Everything you need to know about Ethereum switching to Proof-of-Stake.
Ethereum developers have announced the date for their transition to Proof-of-Stake: đź“… September 15, 2022.
All tests ran successfully and barring any unforeseen circumstances, and the transition should be implemented on time. At this point, there’s little chance of postponement.
There are several reasons for the transition from Proof-of-Work to Proof-of-Stake:
— On PoW, Ether consumes as much electricity per year as the entire country of Finland, but this is out of step with the green agenda of modern technology companies. PoS will reduce electricity consumption by 99.98%.
— The PoW consensus mechanism isn’t sustainable and doesn’t scale in the long term. With PoS, the network will be more accessible to a large number of users, and not just big-time miners. The entry threshold is basically the minimum stake — 32 ETH (~$55K). Anyone can stake without worrying about equipment, where to house it, and electricity bills.
— Eventually, the throughput capacity will grow, and transaction fees will fall, making the entire ecosystem more attractive for users and developers. However, this won’t happen immediately after the Merge. The Merge is just the first phase, which is the hot topic now. Vitalik himself said Ether would only be 55% complete after the Merge.
This will be followed by four more phases:
✶The Surge: breaking up the blockchain into smaller segments — a process known as sharding — which will increase scalability. The transition to sharding is set to take place in 2023, though postponements are possible.
To grasp the essence of sharding, imagine you have 10,000 entries in a database. Rather than verifying all the data yourself, getting five people on board to help you out is better. Each person can check 2,000 entries, and it’ll all go much quicker.
✶The Verge: reducing the size of proofs, data storage, and node size optimization and increasing scalability.
✶The Purge: optimizing old data and organizing data storage, which will reduce network congestion.
✶The Splurge: minor updates to finalize the four preceding phases, helping the network run as efficiently as possible.
All updates will take several years, and there’s sure to be an exciting blockchain battle during this period.
More than 13 million ETH, or 11% of the total supply, has already been staked in the Beacon Chain.
Coinbase analysts predict an ETH yield of 6.9% after the merger in September. Read more about it here.
On the one hand, 6.9% is an excellent yield for the American market. On the other hand, ETH is a highly volatile asset, and it’s possible such a rate won’t be enough to interest non-crypto institutional investors.
By the way, stakeholders won’t be able to sell their staked ETH for 6–12 months after the merger. That is, there won’t be any structural pressure on the sale of it. There will also be a cap on how much stakeholders can withdraw at any time: 43,200 ETH a day for everyone.
Unlike miners, stakeholders don’t have any overhead costs, such as electricity, rent, etc., and they don’t have to sell Ether to ensure their work constantly. This should also reduce the pressure on the market depth.
ETH inflation will decrease from 4.3% to 0.22% after the merger. In fact, there will be 95% less Ether potentially draining into the market.
Because part of the commission will be burned 🔥, Ethereum will experience deflation in most possible future scenarios, even if everyone stakes the gigantic sum of 100 million. Even with 0% commissions (an unrealistic scenario), ETH inflation would only be 1.51%. The most realistic scenario is a steady ETH deflation.
Vitalik argues that PoS is more secure than PoW: It offers greater security at the same cost, losses from attacks are much easier to recover, and there’s more decentralization than with miners. Read his full article here.
⛏ By the way, miners are very unhappy about the transition to PoS because it cuts off their income, and they’re planning a hard fork — ETHPoW.
Crypto veterans remember how the Ether/Ethereum Classic fork came about. Or there’s the story with Bitcoin Cash, when all the owners of the main coin received a forked coin for free, which they could sell for a nice bonus to add to their main stack.
And now, there are several teams that want to keep the old network on Proof-of-Work. The frontrunner is probably the team behind ETHPoW. They’ve already announced that they were able to eliminate the difficulty bomb and have their test network ready to go.
đź’Ł A difficulty bomb is a mechanism embedded in Ethereum specifically to exponentially increase the level of mining difficulty, which makes it unprofitable to continue mining.
The Ethereum Classic team claims this fork won’t work and those miners shouldn’t waste their energy, but should instead switch over to them. However, the Ethereum Classic network isn’t big enough to accommodate all Ethereum miners. This could require multiple PoW forks.
September is when it all goes down. The fork is planned for immediately after the merger — it’ll be interesting to see if it can survive.
How can I make money with ETHPoW? đź’°
1. Stock up ETH in your wallets (withdraw from exchanges) or the less risky USDC before the Merge, get tokens in the hard fork (in the case of USDC, immediately exchange for ETHPoW) and then sell the ETHPoW tokens on CEX (exchanges aren’t averse to making money on commission, and most likely someone will list a new token).
2. Put up other assets as collateral for ETH.
If the hard fork succeeds, all your tokens will remain in the PoW network. Stablecoins will immediately lose their value in the fork, because only tokens of the main ETH network, which will be supported by the asset management, will remain secure.
The same thing will happen with altcoins unless certain projects decide to stay on the forked network. All NFTs will have clones — CryptoPunks, Bored Apes — but the big question is whether they’ll have any value on PoW.
Several more burning questions: âť“
— Will NFT marketplaces and staking portals support PoW protocols?
— Will smart contracts work, and will it be possible to buy Bored Apes, (listed on OpenSea) but several times cheaper? 💎
— Will the current owners of punks take advantage of the situation and earn extra money by selling them on the forked network?
By the way, Gate and Poloniex already launched ETHS (ETH2, Ethereum PoS) and ETHW (ETH1, Ethereum PoW) IOUs on August 7, promising to issue tokens of a new PoW network or a new Ether on PoS in return.
ETHW costs all of $54. That is, the market is currently evaluating the fork at 3% of the cost of ETH. ETHS is trading at $1,658, which is $60 cheaper than the price of ETH on Binance.
⚡ Overall, it’s expected that the transition will be seamless — your MetaMask wallets, DeFi protocols, NFTs, dApps, and stablecoins will all continue doing what they do. Developers don’t expect any problems with the transition to PoS. ⚡
In any case, the success of the Merge and all other projects to improve Ether is a success for the entire crypto scene: Better blockchain âž” more adoption âž” higher value of the entire network, and opportunities for us.
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