Ethereum 2.0: Shifting From Proof-Of-Work To Proof-Of-Stake
The move from the PoW to the PoS consensus mechanism will bring impactful improvements to the Ethereum blockchain. What are the benefits, and when will they be noticed?
Understanding Consensus Mechanisms
Also referred to as protocols and algorithms, consensus mechanisms allow decentralized crypto-economic systems to securely work together and agree on the state of the network.
The two consensus mechanisms that we’re weighing, proof-of-work (PoW) and proof-of-stake (PoS), are used to achieve an agreement across the network of the network’s current state. With plans to switch to PoS, Ethereum currently uses the PoW mechanism.
- With PoW, anyone who wants to add new blocks to the chain must solve a puzzle that requires a lot of computing power. Mining is solving the puzzle to “prove” that you have done the “work” by using computational resources.
- PoS requires users to stake their currency to become a validator. Similar to miners in proof-of-work, validators are responsible for ordering transactions and creating new blocks. A user can validate block transactions based on how much ETH they hold.
While there are downsides to Ethereum’s shift from the PoW to PoS mechanism — such as PoS being newer, not as proven as PoW, and subject to dominance by validators with the most ETH staked— let’s focus on the upsides.
Benefits
Security
One of the most notable benefits of shifting consensus mechanisms is enhanced security through decentralization. The Ethereum 2.0 protocol requires a minimum of 16,384 validators within the network, making security a highly praised benefit of proof-of-stake.
- As of March 2022, we’ve already far surpassed the minimum requirement with 300K+ active validators on the Beacon Chain (and also worth noting, nearly 100M of staked Ether)!
With an increasing number of validators in the network, a higher level of decentralization is enforced — making the entire network more secure as attackers would have to compromise or avoid being detected by more stakeholders.
Ultimately, any attempt to breach security in Ethereum 2.0 would be risky for the bad actors. Attackers would need 51% control over the staked ETH, and even if they were able to gain control over the network, it would only destroy the value of ETH. Why destroy the value of the currency you’re trying to profit off of when there are more incentives to keep the network secure?
While we can’t answer the why mentioned above, we can look on the bright side. Through clever proof-of-stake design, an attacker’s ability to earn extra profits is limited under the PoS protocol. If they attempt a 51% attack, the network can coordinate a “hard fork” and delete the offending validators’ deposits. Additionally, there is a built-in “slashing” mechanism where the majority of an attacker’s stake (and no one else’s stake) can be automatically destroyed.
Energy
A highly impactful improvement is the reduced energy usage’s effects on the environment. While the PoW protocol involves miners expending large amounts of electricity to validate transactions, the PoS protocol is more energy efficient. Securing the network and processing new transactions rely on staked ETH rather than computing power.
It’s estimated that the shift to proof-of-stake could result in a 99.95% reduction in total energy use, making the new protocol roughly 2000x more energy-efficient than proof-of-work. The energy expenditure of Ethereum 2.0 will be roughly equal to the energy usage of running a home computer for each node on the network.
Gas Fees and Throughput
Previously (with PoW), the surge in transactions occurring on the Ethereum blockchain led to network congestion and gas fee volatility. Since the shift to PoS will enable thousands of transactions per second and scale globally, Ethereum 2.0’s protocol will significantly reduce gas fees and make the Ethereum blockchain cheaper and faster to use. Good news for DeFi enthusiasts!
- Ethereum 2.0 will enable up to 100,000 TPS compared to the 30 TPS experienced with Ethereum 1.0.
Barriers to Entry
Unlike the equipment required with the proof-of-work mechanism, anyone can participate in staking since becoming a validator only requires minimal hardware and 32 ETH. Even if you don’t have enough ETH to stake, you can still join staking pools.
- Upstate Interactive’s Kseniya Lifanova and Doug Crescenzi set up a validator node last year, detailing the process for anyone interested in doing the same!
In addition to lowered barriers to entry through reduced hardware requirements, the staking space is more inclusive from a geographical standpoint. With the proof-of-work protocol, miners would need to live in regions with lower electricity costs to earn significant block rewards. The reduction in the energy involved in staking means participants won’t be held back by their region’s energy costs. (A win for Ethereum enthusiasts AND the environment!)
Other benefits
- Value of Ethereum: The price of Ethereum will likely be stable since the holder of the coin will be motivated by the profit to hold them instead of selling to purchase mining equipment.
- Immunity to Centralization: Having more nodes in the network will provide a stronger immunity to centralization, making the PoS protocol the least likely to lead to network centralization.
- Data Capacity: After the upgrade, 64 shard chains will be added to the network, giving the Ethereum blockchain more capacity to store and access data. The additional shards will enable a more resourceful mainnet to build shard chains off of, powered by layer 2 solutions that supercharge the scalability.
When will we experience these benefits?
Ethereum’s shift from the PoW to PoS consensus mechanism started in 2021 and is estimated to continue into the end of 2022. However, these benefits won’t be noticed until all three phases of the upgrade are complete. Understandably, a mass overhaul of one of the most popular blockchains involves careful coordination and implementation, so we’re watching closely.
Moving Forward
If you’re interested in developing smart contracts and dApps on the more secure, scalable, and energy-efficient Ethereum blockchain discussed above, feel free to contact Upstate Interactive.
