Introduction to Proof-of-Work
In order to prevent abuses of computer resources for things like spamming or DoS attacks, proof of work (PoW) defines a method that needs a not-insignificant but practical amount of effort. In 2004, Hal Finney applied the notion to the protection of digital currency by devising the reusable proof of work using the SHA-256 hashing algorithm.
Introduced in 2009, Bitcoin pioneered the widespread implementation of Finney’s PoW proposal. Not surprisingly, Finney was also the recipient of the first bitcoin transaction. Many altcoins are also based on proof of work since it provides a safe, decentralized consensus.
To reach an agreement in a decentralized fashion and to stop bad actors from taking over the network, PoW requires nodes on the network to give proof that they have spent computing power and worked towards the network.
Proof-of-Stake Approach
The proof-of-stake is an alternative way to proof-of-work. To confirm transactions and add them to the blockchain, proof-of-stake is used as a consensus method in cryptocurrencies. To ensure the integrity of a distributed database and the validity of its data entries, a consensus technique is used. Blockchains are the databases used by cryptocurrencies, and they are protected by consensus mechanisms.
By reducing the computing labor required to validate blocks and transactions, Proof-of-stake helps ensure the continued security of the blockchain and the cryptocurrency it supports. The proof-of-stake protocol alters block verification by relying on the personal computers of cryptocurrency holders. In exchange for the authority to verify blocks, the owners stake their currencies as collateral. Staking coins makes their owners become “validators.”
Following that, randomly selected validators “mine” or validate the block. Instead of utilizing a competitive method like proof-of-work to determine who gets to “mine,” this system randomly selects participants. To become a validator on Ethereum, for instance, one must first deposit 32 ETH.
Much-needed Scalability and Efficiency
Scalability was an early topic of debate, leading Ethereum’s creators to suggest a three-stage upgrade. Beacon Chain went live on December 1, 2020, marking the beginning of Phase 0 of the transition’s three-stage process.
This transition to PoS was initiated by the Beacon Chain, which allowed users to stake their Ether (ETH) and consequently become validators. While Ethereum’s main blockchain was unaffected by Phase 0, the Beacon Chain does coexist with it. However, the Merge will ultimately connect the Beacon chain to the mainnet.
Developers have cited incomplete work and code audits as the main reasons for the Phase 1 launch delay. In Phase 2, Eth2 hosted all of Ethereum’s transaction history and enable smart contracts on the PoS network. Once Eth2 is deployed, mining will no longer be possible, requiring the stakers and validators to take over.
When Ethereum makes the switch to PoS, shards will be used to submit transactions instead of a centralized network. At least 128 validators are needed for a shard block to be confirmed by a validator before it can be added to the blockchain. When a block has been generated after shards have been verified, it cannot be closed until two-thirds of validators agree that all of the transactions inside it are legitimate.
How Does Proof-of-Stake Differ From Proof-of-Work?
Both consensus approaches facilitate transaction processing, data validation, and record synchronization in blockchains. Each of these approaches has been shown to be effective in blockchain management, however, they each have their advantages and disadvantages. On the other hand, the two methods consider radically various methodologies.
In PoS, those that generate blocks are known as validators. A validator is someone who audits the ledger, validates activities, casts votes, and keeps track of data. In Proof-of-Work, the creators are known as miners. In order to validate financial transactions, miners must solve difficult mathematical puzzles.
To get into the role of block creator on a Proof-of-Stake (PoS) blockchain, investors need only the minimum number of coins or tokens necessary to do so. In order to mine using PoW, miners must spend a lot of money on processing equipment and pay for expensive energy to run the machines that are trying to do the calculations.
PoW techniques increase blockchain security by making mining prohibitively costly due to the high cost of mining equipment and electricity. PoS blockchains, on the other hand, are more energy efficient, allowing for greater scalability.
Advantages of Proof-of-Stake
The proof-of-stake (PoS) protocol was created as a solution to the problems with scalability and resource consumption that plague the proof-of-work (PoW) system. Since money is at stake, it is only logical that participants in a proof-of-work system for validating transactions will hunt for methods to gain an edge over their rivals.
Bitcoin miners validate blocks of transactions and get Bitcoin as compensation. They use fiat money to pay for things like energy and rent, however. The cost and profitability of mining proof-of-work cryptocurrencies are heavily influenced by the amount of energy necessary to do so.
To address these issues, the PoS system uses a kind of decentralized, network-based randomization to assign mining power to nodes rather than individuals. Since miners can no longer depend on huge farms of specialized gear to gain an edge, this should result in a significant drop in energy usage.
More than one validator checks each block for correctness before it is closed, and a block is considered verified when a certain threshold is met.
Very Close to the ‘Merge’
Ethereum has completed the third and final testnet merging, called Goerli, in its shift from Proof-of-Work (PoW) to Proof-of-Stake (PoS). A testnet is a secondary network in the cryptocurrency ecosystem where new features and upgrades to the blockchain may be tried out without impacting the primary network.
When the Ethereum blockchain finally makes the switch to the PoS paradigm, it will be free of the energy-intensive PoW crypto mining process, allowing for far better scalability and less impact on the environment. In other words, PoS will increase the pace at which new coins are generated and crypto transactions are verified.
Eventually, Ethereum will switch from its current power-intensive proof-of-work protocol to the more environmentally friendly proof-of-stake protocol. In the case of Ethereum, the expected date of the Merge is September 19, 2022. Transitioning the network is anticipated to boost its scalability and make it 99% more eco-friendly. Thus, traders will not have to wait long for their trades to be validated and would not incur a hefty gas price.
Ethereum passed its last major test before switching to a proof-of-stake consensus mechanism during the Goerli testnet merging. Anxiety among key developers like Vitalik Buterin has subsided after the successful rehearsal.
Both Ropsten and Sepolia, the two mergers that came before this one, met with considerable success. Both of those things happened in June and July of this year.
PoW Pros
- Staking encourages decentralization by making it simpler for anyone to contribute to the network’s security.
- A standard laptop should be OK to use as a validator node.
- A minimum of 32 ETH is not required to stake with a staking pool.
- Staking operates in a more decentralized fashion. Unlike Proof-of-Work mining, PoS mining does not benefit from economies of scale.
- When compared to proof-of-work, proof-of-stake provides superior crypto-economic security.
- A smaller amount of newly created Ether is needed to incentivize network members.
PoS Cons
- Compared to proof-of-work, proof-of-stake is a more recent innovation with less field experience.
- The implementation of proof-of-stake is more difficult than proof-of-work.
- To take part in Ethereum’s proof-of-stake, users must install and execute three separate software.
Ethereum developers have set September 19 as the final date for the PoW chain to combine with the PoS chain. The Merge should be live on the Goerli testnet by the middle of the present month. Recently the Goerli testnet has been successfully integrated. The step would be the release of the Bellatrix upgrade at the beginning of September, followed by the Merge two weeks later.
Difficulty Bomb
The proof-of-work mining difficulty will rise as a result of the difficulty bomb, rendering large-scale mining impossible. The difficulty bomb is a code embedded in the Ethereum protocol since 2015. It is configured to run every time a particular amount of blocks have been mined and posted to the network. It makes the mining activity on the current proof-of-work blockchain substantially tougher.
Ethereum’s proof-of-work chain would be forced to cease block generation as a consequence since the difficulty bombs would make mining a block very difficult. The bomb’s primary purpose is to push miners into a full merger, which will boost the spread of the proof-of-stake chain.
Conclusion
Ethereum’s growing ecosystem caused multiple instances of network congestion and very high gas prices, necessitating a switch to a new PoS network. Over the last year, however, the narrative has also evolved toward PoS being more environment-friendly than PoW. From a technological and political standpoint, a complete shift of consensus for an ecosystem as vast as Ethereum would have significant consequences. The crypto community now has faith in the mainnet transition after three successful testnet mergers. Whether a trouble-free switch to PoS will finally end crypto winter is an open question.
