PoW vs PoS: Exploring The Big Ethereum Debate

The ideology behind cryptocurrencies revolved around the need for a peer to peer trustless system where different individuals can come together and transact in a secure way. The solution? Blockchain technology, a mechanism that used the consensus (unanimity) of all network participants to arrive at a valid decision. There was no single point of failure in this system which made the data secured against fraud. There are different types of this mechanism which includes Proof of Work (PoW), Proof of Stake (PoS), Proof of Activity(PoA), Proof of History(PoH). The focus of this post is on the first two.

Proof of Work (PoW) consensus mechanism was the first version of how a blockchain should operate. PoW required a network of nodes where the node owners (miners) compete with each other to solve extremely complex computational equations in order to validate a transaction. This involved the use of large amounts of computational resources and energy to generate a new block of data.

This action is not done out of altruism as these miners are also fighting over a reward for being the first to solve the mathematical equations. Platforms currently using PoW include Bitcoin, Ethereum(pending), Zcash.

Proof of Stake (PoS) is the alternative consensus mechanism developed to improve upon the drawbacks of PoW. This system involves the process known as staking where the stakers (equivalent of miners) are required to lock up digital assets/funds for a chance to be randomly chosen as a validator for a newly produced block. Unlike PoW, here the validators earn their rewards from transaction fees and also from doing other activities to help secure the network.

This mechanism is a more sustainable and eco-friendly alternative to PoW. Platforms using PoW include Cardano, Solana, Avalanche.

For a long time, the operating costs required to run a PoW system on Ethereum were notoriously high. Not only were the costs high, the impact of the electrical consumption on the environment has led to criticisms from some investors and environmentalists. With these prevalent issues, there was a need for meaningful changes to be made to the operating process which has led many to seek more sustainable energy efficient solutions such as PoS. The PoS upgrade will make the crypto “more scalable, more secure and more sustainable,” and to pave the way for more updates to be made on the ETH blockchain, opined the Ethereum Organisation.

The Merge will complete Ethereum's blockchain move from a Proof of Work(PoW) to a Proof of Stake(PoS) consensus mechanism. This upgrade known as ‘Paris’, will happen when Ethereum hash rate reaches a certain level in approximately 3 days. The first step on this journey was taken on 1 December 2020. On that day, The Beacon Chain went live and brought PoS to Ethereum.

The working principle of the PoS system already borders on executable smart contracts which forms the bedrock of DeFi projects. So, it’s not really new terrain for Ethereum blockchain to circumvent. There might be a number of controversial outcomes that will likely emerge following this upgrade.

One ‘exciting’ outcome hinges on the upgrade’s deflationary impact on ETH because staking will likely slow down the rate at which the crypto is produced. In a nutshell, a decrease in rate of supply and a corresponding increase in demand might push up the market price of ETH. Good news for ETH investors, I suppose.

Another outcome might be found in the NFT sector. With millions of valuable artworks and collectibles running on the Ethereum blockchain, NFT collectors are right to have some concerns regarding the Merge. Some of the concerns include potential loss of NFTs during or after the upgrade and the possibility of a replay attack due to the existence of two forks of a particular blockchain. However, both scenarios are highly unlikely to happen.

There are still some misconceptions concerning the Merge like: will Ethereum fees decrease after the Merge? No, it wouldn't. At least, not immediately. You can find more answers and explanations here. The crypto community will be keeping a close eye on the events from outcome of the Merge as it will definitely have an effect on the overall crypto ecosystem.

Thanks for reading and I hope you enjoyed the post.

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