Changing the way tokens are mined entails a transformation of the entire ecosystem. John Belford discusses the possible effects of changing the protocol
The Ethereum blockchain is scheduled to switch to Proof-of-Stake (PoS) mining in August 2022. This will mean the end of ETH mining via Proof-of-Work (PoW) mining. Under the new rules, the number of tokens a user owns will be key.
Ethereum has used mining to keep its network and coins secure since its inception in 2015, but the creators have always planned to switch to a different, more secure protocol that would allow for new solutions and use less power.
In addition to lower power consumption and increased network bandwidth, the transition to the new algorithm entails many changes to the entire Ethereum ecosystem.
Reasons for switching to the new protocol
In addition to higher levels of energy efficiency and scalability, PoS allows more nodes to run, which will lead to greater decentralization and is only in theory, how it will be in practice is debatable. PoW networks have slow transaction output. The idea behind Ethereum’s transition from PoW to PoS was to increase the speed for hosting various decentralized applications (dAapp) and provide the necessary infrastructure for the emergence of web 3.0.
Advantages of the old algorithm
The main advantage of PoW over PoS is stable network operation since 2013 and proven reliability.
PoW provides more opportunities to maintain decentralization compared to PoS, although in theory it should be the other way around. PoW is an investment in computing power that is not available to everyone, the entry threshold for coin mining is higher than PoS.
“In practice, PoS networks risk a higher level of centralization than PoW networks because stacking also requires a certain number of network coins that the user can deposit in a stacking smart contract. For example, for Ethereum, that’s 32 ETH.”
PoW allows even a single miner to mine a block. The competition is more fair than in PoS, where the validator who placed more coins on the stack has priority for block recording and verification.
“In general, PoS is a relatively new concept, and one can only talk about its disadvantages and advantages in theory.”
PoW has an advantage over PoS because of the electricity used to perform computing functions for the network.
“The more electricity the network consumes, the higher the hash rate and security of the network. Thus, possible attacks on the network are prevented and the security of the network is improved.”
How will the transition affect blockchain security?
PoW in large and popular blockchains, such as bitcoin, better resists a 51% attack because it would take an attacker or group of attackers to take over 51% of the network’s processing power to break the chain, says the ENCRY Foundation co-founder.
“To pull off such an attack on a bitcoin network is very expensive and labor-intensive (to buy a huge amount of equipment), to agree with a group of other miners is unrealistic, because everyone has his own goals and few people will want to participate in such a scam.”
In PoS-networks labor intensity of the attack is 51% lower, which means its feasibility – is higher, according to the expert. He pointed out that an attacker only needs to accumulate a large number of coins, and while it will still be a costly attack, it is easier to execute than in PoW networks when cash resources are available.
“When Ethereum eventually moves from its current algorithm to a new algorithm, it will rely on validators rather than miners to validate transactions on the Ethereum blockchain with a consensus mechanism.”
The new Ethereum network security risks in the PoS consensus mechanism relate to possible attacks on validators or abuse of the validator function.
Lido DAO, which currently owns 33% of ETH in Beacon Chain, allows users to deposit any amount of ETH to be rewarded for bets, virtually bypassing the requirement for a full deposit of 32 ETH to run a validation node. Lido employs 22 Ethereum node operators who handle the technical side of running the validator node software.
“However, the top 100 holders of LDO, the control token for the Lido DAO, own 93.1% of the total LDO supply, leading to the centralization of power within ETH validators that Ethereum management has been trying to avoid all along.”
Impact on blockchain users
The transition of ether to PoS will lead to the fact that small miners, who now mine ether on video cards, will switch to another cryptocurrency, most likely Ethereum Classic. Confirmation and blockchain writing in Ethereum will be handled by large holders of ether in the first phase after the switch.
“I expect that at least in the first stage after the transition to PoS in the Ethereum blockchain, the level of centralization will increase.”
What is certain is that PoS will affect the entire crypto market. First of all, it will affect miners, they are in the risk group, because ETH mining on video cards is the most profitable.
“At the moment, it is unknown what consequences this transition will have for Ethereum blockchain users in the long term.”
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