Topics Tech Deep Dive
Bybit Learn
Bybit Learn
Advanced
May 10, 2022

Ethereum's Switch to Proof of Stake: What We Know So Far

Introduction

With new tokens and platforms being developed all the time, an apt word to describe the crypto industry would probably be “dynamic.” While new cryptocurrencies pull out all the stops to break into the market, well-established cryptocurrencies are faced with the challenge of maintaining their rankings amid fierce competition. One way to do so is to constantly look at their offerings, and adjust/reinvent themselves in tune with consumer needs.

Ether, the second most popular cryptocurrency after Bitcoin, has enjoyed a much higher rate of adoption and growth than the latter in merely the first five years of its existence. Still, the platform is plagued by a number of issues such as high gas fees and slow transaction speeds, and its competitors are catching up fast. Change is imminent, and Ethereum is stepping things up — with big changes listed in its road map. 

This article will explain everything you need to know about Ethereum's forthcoming upgrade, with information about what Ethereum is, why the Ethereum blockchain is switching to the proof of stake (PoS) consensus, and how the move will help solve the issues currently faced by the network.

What Is Ethereum?

Source: Forbes

Ethereum is a community-run technology powering the Ether cryptocurrency (ETH) and thousands of decentralized applications (DApps).

The network allows users to send crypto to anyone by paying a small fee. Ethereum also powers various applications that can be used by everyone, but can't be taken down by anyone.

Known as the world's programmable blockchain, Ethereum has built on Bitcoin's innovation. It comes with a number of significant differences and improvements.

Both Ethereum and Bitcoin allow you to use digital money without intervention by payment providers or banks. However, Ethereum is programmable, and can therefore be used to send many digital assets, including Bitcoin.

Ethereum is designed for more than payments — it’s a marketplace of financial services, apps and games that cannot censor you or steal your data.

How Ethereum Works

Ethereum works on a blockchain network, which is a decentralized, distributed public ledger that verifies and records all transactions. The Ethereum network is not operated or managed by a centralized entity — it’s managed by all of the distributed ledger holders. All participants have access to a copy of the Ethereum ledger, which includes details about all previous transactions.

Blockchain transactions make use of cryptography to verify transactions and keep the network secure. People use computers to solve complex mathematical equations (also referred to as mining), whereby each transaction on the network is confirmed, and new blocks can be added to the blockchain at the heart of the system. Miners are rewarded with crypto tokens — e.g., ETH for Ethereum participants.

Like Bitcoin, ETH can be used to purchase and sell goods and services. However, Ethereum is unique in the sense that users can build their own applications that run on the Ethereum blockchain, like how software runs on a computer. These Ethereum-based applications can store and transfer personal data and handle complex financial transactions.

What Is PoS (Proof of Stake)?

Proof of stake, or PoS, is a crypto consensus mechanism that helps process transactions, validate entries on the blockchain, and create new blocks while securing the blockchain.

PoS reduces the computational work required to verify blocks and transactions that keep the blockchain and its cryptocurrency secure. It changes how blocks are verified using the coin owners' machines. The owners put their coins up as collateral for the opportunity to validate blocks. 

Coin owners who stake their coins are referred to as "validators." Validators are then chosen at random to mine or validate a block, rather than the consensus being based on a competition-style mechanism such as proof of work (PoW).

If a coin owner wants to become a validator, they must first stake a specific amount of coins. Ethereum users must stake 32 ETH to become a validator. The blocks are simultaneously validated by more than one validator. After the block has been validated by a specific number of validators, it is finalized and closed.

Different PoS mechanisms use different methods for block validation. When it transitions to PoS, Ethereum will use sharding for transaction submissions. A validator will verify transactions and add them to a shard block, which requires attestation by at least 128 validators. Once the shards are validated and the block created, at least two-thirds of the validator pool needs to agree that the transaction is valid for the block to be closed.

Why Is Ethereum Switching to Proof of Stake?

Thanks to the increasing popularity of NFTs and DeFi projects, the Ethereum network has grown tremendously in the last year.

So far, Ethereum has been the preferred network for developers working on NFT or DeFi projects, with over 200 DeFi projects currently hosted on the its blockchain. This increased adoption has led to a substantial rise in the number of transactions made on the Ethereum network. On the flipside, there’s also been a noticeable increase in the number of problems encountered on the network.

Current Issues With Ethereum

With more transactions occurring, miners have had to expend more computational power for the verification of transactions. This higher computational power consumes more energy, to the point where users have begun to evaluate the network’s environmental impact and sustainability.

At present, Ethereum uses 113 terawatt-hours (TWh) of electricity every year, which Digiconomist says is equivalent to what the entire population of the Netherlands uses in a year. A single Ethereum transaction can consume the same amount of power as an average U.S. household in about a week.

This high energy consumption has become a significant concern among the scientific community, which has started to warn Ethereum developers about the negative impact of the network's alarmingly high energy consumption on the environment. Since then, the PoW consensus mechanism has faced scrutiny by global lawmakers. In Sept. 2021, China banned all crypto transactions country-wide, partially over mounting environmental concerns.

The Ethereum network is also quite slow, with a current rate of only 15 transactions per second (TPS) — significantly slower than competitors like Cardano and Solana, whose TPS rates are in the hundreds and thousands, respectively. Another issue faced by Ethereum is its gas fees (transaction costs). Users pay exorbitant fees to have their transactions verified with the current PoW mechanism.

PoS: The Solution to Ethereum's Current Problems

Switching to PoS will decrease the amount of computing power required to process transactions, making Ethereum more environmentally sustainable. However, lower energy consumption isn’t the only benefit to be effected by Ethereum 2.0.

After implementing the PoS consensus mechanism, Ethereum 2.0 will ostensibly use 99 percent less energy, allowing the network to scale and potentially perform as many as 100,000 TPS.

When Is Ethereum Switching to Proof of Stake?

Ethereum plans on transitioning its entire network to the PoS mechanism in a dramatic event called The Merge.

Ethereum's PoS approach has already been tested on the Beacon Chain, launched on Dec. 1, 2020. As of March 2022, 9.5 million ETH ($37 billion in current value) has already been staked.

There are still two phases to go, but the full release of Ethereum 2.0 is expected in Q2 of this year (2022).

Proof of Stake (PoS) vs. Proof of Work (PoW)

Source: skalex.io

With PoW, the probability of mining a block is determined competitively and is based on the size of the stake the person holds (i.e., the number of coins they possess).

With PoS, randomly selected miners are selected to validate transactions. The amount of computational work done by miners determines their probability of mining a block.

  • To add each block to the chain with PoW, a miner must compete with other miners to solve difficult puzzles using their computer's processing power.

On a PoS blockchain, the block creator is selected by an algorithm based on users' stakes, rather than being determined by competition.

  • With PoW, the first miner to solve the cryptographic puzzle of each block receives a reward.

With PoS, the validator collects network transaction fees as a reward for completing a block.

  • Miners on PoW networks have to initially invest in hardware, and also require specialized equipment to optimize processing power and get ahead of the competition.

PoS miners, on the other hand, can easily work with a standard server-grade unit. The only prerequisites they need to meet are securing a stake and building a reputation.

However, with PoS, it’s practically impossible for hackers to add a malicious block — as they would have to own 51% of all the cryptocurrency on the network to do so.

  • PoW systems are more proven and less costly, but are also less energy-efficient.

PoS systems, on the other hand, are less proven but much more cost- and energy-efficient than PoW systems.

Is Ethereum a Good Investment?

The Fed raised interest rates on March 16, 2022. In this decision’s direct aftermath, the value of ETH and a number of other cryptocurrencies increased. In general, rising interest rates hurt growth stocks. However, in this case, the declines had been priced in since January, so the market saw the rising rates as a good way to reduce inflation in the U.S. economy.

However, Ethereum faces a direct threat from faster and more efficient competitors eating into its market share. The network plans to address this challenge with Ethereum 2.0, which replaces the current PoW consensus mechanism with PoS. This change in approach will make the network faster, increase transaction capacity, reduce costs, boost security and decrease energy use, bridging the gap between Ethereum and key rivals like Avalanche and Solana.

The Ethereum 2.0 upgrade is scheduled to conclude in 2023. According to analysts at TradingBeasts, ETH has the potential to cross $3,200 by end 2022, a +27.90% increase on its current price of $2,921 per coin.

It’s reasonable to presume the upgrade will boost the Ethereum network and help maintain its dominance in the DApp space. Given its branding, market dominance and planned upgrades to its infrastructure, Ethereum is without a doubt a solid long-term investment option. 

(Editor’s note: The views expressed above must not be considered investment advice. There is a lot happening right now, and crypto markets tend to be extremely volatile. Please be cautious, conduct thorough research, and invest only what you can reasonably stand to lose.)

Buying Ethereum

You can acquire ETH in exchange for USDT, USDC, UST, BTC and DAI on an exchange like Bybit. Here’s how you can buy ETH on Bybit.

Step 1: Create an account on the exchange by filling in details such as your name, phone number, email ID, address and other KYC information.

Step 2: If you don't already possess USDT, USDC, UST, BTC or DAI, you’ll first have to buy one of these tokens using a credit card, debit card or bank transfer.

Step 3: You can then complete your transaction at a price of your convenience using a limit order. Select the crypto with which you wish to buy ETH, enter your order price, and select the amount of ETH you want to acquire. If the token price reaches your specified amount, your order will execute and the ETH tokens will reflect in your account.

Source: Bybit

Closing Thoughts

The Ethereum network is switching to the PoS system, and we’re excited by this major (and possibly industry-changing) move. While Ethereum’s impending upgrade to 2.0 is something to look forward to (with high expectations in the crypto community), only time will tell whether it lives up to its promises. In the meantime, be sure to stay tuned for the latest updates on this project — as we will!