Called “The Merge” it is a major upgrade to the way the Ethereum cryptocurrency platform performs. With it, the currency has been migrated from the current “Proof of work” consensus mechanism, to a better, “Proof of stake” consensus mechanism.
A consensus mechanism, simply put, is when a majority of peers that are a part of a blockchain network agree on the state of data within the network.
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To make it easier, think of it as trying to agree upon what movie to watch with friends. In order to watch one specific movie, out of 10 friends, at least six need to agree to reach a consensus, with the rest falling in line.
In blockchain , consensus mechanisms reign supreme, with three different kinds, Proof-of-work, Proof-of-stake and Proof-of-authority. The focus is currently on the how and why Ethereum has shifted from Proof-of-work to Proof-of-stake.
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The reason why the Ethereum Merge is being called revolutionary is for a few reasons. One, energy consumption to tackle Ethereum transactions will come down by roughly 99.95%, says the community behind the technology. Two, with the shift in the consensus mechanism, experts believe that the blockchain will be able to process up to 100,000 transactions per second compared to the 30 per second that was possible with the proof-of-work consensus mechanism.
What is Proof-of-Work?
A Proof-of-Work consensus mechanism requires users on a blockchain network to collectively solve arbitrary math puzzles to reach a consensus. It was initially designed to prevent frivolous and malicious attacks on computing systems like mass spam email attacks or denial of service attacks.
The concept was designed by Hal Finney in 2004. It was finally introduced in 2009 and became widely adopted in how Bitcoin transactions. Since then, it has formed the basis of many other cryptocurrency exchanges.
The nature of Proof-of-work means that it is a peer-to-peer cryptocurrency transaction which doesn’t require any third party to be included. The downside of the mechanism however, is that the energy required to solve the mathematical puzzles requires vast amounts of energy, which only increases, the more peers join the network.
In addition, since Bitcoin mining took the world by storm, the number of people mining for the cryptocurrency shot up, even as it became more rare while expending more energy.
What is Proof-of-Stake?
In a Proof-of-Stake consensus mechanism, transactions are validated based on the number of coins a peer on the network ‘stakes’, i.e., offering up their own coins as collateral for a chance to validate a transaction.
To validate a transaction, coin owners have to “stake” a set of their own coins. With Ethereum, users must put 32 ETH on the line. A transaction is then finalised when a certain number of peers who put up their ETH validate it to be authentic.
The Ethereum Proof-of-Stake mechanism employs a shard system. A validator must verify a transaction, adding their own validation ‘shard’ to a database. In order for that database to be complete, 128 other validators put also add their own ‘shard’ to validate that database. With the validations complete, the database is created, which in turn must receive a two-third majority from the validators saying that the transaction is valid, following which the database is closed.
Key differences between Proof-of-Work and Proof-of-Stake
At its core, the Proof-of-Stake mechanism is about cooperation and not competition, unlike Proof-of-Work. The former system randomly selects cryptocurrency miners to validate transactions, whereas the latter uses a competitive validation method to confirm transactions to add new blocks to the blockchain. With Proof-of-Work, the first person to validate a transaction is rewarded, while others get nothing.
Here are the key differences:
Under Proof-of-Stake validation, block creators are called validators, on the other hand with Proof-of-Work, creators are called miners.
With PoS, creators must buy cryptocurrency to become a validator, while with PoW creators, they need equipment and energy to mine their coins. As a result, PoS is energy efficient considering it makes use of existing currency whereas PoW guzzles energy as miners must use highly expensive equipment to find new tokens to use in future transactions.
Another reason why PoS is a better alternative is because it allows for the technology to be scaled, whereas PoW mechanisms, by virtue of using high-tech, expensive equipment, is usually relegated to server farms maintained by either groups who farm tokens or extremely wealthy individuals. Which leads into issues surrounding security.
In terms of being secure, PoW systems are a little more secure than PoS mechanism. Expensive equipment and mining farms ensure that submitting invalid transactions are a drain on resources like energy.
With PoS, there are concerns regarding 51% attacks, but those are unlikely. A 51% attack is when somebody owns 51% of a staked cryptocurrency. This in turn allows them majority control, allowing them to change the blockchain. The downside for doing that when PoS mechanisms are in play is because the cryptocurrency has to be staked to validate a transaction. Therefore, if other peers on the network reject such a transaction, all 51% of the staked coin is lost. Therefore, it is in the network’s best interest to act in good faith.
Another difference between PoS and PoW mechanisms is how rewards are distributed. In PoS mechanisms, because the validations are distributed amongst the peer network, everybody gets a share once a transaction is finalised. However, with a PoW mechanism, the first one to crack the computational puzzle required to acquire new coins, is rewarded, while others get nothing.