Proof Of Stake: How Ethereum’s Next Big Change Could Change The Crypto Mining Industry Forever

Ethereum plans to do this by switching from a Proof-of-Work model to Proof-of-Stake. In today’s column, we take a look at how the new Ethereum upgrade could change the crypto mining industry forever.

Transaction Verification

Cryptocurrencies use huge amounts of electricity to secure their networks. This is done through something called crypto mining. Cryptocurrency mining is not just a way to add or create new coins. Crypto mining also involves validating cryptocurrency transactions on a blockchain network and adding them to a distributed ledger.

For example, when you send money to a friend or family, your bank updates the digital ledger by debiting one account and crediting the other. Blockchain, essentially, is a distributed digital ledger which records each transaction. Every crypto coin you buy or every NFT you mint must be recorded in the digital ledger. Crypto miners verify and update each record on the blockchain.

However, the Crypto distributed ledger only allows verified miners to verify and update these transactions on the digital ledger. And for verifying these transactions, miners are rewarded with cryptocurrencies for contributing their computing resources to the network.

But how does blockchain ensure that only verified crypto miners can mine and validate these transactions? This is possible through the Proof-of-Work (PoW) consensus protocol. PoW also protects the network from any external attacks.

problem area

Mining consumes a lot of computing power and resources due to the proof-of-work algorithm. The idea was first introduced in 1993, as an effective way to combat spam. However, until 2009 the idea remained largely ineffective.

satoshi Nakamoto, a pseudonymous Bitcoin creatorrealized that this mechanism could be used as a way to secure the Bitcoin Blockchain.

The proof-of-work algorithm works by having all nodes (devices) solve a cryptographic puzzle. This puzzle is solved by miners and the first to find a solution gets the reward. This has led to a lot of competition and situations where people are building bigger mining farms.

According to Digiconomist, Ethereum consumes about 112 terawatt-hours of electricity per year, which is comparable to that of the Netherlands and more than the Philippines or Pakistan use. A single transaction in Ethereum is equivalent to the energy consumption of an average American home for more than nine days.

A single Ethereum transaction is also equivalent to the energy consumption of more than 1,50,000 Visa card transactions.

In the case of Bitcoin, it is even higher: 137 terawatt-hours of electricity per year.

The more computing power you have, the easier it will be to mine a coin. This computational power is also known as the hash rate. To increase their chances of earning even more, miners can join together in what are called mining pools, combine their hash power and distribute the rewards evenly among everyone in the pool, ultimately causing miners to use massive amounts Of electricity.

This has also centralized crypto mining. Imagine several big players joining together, combining their hash rate, and eventually joining together to increase their chances of mining a new block and thus getting a reward.

Small crypto miners are left at the mercy of such big players. To address these issues, a new consensus algorithm was needed that was better than Proof of Work.

bet coins

In 2011, a user of a Bitcoin chat forum, Quantum Mechanic, proposed a new idea to end competition among crypto miners. This was called Proof of Stake (PoS).

Instead of competing with each other for a block, PoS uses a process where a node is randomly chosen to validate the next block.

The terminology is slightly different here. PoS calls them ‘validators’ of the miners. Unlike PoW, where users have to mine a new block, PoS users have to ‘mint’ or ‘forge’ new blocks.

To become a validator in PoS, users must deposit a certain amount of cryptocurrency as a stake, as a security deposit. The higher the stake amount, the more chances users have to mint a new block. For example, if one user deposits $100 into the network as a bet and another user deposits $500, the second user now has a five times higher chance of being chosen to fake the next block.

PoS vs PoW: Which is better?

Crypto miners have the potential to update and verify transactions, and there is a chance that a transaction that never happened or a fraudulent transaction can also be verified. This is where gambling comes in. Validators will lose a portion of their stake if they approve fraudulent transactions.

But what happens if the majority of the stake is bought in a network by a single entity, and worse, what happens if the entity starts approving bogus transactions? This is called a 51 percent scenario. If a single miner or a group of miners can get 51 percent of the hash power, they can effectively control the blockchain. It was first discussed as a weak point of the proof-of-work algorithm.

On the other hand, proof of stake makes this attack impractical, because users are asked to stake more than they receive from the block rewards. So even if the miners acquire 51 percent of the hash power, they would lose much more than they gain from verifying each fake transaction.

It should be noted that if a user ceases to be a validator, the participation plus all transaction fees are released after a certain period of time, not immediately because the network must still be able to punish, in case it discovers that some of the blocks were actually fraudulent. Therefore, the 51 percent attack is less likely to occur with proof of stake.

On the energy front, PoS only allows a few crypto miners or ‘validators’ to mine cryptocurrencies. This means that less computational power is required. Therefore, no high-tech mining equipment is needed, which significantly reduces mining energy.

Defects

PoS favors wealthy people who will be picked more often, charge more transaction fees, become even richer and thus further increase their chances of being picked as validators.

Another potential problem is when the network chooses the next validator, but the validator doesn’t show up to do the job. In short, proof of stake carries additional risks compared to proof of work.

Much research remains to be done to understand the risks associated with PoS and then mitigate them. For now, it seems likely that more cryptocurrencies will follow PoS in the future.

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