Ethereum price: What the Casper update means for Ethereum

Ethereum is on a charge right now after the first testnet of a major update was released. Here's what it means.

Ethereum, while many believe is the future of the internet, in its current form still has problems handling capacity, relies on miners for proof of work and is quickly becoming more expensive for transactions.

In December, the increasingly popular Ethereum-based game CryptoKitties brought in so much traffic that it completely overwhelmed the Ethereum network for 24 hours.

There are several improvements on the roadmap to eventually bring Ethereum to the point where it can handle as many transactions per second as the Visa network, decentralised and at a cheaper price.

The first of these is known as the Casper update, and its initial test network was just released, which is why Ethereum's price has been going through the roof.

Casper, once it's integrated will turn Ethereum from a Proof of Work platform into a Proof of Stake, which will make everything much faster and cheaper as it continues to grow.

Currently, the Proof of Work system Ethereum uses means miners are needed to solve complex algorithms to support consensus and keep the network running.

In the Proof of Stake world, these miners will be replaced by "Stakers". These Stakers will stake their coins in special wallets, and be paid dividends from network fees based on how much ETH they stake. Stakers will need to have a minimum amount of ETH before they can take part in the consensus. It's not sure yet how much ETH will be needed, however Ethereum founder Vitalik Buterin has said it could be around 1,000 to begin with.

The biggest change which will come from this is that it will make Ethereum miners redundant. It also means that the huge electricity costs associated to mining will go away too - something many analysts have been critical of around cryptocurrencies.

The particular testnet that was just released by Ethereum developer Karl Floersch is one of two parts of the Casper update to Ethereum. Floersch's part is known as Casper FFG (Friendly Finality Gadget), and is responsible for the Ethereum network's transition between Proof of Work to Proof of Stake. This will be the first part of the Casper update.

The second part is known as the Casper CbC (Correct by Construction), and will be responsible for managing Ethereum's consenus after Casper FFG has been implemented.

Casper will be apart of a wider so called Constantinople update which is due sometime early this year, however there are no set dates yet.

There is a definite push to get it out as soon as possible to avoid another CryptoKitty-like issue, especially as more Dapps begin to be built on Ethereum.

Also part of the Constantinople update will be the addition of the EIP-86 protocal, which will allow smart contracts to pay the transaction fee, rather than it falling on the shoulders of the sender to pay the Gas each time.

This information should not be interpreted as an endorsement of cryptocurrencies or a recommendation to invest. Historic performance is no guarantee of future returns. As an investment class, cryptocurrencies are speculative investments and investing in cryptocurrencies involves significant risks – they are highly volatile, vulnerable to hacking and capital loss and sensitive to secondary activity. Before investing you should obtain advice and decide whether the potential return outweighs the risks.