The crypto industry is highly dynamic, with new tokens and platforms being developed all the time. However, each of these new cryptocurrencies must be ready to compete with one another in order to survive in the market. Currently, the two cryptocurrencies with the greatest strength are Bitcoin and Ethereum.
Ethereum is the most popular cryptocurrency after Bitcoin. In just the first five years of its existence, Ethereum has managed to gain high levels of adoption and growth. Even today, Ethereum faces tough competition in terms of pricing with Bitcoin.
This article will explain everything you need to know about Ethereum, including the reasons why the Ethereum blockchain switched to a proof of stake (PoS) consensus. Let’s take a closer look below.
What is Ethereum?
Ethereum is a decentralized software platform that runs thousands of Distributed Applications (DApps) and Smart Contracts without the need for any third parties. The community powering the cryptocurrency Ethereum (ETH) manages this technology. The Ethereum network allows users to send crypto to anyone with minimal fees.
Apart from being part of the cryptocurrency market, Ethereum offers a smart contract feature that ensures the integrity of each node. All other nodes will execute the code executed on one node in the same way. This system allows Ethereum to be used in various applications.
How does Ethereum work?
Ethereum operates on a blockchain network, which is a decentralized and distributed public ledger. Its main function is to verify and record all transactions. The Ethereum network is not managed by a centralized entity but rather by all distributed ledgers. All users typically have access to a copy of the Ethereum ledger, which includes details from previous transactions.
Blockchain transactions use cryptography to verify transactions and keep the network secure. Later, users will use a computer to perform mining and confirm every transaction on the network to add new blocks to the blockchain system. After that, miners will receive crypto tokens, such as ETH for Ethereum users, as a reward.
Like Bitcoin, ETH can be used to trade goods and services. However, Ethereum is unique in that users can create their own applications that run on the Ethereum blockchain. One can use these Ethereum-based applications to store and transfer personal data, as well as handle complex financial transactions.
What is PoS?
Proof of Stake (PoS) is a crypto consensus mechanism that helps to process transactions and validate entries on the blockchain by reducing computational work. This method aims to maintain the security of the blockchain and its cryptocurrency. Simply put, PoS allows users or miners to validate block transactions based on the number of coins they own. The more coins you have, the greater your mining power.
Coin owners who participate in staking are referred to as “validators.” The system randomly selects these validators to mine or validate the block. For coin owners who want to become validators, they must first stake a certain number of coins. On Ethereum, users have to stake 32 ETH to become validators. Later blocks are validated simultaneously by multiple validators. Once validated, the block is resolved and closed.
Each PoS mechanism has a different method of block validation. When transitioning to PoS, Ethereum uses sharding for transaction delivery. The validator then verifies the transaction and adds it to the block shard, which requires at least 128 validators to authenticate. Once a block is formed, at least two-thirds of the validator pool must agree that the transaction is valid to close the block.
Why did Ethereum switch to PoS?
With the increasing popularity of NFT and DeFi projects, the Ethereum network has grown rapidly in recent years. Thus, Ethereum has become the preferred choice of developers working on NFT or DeFi projects.
With so many transactions taking place, miners require more computing power to verify them. However, this high computing power is wasteful of energy, which impacts the sustainability of the network ecosystem.
When using Proof of Work (PoW), Ethereum can consume up to 113 Watt-hours (TWh) of electricity each year, equivalent to the electricity consumption of the entire population of the Netherlands for 12 months. Furthermore, a single Ethereum transaction can consume the same amount of power as the average household in the United States uses in one week.
This high energy consumption has raised concerns among community members, and the PoW consensus mechanism has come under scrutiny from global lawmakers. In September 2021, the Chinese government banned all crypto transactions in the country, citing concerns about environmental issues as one of the reasons.
Another problem with the Ethereum network is its slow processing speed. Before the merge, Ethereum could only handle 15 transactions per second, which is much slower than its competitors, such as Solana and Cardano. Furthermore, Ethereum’s gas fees (transaction fees) are extremely high, and users have no choice but to pay these fees for their transactions to be verified using the PoW mechanism. By switching to PoS, Ethereum can reduce the amount of computing power required to process transactions, making it more environmentally friendly.
So when did Ethereum switch to Proof of Stake? An event called “The Merge” migrated the entire network to a PoS mechanism. Developers tested Ethereum’s PoS approach on Beacon Chain, which launched on December 1, 2022. Finally, on September 15, 2022, Ethereum officially completed its transition from PoW to PoS.
PoS vs PoW
Cryptocurrency, the most successful implementation of blockchain technology in the world, commonly uses several consensus models. The most popular models are proof of stake (PoS) and proof of work (PoW). So, which consensus mechanism is the most appropriate and effective? Check out the comparison below:
- In PoS, the activity of mining a block is determined by the amount of staking or the number of coins held by a person. In contrast, in PoW, randomly selected miners validate ongoing transactions, and the amount of computational work performed by miners determines their probability of mining a block.
- To add each new block to the blockchain in PoW, miners must compete with one another to solve problems using their computers. In contrast, on a PoS blockchain, block creators are selected by an algorithm based on user staking, not competition in computing power.
- The PoW mechanism means that the first miner who successfully solves the cryptographic puzzle of each block receives a reward. Meanwhile, on PoS, validators collect transaction fees on the network in return for completing a block.
- In PoW networks, miners must initially invest in hardware and require specialized equipment to optimize processing power to stay ahead of the competition. On the other hand, PoS miners can easily work on standard server-level units. The only conditions they have to meet are securing shares and building a reputation.
- In PoW, hackers need at least 51% computing power to add ‘malicious blocks’ to the network, but this is difficult to implement in PoS because they would need to own 51% of all cryptocurrencies on the network to do it.
- PoW systems are more proven and expensive, but less energy efficient, whereas PoS systems are much more cost and energy efficient than PoW systems.