who validate new transactions.
Casper is a planned upgrade to the Ethereum network that will move it from its current proof-of-work algorithm to a proof-of-stake algorithm.
Proof-of-work relies on miners running nodes on the network to solve computationally difficult math problems to validate new transaction blocks. In exchange for contributing hashing power to the network, they receive a financial reward.
Proof-of-stake relies on validator nodes on the network to take turns proposing and validating the next block in the chain. The weight of a validator’s node — and the size of its reward — depends on the size of the coins staked in the verification process.
With proof-of-stake, nodes on the network can validate new transactions by “staking” a certain amount of Ether. They then vote to validate transactions on the chain.
The problem with this occurs when there are multiple competing chains. In proof-of-work, this is solved by selecting the chain with the most work behind it. In a “naive” proof-of-stake implementation, there’s nothing to prevent nodes to “stake” on multiple chains to increase their rewards, which makes it harder for the system to converge around a consensus. This is commonly known as the “nothing at stake” problem.
Casper solves this problem through a “consensus by bet” mechanism. Nodes on the network stake a certain amount of Ether to validate new transactions. They then bet on which new blocks will be validated. They’re rewarded when they bet correctly and penalized when they bet incorrectly. This incentivizes miners to bet with the eventual consensus.
In doing so, Casper is replicating the economics of proof-of-work. In proof-of-work, miners are implicitly penalized from mining on competing chains because it wastes energy and finite resources. In proof-of-stake, nodes are explicitly penalized from staking the wrong chain because they lose their underlying stake — preventing them from launching another attack without new funds to stake.
Because proof-of-stake doesn’t rely on miners competing with hashing power to mine blocks, it’s much more energy efficient than traditional proof-of-work. But it can also create greater decentralization for Ethereum at the protocol layer.

How decentralized is proof-of-work?
Proof-of-work cryptocurrencies like Bitcoin and Ethereum were designed to be decentralized, and this is what makes them valuable. They’re not controlled by a single entity, are censorship resistant, and open.
Despite this, mining for proof-of-work chains typically is highly centralized.

The top three mining pools on Ethereum control over 51% of hashing power on the network (Source: Etherchain)


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