Ethereum’s transition to a Proof of Stake (PoS) validation system –expected for September 2022– is bringing back many debates and questions around consensus mechanisms. The huge amount of effort that‘s needed to carry out this process (a.k.a. the Merge) puts the spotlight on the pros and cons of the PoS system, and whether this transition will effectively kill mining as we know it. Through it, Ethereum will be joining the group of avant-garde blockchains that use PoS, such as:
- Cardano (ADA)
- Tron (TRX)
- EOS (EOS)
- Cosmos (ATOM)
- Tezos (XTC)
However, first of all, we should check on the technical quirks and aims of the two most popular blockchain validation systems. This way, we’ll be able to understand if (and why) PoS will really mean the end of mining.
Proof of Work vs Proof of Stake
Proof of work (PoW, also commonly known as mining) and PoS are two different systems designed to verify and validate operations. The first one was created by the original blockchain, Bitcoin; and even though PoS precedes PoW as a theoric model, it became more popular in recent years. They are both known as mechanisms of consensus, and their main end is to guarantee the security of the blockchain and the legitimacy of transactions.
It’s important to have this end in mind when we try to understand the different decisions taken over time: PoW and PoS are technological means to keep the system safe. Contrary to what is commonly thought, PoW isn’t a way of creating cryptocurrency, even though it’s called mining. “Mining” is just a confusing metaphor since crypto miners are not “extracting” precious materials: The crypto they receive is a reward for securing the blockchain.
So, what are the main reasons for Ethereum transitioning to PoS?
Consensus: Security and decentralization
Consensus mechanisms have the mission of reconciling security and decentralization. And to be clear, when we talk about security we refer to the impossibility of external agents altering results. In this sense, we can assume a centralized institution such as a bank is the safest option, letting aside the topic of governance (i.e., deciding what should be done, and which policy to follow.)
When looking for a decentralized validation system, it is needed to design a process in which violating the system’s laws results in a punishment bigger than the obtained benefit. As no user has enough reasons to trust the rest of the users, there must be a way of creating acknowledged incentives for the validators, so they find a reward in approving only the legitimate transactions.
In both PoW and PoS, the reward is earning crypto. To use the most popular examples, BTC and ETH (after the Merge, of course). The difference is the criteria used for selecting which users will be named as validators. In a proof of work system, miners receive crypto for deciphering a 64-digit hexadecimal number known as a “hash.” In the case of proof of stake, validators are selected randomly among (certain) crypto owners.
This apparently slight difference has in fact many notorious consequences.
One of the most forceful arguments against mining or PoW is energy costs. As blockchains such as Bitcoin provide a reward to computers that decipher complex mathematical problems, the competition tends to grow. This way, increasingly powerful computers are needed for mining, augmenting supply costs and, as collateral damage, bringing down decentralization (since common users are not only able to compete with corporations and governments.)
To put it in a nutshell, in the case of PoW, the punishment for validating fraudulent transactions is having paid high electricity costs.
Note: Vitalik Buterin, co-founder of Ethereum, raises an utterly interesting discussion on PoW and centralization, taking into account local characteristics such as cold climates (which lessen system-cooling costs.) You can read it here.
This was one of the main reasons why PoS was in Ethereum’s roadmap from the beginning: Although transition costs and efforts would be gigantic, in the long run, PoW seems to be unsustainable. At this moment, Bitcoin consumes yearly the same energy amount as Sweden, and transitioning to PoS is allowing Ethereum to consume 99,95% less.
In the second place, the PoW competition model comes tied with another long-term problem. As Vitalik Buterin puts it in this recent interview:
“A consensus system that needlessly costs huge amounts of electricity is not just bad for the environment, it also requires issuing hundreds of thousands of BTC or ETH every year (in order to pay to miners). Eventually, of course, the issuance will decrease to near-zero (as it is programmed for the following years), at which point that will stop being an issue, but then Bitcoin will start to deal with another issue: how to make sure that it stays secure…”
As you may see, PoW depends on a system of incentives that is not only costly but determined to be ended in a few years. Once BTC or whatever crypto is used as a reward for mining ceases to be issued, the security problem shows up again.
How is proof of stake different?
In PoS, even though crypto is also the reward for validation, the way validators are selected changes. While in PoW, deciphering a complex mathematical problem is rewarded, in PoS the biggest stakes are those who are selected: The more crypto you commit to the process, the higher probability of becoming a validator; they are selected among the biggest crypto holders willing to put their assets as guarantees.
In the first case, miners have the risk of losing the money they spent on electricity to make the mining computers function. In the second case, if they turn out to be validating a transaction that is fraudulent for the majority of the users, they lose their deposited crypto. This way, users have the same incentives (earning crypto) and the same potential punishments (losing money) in both models, but the second one saves a huge amount of energy by erasing the energy costs and the competition among computers.
Common arguments against PoS: Are they valid?
One of the first and most common arguments against this system also refers to centralization. Basically put, the idea is that rewarding the biggest crypto owners tends to give an advantage to the wealthiest. And it is true, in fact, that proof of stake requires a considerable initial investment to become a validator.
However, the fear of the wealthiest taking control of the future of the blockchain comes from a conceptual mistake around what is at stake here. Again, as we said above, PoW and PoS are validating systems and not governance systems. This means the decisions around updates, modifications, and so on, remain a decision for the community or whoever participates in each blockchain. The only role validators play is securing that rules are complied with, but those rules preexist validators.
At last, we may say this Ethereum’s update is an expression of a development culture that gazes into the future and has characterized this blockchain since the beginning. As a recent technology, blockchain, in general, will continue to need such improvements and developments to keep up with nowadays’ agenda.
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