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The Pros and Cons of Ethereum’s Proof-of-Stake Protocol

The Pros and Cons of Ethereum’s Proof-of-Stake Protocol

Explainers Cryptocurrencies

07 Jun 2022

The most awaited Ethereum 2.0 update continues to inch close as developers predict that the upgrade will be completed before the end of 2022. A significant part of this upgrade is the switch from Proof-of-Work (PoW) to Proof-of-Stake (PoS).

Most people have embraced this switch as a positive move, but some are still scratching their heads about it. This article will explore the advantages and disadvantages of Ethereum's transition to a Proof-of-Stake (PoS) consensus mechanism.

Before we dive into the pros and cons, we need to understand the difference between Proof-of-Work (PoW) and Proof-of-Stake (PoS). With the Proof-of-Work consensus mechanism, miners contest for the opportunity to add the next block to the Ethereum network. They do this using special computer hardware that solves complex mathematical equations. The first miner to reach the correct answer and produce the block is rewarded for their hard work. This process has secured the Ethereum blockchain since its inception. However, the growth of the ecosystem has exposed some flaws. PoW is slower and energy-intensive. This has pushed many to call for the implementation of PoS.

Proof-of-Stake also involves some competition between validators. Miners are replaced by validators in PoS. The process is much faster and less demanding. Proof-of-Stake relies on validators staking their coins to validate transactions on the Ethereum blockchain. Staking refers to the process of providing your coins as collateral to become a validator. Unlike mining, there is higher accountability with PoS since any attempt to tamper with the network could cost the validators half or all of their collateral. Validators who are chosen randomly for every block are rewarded with the trading fees paid for using the Ethereum network. To stake Ethereum, users need to have 32 Ether tokens.

Proof-of-Stake Removes Entry Barriers And Promotes Decentralization

Mining in PoW is very expensive. The average user can't use regular devices such as their phones and laptops to complete the resource-intensive tasks needed to validate a transaction. To become a miner, you will need to purchase expensive devices. Despite the fact that miners are compensated for their work, small-scale miners may take a long time to make a profit or break even.

Moreover, miners need to invest in electricity since the process is energy-intensive and invest in internet connectivity to maintain a constant connection to the network. The nature of mining has prevented many from contributing to the network. This usually leaves mining to bigger firms only.

Proof-of-Stake arguably provides a more sustainable alternative to achieve a more inclusive and decentralized spread of validators. Users only need to hold Ethereum for collateral. Even though the price of Ethereum, depending on the market, could price people out, it is comparatively better to hold the underlying asset since an increase in value benefits the validator. Also, multiple holders can pool their funds together through staking pools to become validators, contribute to processing transactions and earn rewards.

This is expected to improve the decentralization of the network since the validation of transactions will not be handled by a select few who may want to impose their will on the project's direction.

Proof-of-Stake Will Bring Better Transactions To Ethereum

Ethereum has come under a lot of fire due to various issues with transactions. The network has experienced congestion that causes transactions to take longer periods than usual to confirm. These congestions were popular during the ICO boom when investors were racing to buy in before tokens sold out. In recent times, nonfungible token minting events have been no different. Perhaps, the biggest issue for many is the cost of transactions. During these episodes of network congestion, users have to pay relatively huge sums of money as transaction fees.

The question of whether or not PoS will completely solve this problem is still up in the air. However, some improvements in transaction speed and cost are expected. Proof-of-Stake increases the capacity of transactions per second by up to 100,000 compared to the 64 transactions per second experienced with PoW.

With an improvement in network scalability to handle higher volumes of transactions without expensive fees and delays, more applications could be deployed on Ethereum. Large-scale enterprise adoption and an expansion of digital properties that can be stored on the Ethereum blockchain are expected to happen after the switch to PoS.

PoS Makes Ethereum Environmentally Friendly

Bitcoin and other cryptocurrencies have come under strong criticism due to the energy-intensive nature of Proof-of-Work and how that contributes to the pollution of the environment. To be fair, some attempts are being made to ensure that many people who mine Bitcoin do it with clean energy.

However, Ethereum would not have to deal with this issue when the transition to PoS happens. This is set to make it easier for ethical consumers and companies who take particular note of the environmental impacts of technology to adopt Ethereum.

Ethereum PoS - Cons

There are some disadvantages to the upcoming Proof-of-Stake switch. These cons may not match up to the pros but are worth mentioning.

Proof-of-Stake is a younger consensus mechanism and has not been battle-tested on a large scale compared to Proof-of-Work. EOS (EOS), Tezos (XTZ), Lisk (LSK), Cosmos (ATOM), and Cardano (ADA) have all been using PoS before Ethereum's implementation. Even though all of these projects have seen considerable activity in the past, none of them experienced the same volumes as Ethereum. This will be the first large-scale test of PoS in the space.

Secondly, Proof-of-Stake is more challenging to implement. The journey to PoS for Ethereum has taken so much time for this exact reason. At the time of writing, the Ropsten testnet is set to execute its own merge to provide developers with an idea of what the merge will look like on the Ethereum mainnet.

Finally, if you are really picky, you may have an issue with the collateral system. When a coin is staked, it is usually impossible for the staker to move or trade the coins until the stipulated staking period has ended. Further, some argue that people who hold large amounts of coins may have a huge influence on the consensus process, affecting the decentralization of Ethereum.

With Ethereum 2.0 closer to launch date now more than ever, the debate on whether or not the update will bring more good to the ecosystem will soon be settled.

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