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The Ethereum Blockchain Network has finally shifted to the Proof of Stake mechanism from its previous Proof of Work mechanism. On 15 September 2022, the Merge was executed and completed. Crypto enthusiasts rejoiced, and Vitalik Buterin wished everyone a “Happy Merge.” These instances give us an insight into how the Merge was a highly anticipated event in the crypto sphere. But what changed? How is Eth 2.0 different from Eth 1.0? How does PoS compare with PoW?
To answer these questions, we will need to understand more about the difference between PoS and PoW. Let’s look at how the two mechanisms are different and what changes we will see in the new phase of Ethereum.
What is the Proof of Stake?
A user named QuantumMechanic originally suggested the concept of proof-of-stake on the Bitcointalk forum in July 2011. It has become the preferred consensus mechanism for the majority of the modern blockchains that are being launched. With the release of Eth 2.0, Ethereum switched from its existing proof-of-work consensus protocol to proof-of-stake.
In a proof-of-stake consensus mechanism, a cryptocurrency coin is staked or locked up in a pool on the blockchain to win the right to execute transactions rather than requiring a lot of processing power and energy to solve an equation.
The minimum number of tokens a node must lock up as a stake, as well as the duration for which a coin must be staked to process transactions, can differ. It seems that the more cryptocurrency you stake, the more likely you will process transactions and build blocks. Every proof-of-stake implementation also includes a system that randomly chooses the stakeholder who will approve a transaction; otherwise, the stakeholder with the highest stake would be chosen to approve every transaction.
What is the Proof of Work?
The proof-of-work concept was first put forth in 1993 to combat network spam emails and denial-of-service attacks. In order to validate new blocks in the Bitcoin network, Satoshi Nakamoto introduced the PoW consensus to the network in 2008.
PoW is predicated on the ability of network users to demonstrate that a computing task has been completed. A node, or piece of computing power, is used to solve a mathematical equation; once the equation is resolved, a new block on the chain is validated. Any physical instrument, like a computer that has the ability to receive, send, or forward data within a network of other tools, is referred to as a node.
Proof-of-work does have some disadvantages, though. The largest one is that there are numerous environmental issues because the process uses growing quantities of energy. The energy consumed by the Bitcoin network exceeds that of a small nation. According to a survey from 2018, even if green energy makes up roughly 80% of the energy used in Bitcoin mining, there is still a significant amount of energy used, which some individuals outside the crypto ecosystem may view as waste.
The Difference: PoS vs. PoW
Majorly the PoS mechanism is more energy efficient than the PoW mechanism. In PoW, all nodes within the network are involved during a transaction, while in PoS, it isn’t the case. The PoW mechanism requires a high-power server, while a PoS mechanism does not.
In the PoW mechanism, to carry out a 51% attack, a hacker must obtain more than 50% of the total computational power. Additionally, the miners are compensated for completing challenging cryptographic puzzles.
While in the PoS consensus, it is impossible for hackers to own more than 50% of all cryptos on the same network. And a block reward is not given to the validator. Instead, the compensation for the miner consists solely of network costs.
In the PoW mechanism, the amount of computational work determines the mining probability. While in the PoS consensus, the size of the stake determines whether a new block is valid.
The Criticism and the Support
Due to the total elimination of the energy-intensive mining process, proof-of-stake is significantly more energy-efficient. Energy efficiency is going to become more and more crucial, even for critical technologies, as variables like climate change have an impact on our planet.
Hence, it makes strategic sense for Ethereum to move to Proof-of-Stake as a logical step. Post the Merge, the energy consumption of the network was set to reduce by 99 percent. Given the ongoing global rise in energy prices, this transformation is eagerly anticipated and a welcome one.
However, the switch to Proof-of-Stake is not without its critics. There are real objections against Proof-of-Stake, including the possibility of a massive concentration of wealth within a small group of validators and the potential to make it impossible to overcome the barrier to entry.
But many people think that, in the end, the benefits outweigh the drawbacks, particularly regarding the security and long-term scalability of the blockchain. In addition, supporters claim that switching to Proof-of-Stake will strengthen Ethereum’s decentralization and security.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
