Ethereum Moving from Proof of Work to Proof of Stake
The global blockchain market is set to be valued at $23.3 billion by 2023.
No wonder cryptocurrencies are steadily gaining prominence across the world. Their decentralized nature, rising value, and accessibility make their cases stronger. In fact, their popularity is cemented because a new post on Bitcoin pops up every three seconds on social media.
Some of the leading cryptocurrencies being traded across the globe include Bitcoin, Ethereum, and Tether. Ethereum is by far the biggest competitor of Bitcoin due to its widespread usage in decentralized finance. In 2020, Ethereum recorded nearly 1 million transactions.
So, when Ethereum announced that it was shifting its consensus protocol, the entire crypto community noticed and debated what the future would look like. Here in this blog, we will discuss what it means and how the future of cryptocurrencies would look, given that this move has already occurred on September 15, 2022.
What is a Consensus Protocol?
Consensus protocols are algorithms that are followed by companies using blockchain technology that dictate the approach taken to arrive at a consensus through distribution. More specifically, it is the protocol followed by a single data value within distributed systems for attaining a necessary agreement.
For cryptocurrencies, such protocols are also designated fault tolerance algorithms and are often referred to as the backbone of blockchain technology since they help verify transactions.
Two primary types of consensus protocols are of significant importance in the world of cryptocurrencies — Proof of Work (PoW) and Proof of Stake (PoS). Let us understand them in detail:
Proof of Work (PoW)
Popular cryptocurrencies such as Bitcoin and Ethereum Classic use PoW as a consensus protocol. In this protocol, miners competing to create new blocks on the blockchain network must go through many transactions and find the hash code corresponding to the last block.
The process requires miners to display much computing power and solve a math puzzle. The winner then shares their newly created block with the network and returns some bitcoin or ether. The protocol is considered secure because hackers require 51% of the network’s computing power to defraud it. That means the expenses that go into it will significantly outweigh the rewards.
Proof of Stake (PoS)
In the PoS protocol, the user with the highest stake is the one who is likely to be given the responsibility of becoming a validator. The validator in this context is the one who verifies the transactions. So, the longer a staker holds on to their stake and the larger it is, the more likely they will validate.
Proof-of-stake offers better energy efficiency, more scalability, and a decrease in hardware requirements, making cryptocurrencies more accessible. Moreover, the validators are chosen randomly instead of being selected through a competition. These benefits make PoS more future-proof than PoW — an underlying cause for the shift of Ethereum.
What does Ethereum’s Shift Mean?
For stakers, the shift would mean they would earn the transaction fees instead of being awarded block rewards for solving complex equations. And although the rewards lessen, the entry bar significantly lowers as well. The PoS protocol also speeds up the processes in the ecosystem, making it easier for users to conduct transactions instantly, improving dApps user experience.
More importantly, you can also expect a significant reduction in gas fees because the Ethereum network would balance supply and demand much more effectively.
Essentially, the shift of Ethereum from PoW to PoS means that the company is moving to a more energy-efficient alternative. Right now, Bitcoin leaves a significant environmental footprint due to its popularity and PoW mechanism.
Yet, by switching to PoS, Ethereum will significantly reduce these environmental costs by eliminating those complex cryptographic puzzles from the equation.
Moreover, the proof of work protocol no longer seems feasible because it requires higher computing power for mining and cuts out a significant chunk of people from the equation. As a result, even the best Ethereum wallets may need to reevaluate their strategies as we advance.
Even though Ethereum has been trying to shift to PoS since early 2020, it is much more complicated than people think. One of the most distinctive cons of PoS is that in its most basic form, it is pretty vulnerable, less secure than PoW, and may favor the whales. So, the implementation needs to address these issues and grant better usability and attack resistance.
But don’t think that 51% of attacks are so simple in PoS. Validators who misbehave or are found to be colluding will end up losing their entire stake in the process, which is designated as a primary security measure.
All things aside, Ethereum has already merged, on September 15th, 2022, the newly launched Beacon Chain, an algorithm to handle coordination within the network between shard chains, with the currently used Ethereum Mainnet, transforming the network protocol into proof-of-stake.
Impact of the Switch
The Ethereum community is quite divided regarding the switch. One side focuses on security and predicts that PoS will make crypto transactions more vulnerable and insecure.
The other side argues that Ethereum will become more accessible to people who do not have large amounts of computing power, leading to an increase in speed and a decrease in fees price, which makes a strong case for cryptocurrency’s scalability.
For now, the adaptability of PoS in the world of cryptocurrency relies mainly on the success of Ethereum’s shift to staking. If the company can achieve the set goals, the entire community will be assured that the consensus protocol might be worthwhile. Moreover, this shift allows many more people to take part in a larger and much broader ecosystem.
Before the Merge upgrade in September 2022, the energy consumption of Ethereum for the previous month (August 2022) was approximately 86 TWh per year. Basically, this is comparable to the consumption of a medium-sized country. After replacing mining with staking, this indicator dropped by 99.95%.
In a Nutshell
Ethereum, the biggest competitor of Bitcoin and one of the most widely used cryptocurrencies, announced its shift from PoW protocol to PoS and implemented it on September 15th, 2022. While many have debated the ramifications of this move, it is fair to say that both sides have strong arguments.
Regardless of how this debate goes, PoS does have a solid potential to replace PoW as the most commonly used consensus protocol in the crypto market. All there is left to do is wait to see more about how implementation works for Ethereum and pave the way for future cryptocurrencies.
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