Introduction
Ethereum is one of the most popular cryptocurrencies, and it’s set to revolutionize the way we think about blockchain technology. In a recent move, Ethereum has decided to switch from its current Proof of Work (PoW) algorithm to a new Proof of Stake (PoS) algorithm. This switch has been met with both excitement and criticism, as it could potentially help to solve some of the scalability issues that have plagued Ethereum. In this article, we’ll take a look at the basics of the PoS algorithm, how it works, and what it could mean for Ethereum’s future.
09/14/2022
AdvancedEthereum
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- A large-scale update called The Merge is planned for the Ethereum network, which involves changing the consensus algorithm from Proof-of-Work (PoW) to Proof-of-Stake (PoS). The goal of the upgrade is to make the blockchain platform more scalable, secure and decentralized.
- The update will take place in two stages. It started with the successful Bellatrix update on September 6, 2022. The activation of The Merge itself, which will implement PoS, is scheduled around September 15th.
- After the transition of Ethereum to PoS, miners in the network will be replaced by validators. They will do the work of confirming new transactions with the help of stakes and receive a reward in ether coins (ETH) for this. The current ETH staking yield is 4-4.5%.
- Ethereum’s next major upgrades after PoS will be the introduction of sharding and the transition to a new virtual machine with support for multiple languages ​​for smart contracts.
Date of transition of Ethereum to Proof-of-Stake (PoS)
According to the hard fork schedule, it will start with the Bellatrix update on September 6, and The Merge should be activated around September 15. In June 2022, developers have already successfully integrated PoS into the Ropsten and Sepolia testnets. In early August, the team completed a merge for the Goerli testnet. The Bellatrix upgrade was already successfully activated on September 6, on schedule.
The Merge began with the launch of a separate network from the mainnet called the Beacon Chain. It was in it that, at the end of 2020, a special smart contract for ETH staking was deployed, where funds could be sent. The upcoming update is actually a merger between Beacon Chain and the Ethereum mainnet.
After the hard fork, the “signal” blockchain will become the Ethereum mainnet. The registry data and funds on the deposit contract will remain unchanged. As of August 29, 2022, Beacon Chain employs over 420,000 validators, which have over 13.47 million ETH locked in staking. The Beacon Chain signaling network already uses PoS, but does not yet allow transactions and smart contracts.
When can ETH be withdrawn from staking?
The condition for sending ETH to a staking contract on Beacon Chain starting in 2020 was to block funds in it until The Merge is activated. Withdrawal of coins from staking will be unavailable for another 6-12 months after the end of the update. At the same time, validators will start receiving liquid ETH coins as rewards immediately after the upgrade is activated in September 2022.
Why Ethereum is changing the consensus algorithm
Currently, Ethereum uses the Proof-of-Work algorithm to create blocks. This is associated with significant energy costs and reduces the scalability of the network. In addition, mining in PoW requires hardware, which reduces the availability of this activity. The upcoming update should address these issues and bring Ethereum closer to solving the blockchain trilemma.
As of June 2022, the energy consumption of the Ethereum blockchain is 112 TWh per year. As a result of replacing mining with staking, this indicator will drop 99.95%. The developers claim that after PoS, one node will require no more electricity than a regular PC.
Another important consequence of the upgrade will be increased security: Ethereum will be able to more effectively repel attacks by intruders. The new consensus algorithm requires a significant amount of funds to be locked up, so the chances of accumulating the minimum required amount of funds are almost zero.
Another reason for implementing PoS is technical necessity. Without a change in the algorithm, future updates aimed at increasing the scalability of Ethereum are impossible.
How PoS will work on Ethereum
The Proof-of-Stake algorithm assumes that the “weight” of the validator’s vote depends on the number of coins staked. The amount of blocked funds determines the reward of the node. To become an Ethereum validator, you need to deposit at least 32 ETH on a deposit contract. Any holder can delegate a smaller amount of coins to the validator.
To optimize calculations, staking participants are divided into separate groups – committees, the composition of which is determined randomly. The latter include from 128 to 2048 validators. Committees can also join together to form blocs.
In the updated Ethereum, the consensus procedure will be divided into so-called epochs, each lasting approximately 6.4 minutes. These intervals are divided into 32 timeslots of 12 seconds. During the specified period of time, one block is formed. Committee groups are distributed among timeslots and create chain elements.
The chosen validator proposes the block, and the rest vote for it. If the latter has received the most votes, it is included in the blockchain. After each era, committee members are shuffled. The maximum number of groups and the number of their members is determined by the maximum emission of Ethereum, equal to 134.2 million ETH.
How much income will staking ETH bring?
The commission in the Ethereum network is formed from two components: premium and base, which is burned. After switching to Proof-of-Stake (PoS), there will be no fixed block reward. The income of the validators will be determined by the additional emission of ETH, which changes dynamically every epoch. The size of the annual emission of new coins will be calculated based on the amount of funds locked in staking.
According to Staking Rewards at the end of August 2022, Beacon Chain validators receive rewards of 4.5% per annum, and holders delegating funds to them receive approximately 4% per annum. As Nansen analysts found out, over 60% of all Ethereum coins in staking are controlled by only 4 platforms:
Messari Analyst Tom Dunleavy suggeststhat immediately after the merger, the profitability of ETH staking will increase and will be in the range from 7% to 13% per annum, however, it will adjust to a lower side over time.
How will the price of ETH change after the implementation of PoS
Traders skeptically refers to the continuation of the uptrend of the ETH cryptocurrency after the price approaches the resistance level corresponding to $2000. Ethereum reached this mark on August 14th. According to the head of SkyBridge Capital, Anthony Scaramucci, further growth in the value of ETH is possible, but in the long term.
Most experts agree that The Merge will significantly affect the cryptocurrency market.
According to Glassnode, Ethereum-based derivatives traders are “highly optimistic” about the price of ETH in September 2022. Based on the ratio of call and put contracts, as well as OI indicators, investors place bets on the cryptocurrency price above $2,200 – up to $5,000. Former head of the BitMEX platform, Arthur Hayes, predicts ETH to rise to $3,000.
Chainalysys researchers point out that after The Merge, the price of Ethereum may show dynamics independent of the rest of the cryptocurrency market.
After switching to PoS, Ethereum will still have a deflationary burn mechanism, which should also contribute to the growth of ETH. An additional factor could also be the growth in the adoption of the Ethereum cryptocurrency among institutional investors. This possibility was announced in Bank of America. Chainalysys research shows that the number of whales holding ETH has already grown.
What will happen to ETH miners and whether to wait for the appearance of Ethereum PoW fork
The result of The Merge will be the impossibility of further Ethereum mining due to the so-called difficulty bomb. As a result, at least some of the miners can migrate to another project – Ethereum Classic (ETC). It is an old fork of Ethereum and is extremely close to its “parent” in terms of architecture, but it has a much lower hashrate and overall activity.
Another candidate for Ethereum miners is Ravencoin (RVN), whose price in the first two weeks of September grew more than 100%.
A small part of the Ethereum community intends to launch a fork in which the PoW algorithm will be saved. Its initiators are miners and manufacturers of specialized equipment. According to Chandler Goh’s proposal, the project could be called Ethereum PoW (ETHW).
On September 13, the ETHW developers presented the details. The launch of the mainnet fork of Ethereum should take place within 24 hours after the activation of The Merge. The exact time will be announced one hour before the start of the ETHW main network.
Meanwhile, investors do not bet on the project. As a result, by mid-September 2022, the ETHW futures price has already declined up to $30. A number of large projects have already refused to support the Ethereum PoW fork. Among them: Uniswap, Chainlink, Ethermine and OpenSea.
It is highly likely that ETH holders will receive an airdrop of the ETHW fork cryptocurrency. Binance and Bybit have already announced their readiness to distribute free coins. A similar incident occurred in 2017 after the appearance of Bitcoin Cash, which separated from Bitcoin after a hard fork.
Further updates after The Merge
The Ethereum roadmap includes the implementation of a technology called sharding, which is necessary to increase the scalability of the blockchain. Sharding is the division of a common database into fragments and distributed storage of information by nodes. This update will allow the Ethereum network to grow according to the load, despite a significant increase in the size of the ledger.
Beacon Chain allows you to coordinate the work of validators and their distribution among shards. The algorithm implements segment synchronization, thanks to which the latter are aware of the current state of the network. The nodes of the updated mainnet will store part of the blockchain, and special algorithms will be used to verify the validity of the data.
Sharding reduce hardware requirements and will allow you to run the node on laptops and smartphones. The update is planned to be integrated in 2023, but the final date depends on the effectiveness of the transition to PoS.
The next step after sharding is to deploy a new virtual machine Ethereum WebAssembly (eWASM). It will allow using various programming languages ​​to write smart contracts. eWasm aims to make Ethereum more efficient and should eventually replace the Ethereum Virtual Machine (EVM).
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Conclusion
The move to a PoS algorithm is a positive step for Ethereum. Not only does it bring increased security, improved energy efficiency, and a better economic model for miners, but it also allows for more scalability and a stronger network overall. Ethereum’s switch to PoS brings with it the promise of a more secure and efficient network, allowing it to reach its full potential and become an even more viable blockchain platform.
FAQ
FAQ: Ethereum Switching to PoS Algorithm
What is Ethereum switching to PoS algorithm?
Ethereum is in the process of switching from its current consensus algorithm, proof-of-work (PoW), to a new consensus algorithm called proof-of-stake (PoS). PoS is a more energy efficient method of reaching consensus on the Ethereum network, as it does not require miners to burn energy to solve complex mathematical puzzles in order to validate transactions.
What are the advantages of PoS over PoW?
PoS has several advantages over PoW. For starters, it is much more energy efficient, as miners do not need to burn energy to solve complex mathematical puzzles in order to validate transactions. Additionally, PoS is better suited for scalability, as it can process more transactions in a shorter amount of time. Finally, PoS provides greater security, as it requires participants to lock up their coins in order to become validators.
How will the transition to PoS work?
The transition to PoS will happen in two phases. The first phase will involve the launch of a new Ethereum blockchain called “Ethereum 2.0”. This new blockchain will use the PoS algorithm. The second phase will involve transitioning the existing Ethereum blockchain to the new blockchain. This transition will be done through a process called “sharding”, which will involve splitting the blockchain into multiple smaller blockchains.
What is staking?
Staking is the process of locking up coins in order to become a validator on the Ethereum network. Validators are responsible for validating transactions and maintaining the integrity of the network. In return for their work, validators receive rewards in the form of new coins.
Will I need to stake my coins to participate in the Ethereum network?
No, you will not need to stake your coins to participate in the Ethereum network. Staking is only required for those who want to become validators and receive rewards for validating transactions.
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