There are no perfect systems. Proof-of-Work obviously has its own problems. But is Proof-of-Stake a complete fix? Well, not really. Let’s take a look at Ethereum switching to Proof-of-Stake in the near future.
In June 2022 Ethereum is finally planning the so-called Merge. It means that the Proof-of-Work (PoW) consensus mechanism will be no longer used and all the networks’ validations – now done by PoW with the help of miners – will be merged with the Beacon Chain. It is based on Proof-of-Stake (PoS) and is now being actively tested.
Once the Merge occurs the mining of Ethereum will be effectively ended, and all the transactions will be validated by stakers via PoS.
Thus Ethereum will join the growing club of blockchains using PoS (Cardano, Solana, Polygon etc).
And Bitcoin will remain the biggest crypto still using PoW.
Out of the current top ten cryptocurrencies only Bitcoin and DogeCoin still use the PoW algorithm.
Many analysts predict that Ethereum’s move is going to provide a basis for the huge leap of ETH.
PoS is often seen as an ultimate solution to all of the problems crypto is heavily criticized for. For example, the ecological footprint (as mining demands enormous amounts of energy) and transaction speed (which is so slow in case of Bitcoin that it is impossible to imagine BTC as a payment method for your everyday life).
But some things still remain unclear. PoS is severely criticized for security issues and that alone can overshadow all the merits the Merge can actually bring to Ethereum.
Proof-of-Work vs Proof-of-Stake for Ethereum
Let me quickly remind you of some basics about PoW and PoS.
Proof-of-Work and Proof-of-Stake are algorithms, also known as consensus mechanisms, that help blockchains record, synchronize and store data. And remain secure, of course.
These algorithms determine which node in the network can add the next block of transactions to the chain. Both mechanisms have proven to be successful at maintaining blockchains, though they each have trade-offs.
How does Proof-of-Work actually work?
Proof-of-Work is a system where computers compete against each other to be the first to solve complex puzzles.
This process is commonly known as mining because the energy and resources required to complete the puzzle are often considered the digital equivalent to the real-world process of mining precious metals from the earth.
Mining requires huge computational power and a great deal of electricity. It secures the network by ensuring that only those that can prove they have expended resources are granted the right to append a new set of transactions to the blockchain.
You can often hear that cryptocurrency miners are just people who earn free cryptocurrency by keeping their computers on 24/7. But that’s not true.
Miners are actually the main driving force and, if you will, are the guardians of the blockchain. Miners contribute computing powers and strengthen the network. The more miners connecting to the network, the more decentralized and secure the network becomes.
How does Proof-of-Stake work?
In the world of PoS miners do not exist – because there is no mining, obviously – but there is an equivalent.
Validators are chosen to find a block based on the number of tokens they hold rather than having an arbitrary competition between miners determine which node can add a block.
So the stake amount, or quantity of crypto a user holds, replaces the work miners do in proof-of-work.
This staking structure secures the network because a potential participant must purchase the cryptocurrency and hold it to be chosen to form a block and earn rewards.
While in PoW miners spend electricity, PoS validators are required to spend money and dedicate financial resources to the network. Those who have spent money on coins to earn these rewards have a vested interest in the network’s continued success.
The similarity between PoW and PoS in terms of security
There is one thing that PoW and PoS have in common. They both have a theoretically effective solution against the nightmare of every blockchain network. And that is beyond any doubt a 51% attack.
When somebody is in control of 51% of nodes that validate transactions of the network – no matter if it is PoW or PoS – they can modify the records and steal the coins.
To prevent this from happening PoW and PoS act with essentially the same mechanism.
Instead of controlling 51% of the mining hashrate and nodes, like with proof-of-work, attackers of a proof-of-stake system would need to hold at least 51% of the coin’s supply and control at least 51% of the network’s nodes.
In both cases it is way too expensive to organize such an attack. It would require buying millions of ASICs to overtake mining hashrate for Bitcoin or buy billions of dollars worth stakes in Ethereum network.
But wait. There is always some ‘but’, right? We’ll get back to 51% attack in a little while.
Is PoW really that bad?
Well, it depends.
Most typical arguments include high energy consumption, e-waste and traceability.
Bitcoin and other Proof-of-Work blockchains, like Ethereum (for a while now), RavenCoin etc, consume significant amounts of energy to provide their security model to their networks.
It’s a well known fact that Bitcoin mining consumes more power than entire nations, including Norway, Malaysia or Ukraine.
Environmentalists aren’t happy. They claim that mining is wasteful.
Of course, it’s all relative.
Mining does consume massive amounts of energy. But many critics fail to evaluate the types of energy used for mining and instead equate its high energy use to a large environmental footprint.
Many studies have shown that bitcoin miners often use various energy sources in their operations. In some countries renewable energy is the dominant form used for Bitcoin mining, ranging between 50% to over 70% of total power used.
There is no arguing about electronic waste though. Miners generally run at full power 24/7. No equipment is able to work forever in such conditions.
On top of that, ASIC chip manufacturers are constantly developing newer, more effective chips. Old chips regularly become less effective at winning blocks than newer chips. So miners buy new ones, thus generating e-waste with older chips.
In many countries censorship is still a much bigger concern that e-waste.
And while crypto mining requires plenty of electricity it often makes mining facilities easily traceable. The immense power draw can be located using electricity readings or even thermal cameras.
Mining is not banned in most countries, but it is often frowned upon.
The ability to easily trace where crypto mining takes place allows anti-crypto regimes to crack down on the miners.
Can Proof-of-Stake solve all these problems for Ethereum?
As you can see, PoW has some issues. But can PoS take care of them?
Let’s take a look at crucial moments that are often seen as chief merits of PoS.
Proof-of-Stake systems are significantly more energy-efficient than Proof-of-Work operations. The hardware requirements of many PoS systems are equivalent to average laptops on today’s market. Validator software is also not very demanding.
Validators are chosen to find a block based on how many tokens they hold, rather than a competition among miners to solve a puzzle.
What’s most important is that the time it takes for the PoS algorithm to choose a validator is significantly quicker than the PoW mining competition. That helps achieve increased transaction speeds.
As I mentioned before, PoW requires plenty of energy which helps to identify miners and their whereabouts.
At the same time PoS validators can be running on small laptops.
A single validator controlling a huge part of a globally distributed monetary network could operate a laptop in a fast food restaurant round the corner rather than a warehouse filled with thousands of mining computers.
A low barrier to entry
That’s a tricky one.
PoW mining is not easy to enter. You have to acquire lots of expensive hardware and pay for enormous electric bills.
Meanwhile PoS validators only need to spend money once to participate — they must buy tokens to win blocks in the proof-of-stake model.
Of course, some networks have quite a high barrier to entry, but I will talk about that in a minute.
So what is the problem with Ethereum switching to Proof-of-Stake?
The move to Proof-of-Stake is definitely going to make Ethereum faster and greener. But the very problem is that it will also make it much less decentralized.
And that might be a huge problem.
Because decentralization is what cryptocurrencies are about.
Who controls fiat currencies? Right, the central banks of those countries that issue those fiat money.
Who controls Bitcoin?
Hm, that’s a tough one. Actually, you might say that Bitcoin is controlled by a group of developers who are working on different blockchain layers, providing a halving process once a while and so on. But that’s not true actually. Developers oversee the technical processes, nothing more.
You might say that Bitcoin is controlled by miners. And that would be exactly right. But there is a catch. Miners are decentralized as hell. There are millions of them distributed all over the world. They don’t communicate with each other and can not influence the validation processes they take part in.
Unless you are able to gain 51% control over the mining network – and in the case of Bitcoin it is impossible due to obvious reasons – you can not influence the network.
It’s decentralization that’s protecting Bitcoin from malign fate.
Once again, let me put this straight – decentralization is essential to any cryptocurrency.
And Bitcoin shows us how it is done properly with mining and PoW algorithms.
Ethereum switching to PoS brings up some questions, though.
What security downsides might Proof-of-Stake bring for Ethereum?
In the case of PoW, if you want to earn more by increasing your participation in the mining process, you have to increase the power of your mining facilities.
Simply put, as your hash rate grows, you increase your role in the network’s validation process. And the network increases your reward in return.
But in the PoS world there is another factor that plays the most important role in your validation role. It’s the amount of your stake.
Being chosen to validate a block in a proof of stake blockchain is a sort of money war. To stand more chances of being chosen, one simply has to stake more tokens.
So to earn more money for staking you simply have to stake more money.
That sounds OK in terms of usual finance. For example if you deposit $100,000 in the bank and I deposit $100 you will earn more interest.
But if we are talking about a cryptocurrency based on the PoS algorithm, stakers’ role isn’t confined to getting rewards. Staking is there to make sure you validate the transactions honestly.
So if you stake more than I do, chances are you will validate much more transactions than I will.
The amount of money you stake in the PoS is becoming more important than the technology of the network.
And then the centralization issues emerge, once again.
Is Proof-of-Stake a threat to decentralization of Ethereum?
Yes, it is, at least theoretically.
With PoW the decentralization is achieved without any efforts just because of the nature of mining and the economy of mining hardware including electricity costs.
With Proof-of-Stake for Ethereum we are simply shifting everything to the money bags.
The minimal amount to become a part of Proof-of-Stake in Ethereum?
The low entry barrier mentioned above is an argument when we are talking about Solana or Cardano.
But we are talking about Ethereum switching to Proof-of-Stake, right? And staking here requires at least 32 ETH to begin with. That’s a whopping $100,000 at the time of writing.
If the history of civilization teaches us anything at all, it shows that moving the power to the rich never really goes well. PoS rewards stakers and validators in terms of the amount of stake they have in the network and not the power they contribute to the network.
Power of numerous simultaneous connections is what makes Bitcoin and other PoW networks so stable, decentralized and, as a result, secure.
With PoS it is obvious that the power will gradually shift to a smaller number of validators holding the network in their hands.
Switching to PoS could weaken the security strength of the blockchain, a feature which has become its biggest flex.
Let’s get back to that 51% attack once again
Remember that 51% attack?
The PoW network is well protected against 51% attack, at least if the network is big, like Bitcoin or Doge.
To attack PoW networks you will need to control at least 51% of the computing power supplied to the network.
Similarly, you can interrupt a PoS network if you control at least 51% of the tokens supplied to the network. But the difference is that with PoS you don’t actually need to invest into an unspoken amount of computing power. All you need is money.
That’s the danger of moving power to the rich, they can just buy anything they want with money.
Of course, in the case with Ethereum we are talking about enormous amounts of money one needs to stake to be able to control the network.
But, it is still possible. Imagine a group of Russian oligarchs who sit on the oil pipe and don’t even know how many billions of dollars exactly they have. Why don’t they just buy enough validators to gain control over Ethereum through Proof-of-Stake algorithm?
The question ‘why’ is not important now as this is an article about the future of Ethereum after switching to Proof-of-Stake algorithm, not about world politics.
Satoshi would be strongly against Proof-of-Stake
We might never learn who Satoshi Nakamoto was.
But his intentions are amazingly transparent.
The Bitcoin father wanted to make a new kind of money that would eliminate disparity and inequality of all kinds.
So he invented Proof-of-Work blockchain that wrestles the abnormal societal stereotype of the rich being in control. And 13 years later we can clearly see that it actually works. No matter how many rich guys enter the mining business with huge investments, Bitcoin is independent at its very core. Rich people are not able to take it under control.
Meanwhile, Ethereum switch Proof-of-Stake supports the very idea of rich people gaining more control just because they are, well, rich.
So it is obvious that PoS is a menace Satoshi worked so hard to destroy.
Ethereum switching to Proof-of-Stake – key takeaways
Just a couple of thoughts here:
- Theoretically the PoS network is less decentralized, and as such is much more vulnerable to malign acts.
- It does not necessarily mean that something bad is going to happen to Ethereum soon. But it might happen.
- PoS is a something Satoshi Nakamoto would definitely disagree with.
Sources: Blockworks, DataDrivenInvestor