3 Things You Need to Know about Ethereum and Proof-of-Stake

Still a relatively new form of virtual currency, cryptocurrency utilizes blockchain technology to secure transactions. There are dozens of different cryptocurrencies with new digital coins created via a process known as mining. This involves monitoring and legitimizing cryptocurrency transactions via sophisticated computers that solve difficult computation math problems. It’s a costly and complex process, but those who perform mining functions can receive crypto tokens for their work.

The mining process is known as proof-of-work and, because of high energy costs, miners often need to sell their coins to pay their energy bills. Many other cryptocurrencies, including BNB, Flow Token, and Raydium, use a more energy-efficient process known as proof-of-stake, in which miners can validate transactions based on how many coins they have. Many of the most prominent cryptocurrencies use proof-of-work, but Ethereum, which has the second-largest market cap behind Bitcoin, is making the switch to proof-of-stake.

The Recent Shift

Ethereum began its shift to proof-of-stake in 2020 with the launch of the Beacon Chain on December 1. On its website, the staking process is described as easier and more sustainable than mining. The Beacon Chain’s role in this process is to coordinate the larger network of stakers and shards, which refer to transaction validators and a database splitting process, respectively. Phase 1 of the official shift to proof-of-stake is expected to launch in 2021, and a full merger is expected within the next year.

Energy-Efficiency and Security Concerns

Proof-of-work protocols have a much larger carbon footprint than those of proof-of-stake. A recent study found that Ethereum is responsible for roughly 26TWh of energy consumption per year, comparable to that of Ecuador, which has 17 million people. For a proof-of-stake comparison, Tezos’ estimated annual energy consumption is only about 0.00006TWh.

Proof-of-work proponents believe its mining process is more inherently secure and discourages malicious behavior, but proof-of-stake is viewed as less risky concerning mining attacks on the network due in large part to its compensation structure.

Adoption Challenges

Although the benefits for transferring to a proof-of-stake process are obvious, Ethereum hasn’t made the change sooner due to the difficulty of the project, contends Telos Foundation head of product Justin Giudici.

“The challenge of changing the consensus mechanism on Ethereum has been compared to ‘fixing a plane while flying it,'” he told US News. “This is because with thousands of existing smart contracts on the Ethereum chain along with billions of dollars in assets at stake, the migration challenge is significant.”