The rise of cryptocurrencies like Bitcoin and Ethereum has spawned many copycats over the years. But while some networks are still struggling to gain traction, others have already established themselves as major players in the crypto space. Ethereum, the second largest cryptocurrency network, recently announced a change in how it processes transactions. This update marks one of the biggest shifts in the industry since Bitcoin came into existence in 2009.
In short, the move away from PoW to PoS will allow the network to process transactions faster and reduce energy consumption. However, there are plenty of unanswered questions surrounding the switch.
Proof-of-work systems are based on miners solving cryptographic puzzles to validate blocks of transactions and add them to the public ledger. These puzzles require large amounts of computing power and electricity to solve, so mining becomes increasingly difficult over time. As such, the amount of effort required to mine increases over time.
This makes it expensive for anyone without lots of capital to participate in mining. Miners must purchase specialized hardware, pay for electricity and keep up with technological advancements. Because of this, a limited number of people can effectively compete in the mining game.
Proof-of-stake systems eliminate much of this complexity. Instead of requiring miners to expend energy and resources to secure the network, stakers stake ETH and earn rewards for doing so. There are no additional costs associated with running a node, and the network doesn’t become less decentralized because everyone participates equally.
In late 2017, Vitalik Buterin, co-founder of Ethereum, announced that the network planned to make the transition from PoW to PoS. He cited several reasons for the decision, including scalability issues, security concerns, and the fact that PoW is inefficient and wasteful.
One of the most common complaints about Ethereum is the high transaction costs associated with sending money across the network.
While PoW reduces the amount of electricity used to verify transactions, it does nothing to address the issue of fees. In fact, the network’s current fee structure actually increases the cost of doing business on the network. With PoW, miners must compete against each other to find blocks of data that validate transactions. Miners receive rewards based on the number of transactions included in those blocks. However, miners are incentivized to keep mining blocks rather than waiting for larger payouts because the reward decreases over time. As a result, the block size limit is constantly being increased, causing transaction times to grow longer and longer.
With PoS, miners no longer need to compete against each other to mine blocks. Instead, they stake tokens and earn interest on their holdings. Those staked tokens act as collateral for validating transactions on the network. Because the network is now relying on a fixed supply of coins, miners have no incentive to continue increasing the block size limit. Thus, transaction speeds are expected to improve dramatically once the switch goes live.
However, while PoS eliminates the need for miners to compete against each other, it doesn’t eliminate the need for miners altogether. Validators will still be required to stake tokens in order to participate in the consensus mechanism. To do so, they’ll need access to sufficient amounts of ETH. If a large group of validators decides to manipulate the network, they could easily overwhelm the rest of the network by creating blocks faster than everyone else.