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Ethereum Moving from Proof of Work to Proof of Stake

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Last updated October 19, 2021

Estimated Reading Time:
5 minutes, 14 seconds

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 are making their cases stronger than ever. 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 had 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 due to this move. 

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 as fault tolerance algorithms and are often referred to as the backbone of blockchain technology since they help verify the transactions.

There are two primary types of consensus protocols that 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 currently 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 a lot of computing power and solve a math puzzle. The winner then shares their newly created block with the network and gets some bitcoin or ether in return. The protocol is considered secure because hackers will require 51% of the network’s computing power to be able to defraud it. This means that the expenses that go into it will significantly outweigh the rewards.

Proof of Stake (PoS)

In PoS protocol, the validators with the highest stake are the ones who are 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 are to 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 as opposed to being selected through a competition. These benefits make PoS more future-proof compared to PoW — an underlying cause for the shift of Ethereum.

What does Ethereum’s Shift Mean?

Ethereum proof of stake

For stakers, the shift would mean they would be earning 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 a lot more complicated than people think. One of the most distinctive cons of PoS is that in its most basic form, it is quite vulnerable, less secure than PoW, and may favor the wales. So, the implementation needs to address these issues and grant better usability and attack resistance.

But don’t think that 51% attacks are so simple to do 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 launched Beacon Chain, an algorithm to handle coordination within the network between shard chains, which will essentially merge with the currently used Ethereum Mainnet. 

Impact of the Switch

The Ethereum community is quite divided regarding the switch. One side focuses on the security aspect 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 decrease in fees price, which makes a strong case for the cryptocurrency’s scalability.

For now, the adaptability of PoS in the world of cryptocurrency relies largely on the success of Ethereum’s shift to staking. If the company is able to achieve the set goals, the entire community would have the assurance that the consensus protocol might be worth a try. Moreover, many more people would be able to participate in a larger and much broader ecosystem due to this shift. 

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. While many have already started debating 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 for Ethereum to implement it and pave the way for future cryptocurrencies.