The NFT market tokens representing Digital Art, Music and Videos soared to a whopping price of $44 Billion last year. This increased attention to the Ethereum Blockchain, where most of the NFTs were bought and sold. Hence, Ethereum came up with the idea to change from Proof of Work to Proof of Stake.
Unlike a banking system, a Blockchain network doesn’t have a central gatekeeper to verify the transactions. Instead, Bitcoin and Ethereum, two of the largest cryptocurrencies, both rely on a mechanism called “Proof of Work (PoW)” to maintain the ledger of transactions.
What is Proof of Work (PoW)?
It is the algorithm that helps secure many cryptocurrencies like Bitcoin and Ethereum. The concept behind its creation was to control third parties like banks or states involved in the financial ecosystem. Participants maintained a shared ledger, which is why Blockchains like Bitcoin and Ethereum moved their systems entirely to PoW.
Even more specifically, PoW solves the “double-spending” problem. If, for instance, the users double-spend their coins, this will cause inflation in the overall supply, resulting in the devaluation of everyone else’s coins and making the currency worthless. Hence, the Blockchain networks shifted completely to PoW, making doubling digital currency very difficult.
What is Proof of Stake (PoS)?
The problem was quite clear for Ethereum developers regarding the limitations with PoW. So, they are almost in the final stages of building the new solution, “Ethereum 2.0”. This upgraded version of Ethereum will produce a faster, intensive mechanism called “Proof of Stake (PoS)”. It will not only maximize the speed and efficiency but also lower the existing fees.
In Proof of Stake, staking is similar to a proof of work’s mining. It’s the process through which a network participant gets to select the latest batch of transactions to the desired Blockchain and, in exchange, earn some crypto back. The details may vary, but PoS Blockchains generally deploy a network of “validators” who contribute or stake their personal crypto in exchange to get a chance to validate new transactions, update the Blockchain and earn themselves a reward.
How does Proof of Stake work?
Basically, in PoS, the algorithm selects a pool of validators based on the number of funds each validator has. If you’ve chosen and the committee of “attesters” accepts your block. Ethereum claims that the critical advantage behind switching from Proof of Work to Proof of Stake is the economic incentive to play by the rules. If a node picks up a bad block or transaction, the validators face “slashing”, which technically means that all their ether is “burned”.
Proponents have claimed that Proof of Stake is far more secure than Proof of Work. Attacking a PoW chain, you only need half the computing power in the network. Whereas, for PoS, you need to control more than half the coins of the system. It is pretty tricky to achieve this with PoW.
A Risky Move for Ethereum?
Moving the Blockchain network from Proof of Work to Proof of Stake comes with risks. Thousands and thousands of Smart Contracts operate entirely on the Ethereum chain, with billions of dollars of assets at stake.
Proof of Stake has still not been proven onto our existing Proof of Work platforms. Ethereum has been among the top Blockchain networks, and it will be difficult for them to transit from PoW to PoS. The vulnerabilities would surface once the new system is widely released.
Future of Ethereum?
With Ethereum’s transition to this new protocol, we are still unsure how it will affect the Blockchain market. If this plan for Ethereum succeeds, then this will increase the price of Ethereum to booming numbers in the Blockchain market.
However, Ethereum will be launching its “Ethereum 2.0” mid-next month. Only a few days left as Ethereum is working on the final touches of their Proof of Stake model. With the crypto market being uncanny, no one is still sure what the future of Ethereum holds after their new model implementations. Let’s hope it goes the right way, as it will completely revolutionize the Blockchain market.