Ethereum's transition to PoS: What we know so far

As new tokens and platforms are constantly being developed, the appropriate word to describe the crypto industry is likely to be “dynamic”. While new cryptocurrencies are doing their best to break into the market, established cryptocurrencies face the challenge of maintaining their ranking in the face of fierce competition. One way to do this is to constantly review your offerings and adjust/reinvent yourself to meet the needs of your customers.

Ethereum, the second most popular cryptocurrency after bitcoin, has shown much higher adoption and growth rates than the latter in just the first five years of its existence. However, the platform suffers from a number of issues such as high gas fees and slow transaction speeds, and its competitors are quickly catching up. Change is inevitable and Ethereum is revitalizing with big changes planned in its roadmap.

In this article, we will cover everything you need to know about the upcoming Ethereum upgrade, as well as what Ethereum is, why the Ethereum blockchain is moving to Proof-of-Stake consensus (PoS) and how this move will help address the challenges the network is currently facing.

What is Ethereum?

Ethereum is a community-driven technology that powers the Ether (ETH) cryptocurrency and thousands of decentralized applications (DApps).

The network allows users to send cryptocurrency to anyone for a small fee. Ethereum also powers various applications that can be used by everyone but cannot be destroyed by anyone.

Known as the programmable blockchain in the world, Ethereum relies on the innovation of Bitcoin. It has a number of significant differences and improvements.

Both Ethereum and Bitcoin allow the use of digital money without the intervention of payment providers or banks. However, Ethereum is programmable, so it can be used to send many digital assets, including Bitcoin.

Ethereum isn't just for payments - it's a marketplace for financial services, apps, and games that can't censor you or steal your data.

How Ethereum Works

Ethereum runs on the blockchain network, which is a decentralized, distributed public ledger that verifies and records all transactions. The Ethereum network is not run by a centralized organization – it is run by all holders of a distributed ledger. All participants have access to a copy of the Ethereum ledger, which contains details of all previous transactions.

Blockchain transactions use cryptography to verify transactions and secure the network. People use computers to solve complex mathematical equations (also called mining) whereby every transaction on the network is confirmed and new blocks can be added to the underlying blockchain. Miners are rewarded in the form of cryptocurrency tokens, such as ETH for Ethereum members.

Like Bitcoin, ETH can be used to buy and sell goods and services. However, Ethereum is unique in the sense that users can create custom applications that run on the Ethereum blockchain, similar to how software runs on a computer. These Ethereum-based applications can store and transfer personal data and process complex financial transactions.

What is PoS (Proof of Stake)?

Proof of Stake, or PoS, is a crypto-currency consensus mechanism that helps process transactions, confirm records on the blockchain, and create new blocks, while keeping the blockchain secure.

PoS reduces the computational work required to validate blocks and transactions, which keeps the blockchain and its cryptocurrency secure. It changes the way blocks are validated using coin holder machines. Owners put up their coins as collateral for the ability to verify blocks.

Coin holders who put their coins up for auction are called “validators”. Validators are chosen randomly to mine or validate a block, rather than to reach consensus based on a competition mechanism such as proof of work (PoW).

If a coin owner wants to become a validator, they must first stake a certain number of coins. Ethereum users must stake 32 ETH to become a validator. Blocks are simultaneously validated by multiple validators. Once a block has been validated by a certain number of validators, it is completed and closed.

Different PoS mechanisms use different methods to validate blocks. When moving to PoS, Ethereum will use sharding to validate transactions. The validator will validate transactions and add them to a shard block that requires confirmation from at least 128 validators. After the shards are validated and the block is created, at least two-thirds of the validator pool must agree that the transaction is valid in order for the block to be closed.

Why is Ethereum moving to Proof of Stake?

Thanks to the growing popularity of NFTs and DeFi projects, the Ethereum network has grown a lot over the past year.

So far, Ethereum has been the network of choice for developers working on NFT or DeFi projects, and there are currently over 200 DeFi projects hosted on its blockchain. This has led to a significant increase in the number of transactions made on the Ethereum network. On the other hand, the number of problems that arise in the network has also increased markedly.

Current Ethereum Issues

With an increase in the number of transactions, miners have to expend more computing power to verify transactions. This increased processing power consumes more power, so users have begun to evaluate the network's environmental impact and sustainability.

Ethereum currently consumes 113 terawatt-hours (TWh) of electricity annually, which, according to Digiconomist, equivalent to the consumption of the entire population of the Netherlands in a year. A single Ethereum transaction can consume as much energy as the average American household in a week.

This high power consumption has caused serious concern among the scientific community, which has begun to warn Ethereum developers about the negative impact of the network's alarmingly high power consumption on the environment. Since then, the PoW consensus mechanism has been the subject of intense scrutiny from global legislators. In September 2021 China has banned all cryptocurrency transactions across the country, due in part to growing environmental concerns.

The Ethereum network is also quite slow, its current speed is only 15 transactions per second (GST) is significantly slower than competitors such as Cardano and Solana, whose TPS speeds are in the hundreds and thousands, respectively. Another problem that Ethereum faces is gas fees (transaction costs). Users pay exorbitant fees to validate their transactions under the current PoW mechanism.

PoS: Solving Ethereum's Current Problems

The transition to PoS will reduce the amount of computing power required to process transactions, making Ethereum more green. However, reduced power consumption is not the only benefit. Ethereum 2.0.

After implementing the PoS consensus mechanism, Ethereum 2.0 will consume 99 percent less energy, which will allow the network to scale and achieve performance up to 100 TPS in the future.

When will Ethereum switch to Proof of Stake?

Ethereum is planning to move its entire network to PoS in a dramatic event called “The Merge".

Ethereum's PoS approach has already been tried on chain Beaconlaunched December 1, 2020. As of March 2022, 9,5 million ETH has already been placed (current value is $37 billion).

There are two more phases ahead, but the full release of Ethereum 2.0 is expected in the second quarter of this year (2022).

Proof of Stake (PoS) vs. Proof of Work (PoW)

In PoW, the probability of mining a block is determined on a competitive basis and depends on the size of the share that a person owns (i.e., on the number of coins that he owns).

In PoS, randomly selected miners are selected to confirm transactions. The amount of computational work done by the miners determines their probability of mining a block.

• In order to add each block to the chain in PoW, the miner must compete with other miners in solving complex puzzles using the processing power of their computer.

In a PoS blockchain, the block creator is chosen by an algorithm based on user stakes, rather than determined by competition.

• In PoW, the first miner to solve the cryptographic puzzle of each block is rewarded.

With PoS, the validator collects transaction fees on the network as a reward for completing a block.

• Miners in PoW networks have to invest in hardware up front and require specialized hardware to optimize computing power and stay ahead of the competition.

PoS miners, on the other hand, can easily work with a standard server-class device. The only condition they need to meet is to secure a share and build a reputation.

• With PoW, hackers must have 51% of the processing power to add a malicious block to the network.

However, in a PoS system, it is almost impossible for hackers to add a malicious block – for this they will have to own 51% of all cryptocurrency on the network.

• PoW systems are more proven and less expensive, but less energy efficient.

PoS systems, on the other hand, are less proven but much more economical and energy efficient than PoW systems.

Is Ethereum a Good Investment?

The Fed raised interest rates on March 16, 2022. Immediately after this decision, the value of ETH and a number of other cryptocurrencies rose. As a rule, higher interest rates hurt rising stocks. However, in this case, the rate cut was a foregone conclusion back in January, so the market took the rate hike as a good way to reduce inflation in the US economy.

However, Ethereum faces a direct threat from faster, more efficient competitors that are taking market share away from it. The network plans to solve this problem with Ethereum 2.0, which will replace the current PoW consensus mechanism with PoS. This change in approach will make the network faster, increase transaction capacity, lower costs, improve security, and reduce energy consumption, closing the gap between Ethereum and key competitors such as Avalanche and Solana.

The Ethereum 2.0 upgrade is scheduled to be completed in 2023. According to TradingBeasts analysts, ETH has the potential to break $3 by the end of 200, up 2022% from its current price of $27,90 per coin.

It is logical to assume that the renewal of the Ethereum network will contribute to its development and maintaining its dominant position in the DApp space. Given the branding, market dominance, and planned infrastructure upgrades, Ethereum is clearly a solid long-term investment option.

(Editor's Note: The views expressed above should not be taken as investment advice. There is a lot going on right now and the cryptocurrency markets tend to be extremely volatile. Please be careful, do your research thoroughly, and only invest what you can reasonably lose).

Final thoughts

The Ethereum network is moving to a PoS system, and we are excited about this important (and possibly industry-changing) step. While Ethereum's upcoming transition to version 2.0 is something to look forward to (the crypto community has high hopes for it), only time will tell if it lives up to its promises. In the meantime follow the latest news about this project - as we are!