Updated: Nov 14
Author: Filip Balaš
Date of Publication: 08/09/2022
After years of delays, Ethereum developers have scheduled an update from proof of work to proof of stake called “The merge”, targeting the week of September 15.
What is Ethereum?
Ethereum is an open-source blockchain that is used for building apps, transacting, and communicating without central authority.. Ethereum blockchain uses its own cryptocurrency Ether, which is used to pay for activities on the network. It is the second biggest crypto by market cap after Bitcoin.
As the non-profit Ethereum organization explains, Ethereum builds on Bitcoin’s innovation, with some major upgrades to it. Both can be used as digital money, but the main difference between Ethereum and Bitcoin is that Ethereum is programmable.
As mentioned above, Ethereum is designed to be programmable, scalable, and secure. It can be used by developers to create decentralized applications, smart contracts, or decentralized finance (DeFi). This changes the way many industries work. However, Ethereum’s biggest downside is that it is using a proof-of-work mechanism to run the blockchain. This consumes large amounts of energy but it is about to change.
Differences between Proof-Of-Work (PoW) and Proof-Of-Stake (PoS)
All decentralized blockchains like Bitcoin, Ethereum, Cardano and others require a consensus mechanism to execute the transactions. Meantime it is important to maintain security of the blockchain. Proof-of-Work and Proof-of-Stake are the most promising ones. Despite being different, both mechanisms ensure users are honest with transactions. So, they make it extremely difficult and expensive to cheat on the blockchain.
PoW is the original crypto consensus mechanism, first used by Bitcoin in 2009. The reason it is called proof of work is that the network needs a huge amount of processing power. So called miners compete around the world to be the first one solving this extremely hard mathematical puzzle. The winner of this race gets to update the blockchain with the latest transactions. The result is to get a reward by the network in cryptocurrency. Depending on the algorithm, miners use either GPU (graphical cards) or CPU (processors) to generate the computing power. Miners have very high initial investments into hardware so they can validate the blockchain.
Proof of work mechanism
PoS is a younger network consensus which has many advantages compared to PoW. This network can work faster by adding new blocks in just seconds. Also, it is easier to participate in the network validation as all the requirements usually are to “stake” your crypto coins . This means you provide them to a pool (validator) to maintain the network and make it more decentralized. The network then selects the winner based on the amount of crypto each validator has staked in the pool and rewards them. Those rewards are then split between all the people who provided their coins to the pool.
Key differences between PoW and PoS
The first main difference is energy consumption. PoS mechanisms don’t require all this computing power meaning less amount of energy is used to run the network. What’s more, blockchains running on PoW mechanisms often struggle with scalability and have very high transaction fees. This increases with usage of the blockchain. More people using the blockchain means more power used to run it. As a result, fees for the transactions are increasing up to hundreds of dollars. This doesn’t happen with PoS blockchains which are more scalable, and fees are very low.
Ethereum’s highly anticipated update finally has a date
Ethereum’s developers knew from the beginning that proof of work mechanisms will limit scalability. The latter is important to be overcome in order to ensure global adoption. The idea to implement PoS was officially proposed in 2019. The first steps to the upgrade to PoS mechanism started in 2020 and since then the migration has been postponed many times. Actually, it has become a meme in the Ethereum miners’ community.
Ethereum has finally completed its final test prior to the update on the Ethereum testnet. The test was successful and gave a green light to the full transition from proof of work to proof of stake making it now imminent . As a result, Ethereum price almost doubled since the beginning of July 2022 in the high anticipation of the update.
Price increase in anticipation of PoS
The switch to PoS consensus is now scheduled to take place by 19 September 2022. Since this day, the Ethereum mainnet will work with proof of stake mechanism. Developers have been working on this update for years, and it is finally becoming reality. This will be a historic day for Ethereum.