Ethereum, the world's second most popular crypto coin is shifting to a proof-of-stake system to validate transactions on its blockchain. The shift will culminate with the much-awaited "The Merge", which is expected to happen somewhere in mid-September. Here's everything you need to know about this change.
What is Ethereum?
For those who are still new to cryptocurrencies, Ethereum is a decentralized blockchain platform with smart contract functionality. This means that one can store programs on the blockchain which run automatically when pre-determined conditions are met.
It was conceived in 2013 by Vitalik Buterin and went live in 2015. Unlike Bitcoin, which is primarily a cryptocurrency that uses blockchain technology, Ethereum is a blockchain platform on which anybody can run decentralized apps (dApps) to offer a broad range of services.
Popularly, Ethereum is used to provide decentralized finance (DeFi) services as well as a platform to create and trade non-fungible tokens(NFTs). Ether (ETH) is the currency of the platform and is the second most popular crypto coin after bitcoin.
The blockchain is a public LEDGER of all transactions that occur on the network. Every time transaction occurs, it needs to be added to the block to be considered complete. To do so, blockchain has conventionally relied on the Proof of Work system.
What is Proof of Work (PoW)?
Since decentralized networks do not have a central authority that can verify the accuracy of transactions, the network relies on a distributed network of participants to get this done. For their work, the participants are rewarded with new units of the crypto token. Hence they are commonly known as miners and the process is called mining.
This is a lucrative task that attracts a lot of interest and miners need to demonstrate work to earn the rewards. Networks pose complex mathematical problems that need to be solved and the miner who solves them first gets the right to add transactions to the block and earn the reward. This sets off a race among miners who end up setting up high-end computing infrastructure to beat other miners. Once a transaction is added to the block, the process is repeated for the rights to add the next block to the chain.
During the peak of cryptocurrency prices, companies were buying entire power plants, often coal or gas-powered, to keep their infrastructure running and mine tokens, particularly Bitcoin. Since there is only one winner for each proof of work, the entire process has high redundancy and there is massive wastage of energy. This has been a growing environmental concern. Countries like China and Russia have cracked down on miners who were covertly running operations that were threatening the local energy grids.
What is Proof of Stake?
In comparison, the Proof of Stake (PoS) system relies on the network participants staking their crypto coin holdings, which can either be used as collateral or even destroyed if the user behaves dishonestly. In the case of Ethereum, a miner needs to stake 32 ETH to participate in the system, which at the time of writing is equivalent to US$52,440.
The choice for who validates each transaction is then made at random using an algorithm that is weighted based on the amount of stake and the validation experience. After a miner verifies a block, it is added to the chain, and the miner receives a fee in cryptocurrency. Making miners put up a stake provides security as it should make them less likely to steal tokens or commit fraud, and by eliminating redundancy, Ethereum claims it will reduce Ethereum's energy consumption by up to 99.95 percent.
According to Ethereum's webpage on PoS, the method reduces the barriers to entry for miners since they no longer need high-end computing equipment to participate and can also help reduce the incentives provided for verifying the transaction. Block validations can happen on a normal laptop and offer more security since there can be multiple validators. This reduces the risk of centralization when compared to the PoW system.
The organization however also admits that the PoS system is more complex to implement and is less battle-tested when compared to the PoW system.
When did Ethereum decide to move to proof of stake?
The Ethereum network is estimated to use 113 terawatt-hours of energy per year, similar to the amount of energy the Netherlands uses in the same time period, MIT Technology Review reported. The energy consumed by a single Ethereum transaction is the equivalent needed to power a U.S. household for a week. Cryptocurrencies have, therefore, been criticized for their wasteful use of energy while using the PoW system.
The initial white paper that described Ethereum also spoke of using a PoS system stake to validate the transactions on the blockchain. However, the platform was launched with the PoW system, with the plan to switch to PoS in the future.
Since the launch, the platform has received periodic updates and a December 2020 update began the process of shifting the blockchain to the PoS system. Since the update, Ethereum has been running two parallel blockchains, one using Proof of Work called Mainnet while the other uses Proof of Stake called Beacon Chain.
The two blockchains were also referred to as ETH1 and ETH2 for some time and are planned to shortly merge, after which the platform would be known as Ethereum 2.0.
The Ethereum Foundation, however, states that the terminologies do not represent the planned roadmap, and Ethereum 2.0 sounds more like a new operating system, which it is not. So, they have requested Ethereum users to refer to the Mainnet as the 'execution layer' and the Beacon Chain as the 'consensus layer'. However, the recommended terminologies haven't found favor with users who continue to call it Ethereum 2.0.
What is The Merge?
In the month of September, the parallel Ethereum blockchains, Mainnet (Execution Layer), and Consensus Layer (Beacon Chain) are expected to merge such that the blockchain switches from the PoW to the PoS system.
Instead of setting a hard date, Ethereum developers set a total terminal difficulty (TTD) value for the merge to happen. The difficulty number represents the cumulative difficulty of all mined Ethereum blocks under the PoW system. In other words, it specifies the final PoW block, after which the PoS consensus takes over.
The developers have set a TTD of 58,750,000,000,000,000,000,000 for the Merge to occur. This is expected to happen somewhere around Sept 14-15 but can vary since block difficulty and issues also vary over time. CoinDesk reported.
What changes will be needed after The Merge?
Ethereum users do not need to do much to adapt to a new life under Ethereum's PoS system. There is no new ETH that one needs to claim or replace their holdings with. Those operating Ethereum nodes or providing software will need to update their software to continue working with the new version of the network though. This will be done in a series of upgrades. The Bellatrix upgrade began on September 6. This is intended to prepare Ethereum's PoS Consensus layer for a Merge with Ethereum's Mainnet Execution layer.
Supporters of Ethereum can also heave a sigh of relief as the move is expected to reduce the power demand of the network by as much as 99.5 percent. This will also free up a lot of computing resources that are currently dedicated to mining ETH.
What are the risks of The Merge?
Ethereum's plan to move to PoS is a massive undertaking. There are other cryptocurrencies that use the PoS system but none of them operate at the scale of Ethereum.
There could be vulnerabilities that could come to the fore when the system works at the scale Ethereum does, where thousands of smart contracts are on the blockchain and billions of dollars are at stake. The release of the Beacon Chain was a test that the method can work and the developers are going ahead with the Merge after being satisfied with the progress.
However, there are also some users of Ethereum who are not happy with the transition and plan to maintain their own parallel blockchain which will use the PoW system. This could lead to duplication of contracts, altcoins, and NFTs. Which of these systems races ahead will depend on the value of their coin in the open markets.
What other developments are in the pipeline?
In addition to making Ethereum more environmentally friendly, the developers have plans to make it more scalable too. In the upcoming updates, the developers aim to split the blockchain into different shards, much like the lanes of the highway. This is expected to increase the blockchain's transaction throughput while also decreasing its fees.
Apart from this, Ethereum also plans on separating the "builders" —the people who add blocks onto the chain— from the proposers, the miners, and validators who put them up for approval, or choose which transactions to include in the next block. This change is intended to stop miners and validators from profiteering from the pending transactions on the blockchain, something that has been found to be increasingly happening in the past few years.
