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Ethereum’s Proof of Stake, Explained

April 03, 2022 - 8 min read

The consensus method of Ethereum will be switched from proof of work (PoW) to proof of stake (PoS) to enhance Ethereum’s transaction throughput, reduce fees, and make the network more sustainable. What impact does switching to proof of stake have on Ethereum’s future?

Ethereum Proof of Stake

Introducing Ethereum 2.0

A major upgrade to the Ethereum network has been in the works for some time now. Ethereum 2.0 is a switch from PoW to PoS that affects the whole Ethereum network. Launching the second version of Ethereum should improve the network’s efficiency and scalability, which is the reasoning behind the switch. The adoption of the proof of stake consensus method is the most notable difference in Ethereum 2.0. 

According to the Ethereum Foundation blog, switching to proof of stake reduces the network’s energy consumption by 99.95% and increases network efficiency by 2,000 times its capacity.

This will not result in the formation of a new cryptocurrency. Instead, most of the changes will be made behind the scenes, with technological advancements that most on the outside won’t notice.

ETH 1.0 can only handle roughly 25 transactions per second (TPS) at the moment. That’s insufficient for a single DeFi protocol, much less the whole blockchain network. However, the founder of Ethereum, Vitalik Buterin, has previously stated that ETH 2.0’s capacity may soon expand to 100,000 TPS after each step is successfully completed. Therefore, decentralized finance will become much more feasible with Ethereum 2.0, both in terms of speed and transaction costs.

Reaching Consensus: Proof of Stake

Proof of stake is a type of public blockchain consensus mechanism based on a validator’s economic stake in the network. Peercoin was the first cryptocurrency to use the PoS mechanism. Proof of stake asserts that a miner’s ability to mine or confirm block transactions is proportional to the number of coins the miner owns. This implies that the more coins a miner has, the greater the mining power will be.

Proof of stake measures a miner’s mining power by the number of coins they possess. Thus, a PoS miner is confined to mining a percentage of transactions equal to the ownership stake. A miner with 5% of the available Ethereum, for example, could potentially only mine 5% of the blocks. With the aid of a validator, PoS validates a transaction. A validator is a node that participates in the network’s consensus mechanism. To complete a block, it must have the approval of two-thirds of all active validators.

The algorithm that PoS uses is as follows:

  • Validators freeze the staked coins.
  • Staked coins are looking for a new block to add to an existing chain.
  • Only if a new block is discovered is the payment given.

Advantages of PoS Over PoW

  • Transactions are processed quickly.
  • PoS has a much lower negative impact on the environment than PoW.
  • As it does not require downloading the entire blockchain and does not require a lot of computational power, it can more easily be mass-adopted on smaller and less powerful devices.
  • PoS significantly increases the cost of 51% attacks in many forms. An attacker with a 51 percent ownership in the currency who wants to attack the network would not gain from attacking the network when the attacker has the majority. If the value of the cryptocurrency drops, so does the value of the attacker’s holdings, and the majority stakeholder will be more motivated to have a safety net in place.

What About Ethereum Miners After Switching to PoS?

Ethereum Proof of Stake

After Bitcoin, Ethereum is the second most popular and capitalized cryptocurrency. The Ethereum blockchain serves as a foundation upon which decentralized applications can be built. Miners now execute Ethereum mining by verifying transactions using computing power. 

A new block is added to the Ethereum blockchain every 15 seconds, transactions are logged in the block, and the miners who contributed to the block are rewarded with 3 ETH. Miners are also rewarded with commissions for transactions on the network.

Following the changeover, a new kind of mining will be employed. Token holders pick a validator-controlled node and stake their tokens in PoS. The validator is the node owner that receives the reward, with a portion of it going to itself and the rest going to token owners in proportion to the staked amount of tokens. As a result, token holders in PoS systems can earn passive revenue.

How to Become an Ethereum Stakeholder or Validator

Staking is the act of securing ETH in a smart contract in exchange for a payout. Ethereum 2.0 relies on locked tokens to execute transactions and produce new blocks. To become an Ethereum 2.0 validator, at least 32 ETH must be staked. If not, it would be wise to join a staking service where everyone serves as a validator simultaneously.

Why Switch to Proof of Stake?

Ethereum Proof of Stake helps the environment

Ethereum mining now necessitates a lot of productive equipment and uses a lot of power. As a result, individual mining has practically become obsolete — as the demand for mining equipment continues to rise; now, all miners work together and split the reward proportionally to their shares of the hash rate.

Currently, the Ethereum network is based on proof of work. Ethereum uses this method to maintain the network and ensure it is safe and up to date. However, since PoW does not scale, it requires increasing computational power. Scalability refers to a system’s capacity to expand to serve additional users. 

Since the PoS algorithm consensus will be supplied without the need for mining, the network’s efficiency is likely to skyrocket — lowering power costs as well. Furthermore, since it’ll be easier and faster to verify who has the most significant percentage of ownership, the block generation time will be cut to a bare minimum.

PoS does not require large mining farms and consumes thousands of times less electricity compared to PoW. It’s also founded on the idea that the computers with the most invested in the system have the best chance of creating a new block. Consequently, mining Ethereum reduces long-term environmental impacts.

Casper Protocol as a Stepping Stone for the Transition

Ethereum developers believe that the PoW principle is the basis of all current cryptocurrency issues. However, even though PoW effectively obtains decentralized consensus, it consumes a lot of energy and has little commercial value. Furthermore, the PoW blockchain’s speed is restricted, and it can only handle a few hundred transactions per second at most. 

As a result, the Ethereum team chose to build a protocol that combines the parameters of two algorithms — proof of stake and proof of work — at the same time. Casper, the friendly finality gadget, is the name of the new protocol. Casper is a partial consensus technique that combines research into proof of stake algorithms with Byzantine fault-tolerant consensus theory. It is intended to alter the fundamentals of producing and distributing Ethereum blocks, while also decreasing the blockchain’s overall complexity.

The Casper protocol will serve as a stepping stone between PoW and PoS. All present PoW miners will continue to exist with a lower block reward under the Casper protocol, but new PoS mechanisms will be implemented. 

Casper will include a unique technical advancement called sharding. The aim is for the nodes to only maintain a portion of the distributed ledger, with the underlying math keeping the system transparent and accountable so that each node can trust the information of the others. In other words, Ethereum’s main chain will be split into shards, which will be connected to one other and the main blockchain. Shards are used to facilitate transaction processing in parallel.

Validators and miners will work together to validate transactions within each shard. Validators will check the authenticity of currency transactions and operate as escrow in the system, validating transactions with their deposit. 

The validator will earn a reward equivalent to the part it contributed if the block is legitimate and added to the network. It will, however, lose its investment if it authorizes an incorrect or malicious block. Validators will also construct checkpoints every fifty blocks to ensure the blockchain’s finality and dramatically boost the network’s security by removing potential returned transactions before the checkpoint.

How the Transition Will Affect Ethereum’s Decentralized App

The impact of ETH 2.0 on current decentralized apps is one of the concerns around the transition. However, there’s no need to worry about decentralized apps being incompatible with this blockchain. Instead, a greater risk is that business disruptions caused by road bumps in the network’s deployment may delay operations.

If Ethereum 2.0 is implemented correctly, it might spark a new wave of blockchain innovation as developers return to smaller platforms, previously frustrated by high transaction fees and sluggish confirmation times. As a result, Ethereum may begin to reclaim some of the market shares it has lost over time in the long run.

Roadmap to Ethereum’s PoS Transition

Phase 0, Phase 1, and Phase 2 are the three primary phases. At each level, the Ethereum 1.0 blockchain will continue to function.

  • The Beacon Chain will be launched in Phase 0 and will be responsible for monitoring validators, providing proof of stake consensus mechanism, and issuing penalties and prizes. The Beacon Chain went operational on December 1, 2020.
  • Phase 1 introduces shards, dividing the Ethereum network into 64 distinct chains. While it seems as if this would increase capacity by 64, it implies that ETH 2.0 can process hundreds more transactions per second than its predecessor. 
  • Phase 2 will see the introduction of ETH transfers, withdrawals, and smart contract capability, which will finally lead to the winding down of the Ethereum 1.0 network. This is expected to happen within 2022.

Final Thoughts

It will take a lot of effort and coordination for Ethereum to shift to proof of stake, but it is currently underway. The Ethereum blockchain’s efficiency and scalability will increase following the switch. Since PoS algorithm consensus will be provided without the requirement for mining, the network’s efficiency will rise, cutting power costs. While PoS mining may help alleviate some of the concerns, it’s unclear how effective it would be for overall convergence or security.

References

  1. Buterin, V. (2017, 15 Jan.). Parametrizing Casper: The decentralization/finality time/overhead tradeoff. Medium.
  2. Beekhuizen, C. (2021, 18 May). Ethereum’s energy usage will soon decrease by ~99.95%. Ethereum Foundation Blog.
  3. Chalopin, J., & Trehan, R. (2021, 14 July). A Proof of Stake Explanation. Deltec Bank & Trust.

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