It’s been eight years since Ethereum founder Vitalik Buterin began developing the cryptocurrency software upgrade known as “merger,” but now the new project that plans to cut emissions from carbon over 99% is ready to launch in September, and the crypto world is going ballistic.
The upgrade plans to move from the traditional transaction verification system, called “proof of work”, currently used by many major cryptocurrencies, such as Bitcoin, Ethereum and Dogecoin, to this new concept, called “proof of stake”. “. which will soon leave other cryptocurrencies stuck in the past.
Ethereum was officially launched into the crypto world on July 30, 2015, with the primary goal of creating a network that would run on decentralized smart contracts, essentially eliminating the “middleman” in transactions, so that all parties could be immediately some of the result. , without intermediary intervention or loss of time.
Now, its native cryptocurrency Ether has the second largest market capitalization, behind Bitcoin, in which its market capitalization is higher than Coca-Cola and Nike.
Currently, the concept of “proof of work” underlies many major digital currencies in the crypto world.
Founded in 1993 and later popularized when used as a key mechanism for Bitcoin in 2009, the concept of “proof of work” provides consensus among many participants on a network, as well as a way to secure and solidify Bitcoin. blockchain.
When there is a cryptocurrency transaction from one user to another, a block representing that transaction is created, and this is where the concept of “proof of work” begins.
The block is sent to a distributed network of participants, called miners, who compete to solve the virtual puzzle of validating that incoming transaction, then add it as a new block on the existing blockchain.
The other miners in this network validate the transaction once it has been resolved.
In exchange, the miner who solves this puzzle is rewarded with a certain amount of the cryptocurrency used in the transaction.
And it’s a profitable business.
Bitcoin miners receive 6.25 BTC, or approximately AU$183,884 at today’s price, as a reward for solving the arbitrary mathematical puzzle. A bitcoin mining algorithm is solved every 10 minutes on average.
By incentivizing miners with hefty rewards, the “proof of work” system provides a decentralized method, which has a high level of security for each transaction.
Amaury Sechet, founder of the eCash cryptocurrency, also agrees, saying, “It’s a consensus mechanism that allows anonymous entities in decentralized networks to trust each other.”
However, it has some major flaws that only get worse over time.
These online puzzles become increasingly difficult to calculate as more are solved, as they are surrounded by more security measures, requiring additional funding, software and equipment to complete the algorithm. .
Below is an image of the mining farm of Hive Blockchain Technologies Ltd.
Source: Midas Letter Live, “Hive Blockchain Technologies Respond to Strong Bitcoin Rally”
And these big mining farms consume a lot of energy.
Currently, Bitcoin mining consumption is around 130 terawatt hours per year, or 0.55% of global electricity production, or roughly equivalent to Sweden’s annual energy consumption, according to Alex de Vries, a Dutch economist who operates the Digiconomist website.
Mr. de Vries estimates that Ethereum mining consumption is slightly lower, at 72 terawatt hours per year.
Another point to add is that the crypto miner reward follows the volatile nature of the crypto markets, where prices are currently significantly lower year-over-year. This has a devastating potential to reduce the security of the system if members become less attracted.
Thus, a new and improved system is needed to help control the high levels of power consumption and financial costs associated with crypto mining.
The “proof-of-stake” system eliminates all of these issues, including speeding up transaction processing, thereby reducing bottlenecks that have led to network outages in the past. However, the system does not address some of the larger issues that underpin the crypto market space, which could be a potential barrier to Ether’s stock price surge.
The “proof of stake” system involves a random election process, in which a participant is selected to validate the transaction, eliminating participants from mining blocks and, therefore, removing all associated financial and environmental costs.
But not everyone can be selected. Participants must stake a certain amount of Ether in a network to be chosen.
And the size of the bet determines the odds of being selected. The higher the bet, the higher the odds.
If a participant is chosen to validate, it must check whether all the transactions it contains are valid, and if so, it then adds it to the blockchain.
In exchange, the participant receives all fees from the transactions that were in the block.
Overall, De Vries estimates that by switching to this new system, there would be a 99.9% reduction in energy consumption, which translates to Portugal’s electricity consumption.
And with soaring global energy prices, massive cost reductions will come from participants staking ether, as opposed to mining cryptocurrency.
Although other cryptocurrencies, including Cardano and Solana, are already implementing “proof of stake”, none have done so on this scale, leaving the biggest crypto player – Bitcoin – to face criticism for its heavy reliance on the outdated and environmentally dangerous “proof of work” system.
Although this system is a step up from “proof of work”, the concept still has some flaws and its overall impact may not be relevant due to the volatility of the cryptocurrency itself.
- It is in its infancy. Because of this, there will be higher levels of confusion and an increased level of fraudulent activity. “You should be on high alert for scams trying to take advantage of users during this transition,” Ethereum says.
- It is complicated. There are a lot of steps required for the average user. Participants must download the software, understand how it is supposed to run, obtain a wallet to stake Ether, and then learn more about securing Ether.
- Lack of decentralization. Participants with larger stakes in networks may be more likely to be selected to verify transactions, making it harder for smaller participants to contribute, disrupting the principle on which Ethereum was built.
- Centralization of power. The “proof of stake” mechanism relies on a small number of validators to approve blocks and pass them to the blockchain. If these validators are controlled by a single player, that player can have control over the entire blockchain network.
However, it is important to note that the last two points are also negative aspects of the “proof of work” concept, as more capital is required to fund the machines used to mine cryptocurrency.
Despite upgrading to “proof of stake,” there are still many issues regarding the crypto world as a whole, a tough and volatile market that can crash without support, as evidenced by the past twelve months. Since last Friday, the crypto market has lost around US$100 billion, with the outlook for September looking ominous.
There is still an absence of regulation surrounding the space, which increases its risk.
Many still wonder about the actual use of cryptocurrencies. Currently the main practice for cryptocurrencies themselves is to trade them, and that’s interesting to a lot of people, but at some point there has to be some utilitarian reason for people to keep going there to interest.
The current high market inflation, coupled with these underlying issues, has caused crypto trading volumes to plummet to two-year lows. Only with a stable market outlook will the new concept of Ethereum fully flourish.