Reading: Ethereum Mining: Proof-of-Work vs. Proof-of-Stake
If you haven’t familiarized yourself with Ethereum yet, you would be surprised to learn what it’s capable of when compared with cryptocurrencies like Bitcoin. Besides being the second-largest cryptocurrency project behind Bitcoin, Ethereum has unique and exciting concepts to offer its users.
Beyond Digital Currency
So, what is Ethereum?
The most straightforward answer would be that it is technology that includes digital money, payments, and applications. Ethereum’s infrastructure represents the next step for crypto platforms, as it integrates new technology that’s not specifically transaction-oriented.
Ethereum is an open-source platform that anyone can use to create applications, build infrastructure for decentralized exchanges, and create smart contracts. Of course, it’s also a platform with its own cryptocurrency.
What’s Ether (ETH)?
Payments on Ethereum are made with Ether (ETH). Ether is currently the second-largest cryptocurrency by market cap, right behind Bitcoin. Ether is used as an incentive for those performing actions on Ethereum and as a reward for adding hashing power to Ethereum’s mining network.
ETH is central to the Ethereum platform. Whether you are using Ethereum-based applications, or simply paying with it, a percentage of the ETH from your transaction is used as an incentive for miners to process the request on the Ethereum network.
The role of miners on the Ethereum network is similar to Bitcoin miners. They ensure that transactions and other processes, like smart contracts and decentralized applications (dapps), run smoothly, securely, and independently of centralized control.
Ethereum and Proof-of-Work (PoW)
Proof-of-work is a system known as a consensus protocol that ensures the security of the crypto network using computing power. Miners prevent things like double-spending by solving demanding computational tasks. Solutions are found through trial and error, and when the network majority agrees that a miner or a pool of miners found the correct answer – through proof-of-work – they get rewarded, and a new block is added to the blockchain.
Ethereum mining is done using graphics cards (GPUs) with specialized ASIC (application-specific integrated circuit) requirements. Anyone with the right gear can participate, keep the network secure, and get rewarded for it.
Unfortunately, proof-of-work mining creates a hardware “arms race”: The better your hardware, the higher your computing power, and the greater the rewards for participating in the mining process. This race is the cause for the incredible spikes in GPU prices we’ve witnessed over the past few years.
Proof-of-work is demanding, power-intensive, and extremely polluting, particularly when more than a few graphic cards are used to mine. That’s why Ethereum is actively moving to a proof-of-stake model for its consensus mechanism.
Ethereum and Proof-of-Stake (PoS)
With proof-of-work, computer power is put on the line to maintain the security of the Ethereum network. Proof-of-stake requires users to stake their ETH to become validators in the network.
Validators, the same as miners, are responsible for validating new blocks added. This also comes with great benefits compared to proof-of-work:
- Power saving – significantly less electrical energy is needed to add new blocks, and Ethereum will use almost 99.95% less energy after switching to PoS.
- Lower entry barrier – a significant hardware investment isn’t needed to participate in the creation of new blocks.
- Even more decentralization – a new consensus algorithm can lead to more network nodes and, therefore, less centralization.
- Foundation for further Ethereum upgrades like sharding.
Ethereum requires users to stake 32 ETH to become validators. Of course, like mining pools before them, there are staking pools for users who want to participate but don’t have the whole 32 ETH themselves. Validators are rewarded for proposing new blocks and attesting to the correct ones. If a validator authenticates a malicious block, they will lose their stake.
Another benefit of the PoS system is that it makes a 51% attack almost impossible, since it would require someone to have 51% of the staked ETH.
Currently, Ethereum runs both PoW and PoS consensus algorithms. Once Eth2 launches in late 2021 or early 2022, it will have fully transitioned to PoS.
Ethereum’s Future
After implementing proof-of-stake, the next step for the Ethereum project is sharding or creating so-called shard chains. This process is a common concept in programming, where databases are split to accommodate increased traffic and the amount of data they hold.
Sharding would split the current Ethereum network across 64 new chains. The upgrade is supposed to improve Ethereum’s scalability and capacity, allowing for more transactions per second and further reducing the hardware requirements of running a node.