What’s going on ?
Until now, the blockchain underlying Ether used the same paradigm as most other blockchains, namely proof of work. September 15, 2022 at 8:42 (French time), the chain went into Proof-of-Stake mode in an operation called The Merge.
To sum up roughly, to write and validate data in a chain in Proof-of-Work mode, you have to find the answer to a mathematical question requiring a lot of tests or calculations, in order to make it difficult to modify the chain undesired. The search for this solution is called mining, and the first to find the answer wins a reward (in cryptocurrency, usually). Block chaining means that the more the chain advances, the more the old blocks become difficult to modify because it is necessary to go up in the chain. For more details, a very good explanation can be found here.
The immense advantage of this choice is that all the users of the chain are potentially able to contribute fairly to the creation of the chain, because the computing power influences “only” the probability of finding the answer to the problem. mathematical.
One of the consequences is that if a participant succeeds in obtaining 51% of the computing power, he becomes the master of the chain; this is why groups of participants must not be too powerful, which has for example led some bitcoin miner pools to cap the power of each pool so that no one hits that 51% barrier.
A large energy expenditure
The very big counterpart of this model is the need for computing power, which results in the development of specialized components or the monopolization of certain others such as graphics cards, which require a substantial power supply. Worse still, most of what was calculated served no purpose other than to weed out solutions that didn’t address the problem, and so the vast majority of the power consumption had no positive effect or did not. is not translated into useful concrete production.
Many cryptocurrencies boast of having green energy sources, but today we see that this is not enough, and that sobriety will fall on us: green energy or not, we lack it. Not to mention that one could very well argue that the energy spent on cryptos could be used more efficiently elsewhere… in the motor of a Tesla, for example.
What is PoS?
In proof of work, computing power determines the probability of being the validator of a block; in proof of stake (Proof of Stake or PoS), or proof of interest, the probability is determined only by the number of tokens deposited by the candidates, that is to say, it is necessary to pledge an amount in cryptocurrency to be able to be chosen to validate a block. If there are two participants, the first brings 50 ETH and the second 25 ETH, it will be decided randomly which of the two will be the validator by assigning a weight of 50 to the first and 25 to the second. Thus, the first will be twice as likely to be the validator.
Source : ledger.com
To bet, you must therefore have ETH and block them (pledge). As long as they are blocked, you receive interest, in order to encourage users to participate: there is no longer a reward for the person who validates the block and thus all those who “invest” are rewarded. No more mining, looking for solutions to the proof-of-work problem, hence the huge energy savings.
Admittedly, it is premature to speak of the collapse of the blockchain ecosystem, but certain elements are likely to worry the promoters of these technologies. First point: there is still no relevant use case for blockchains, fourteen years after the creation of bitcoin. Explanation: this technology indeed solves certain problems, but to date no problem that another technology does not already deal with and at a lower cost, in particular via the mechanism of trusted third parties, such as certificates. Unfortunately, the main use of cryptocurrencies remains speculation.
Alongside this, the need to get rid of a trusted third party dates from the 2008 surcharge crisis, with the fear of the collapse of the global banking system where banks have this role. And today, this scenario has become much less credible and therefore less likely, which mechanically reduces the appeal of cryptocurrencies.
Maybe in the future it will resume, but it is clear that cryptocurrencies are in a down cycleand so-called new uses such as NFT have failed to revive the popularity of cryptos, failing to offer real utility to blockchains.
Worse still, even when cryptos are used for what they were designed to do, current usage is anecdotal! In El Salvador, where cryptocurrencies have been promoted with fanfare (almost literally) by President Nayib Bukele, only 2% of trade has taken place in cryptocurrencies, to the point that the IMF may have to step in to bail out the state coffers, according to the magazine Fortune. Whatever is said about the qualities and faults of cryptos, people do not adhere even though the concept is now old and established.
Where it still comes back to tokens
The switch to PoS will be a major step forward for cryptos, in terms of energy saving, with promises of reducing the 99.95% consumption according to the Ethereum Foundation (recall theestimated consumption of 150 TWh for all cryptocurrencies according to Columbia University).
Source : Ethereum Foundation Blog
Presented in this way, the energy gain is obvious. And it’s a safe bet that other cryptocurrencies will follow, given the current trend. If this sounds like very good news for their growth, let’s think for a moment about the consequences of such a choice.
First, the choice of PoS for the Ethereum chain is not insignificant: it is one of the most active chains, and this choice is probably the most suitable and the most reasonable for the future. This concept of Proof-of-Stake will therefore surely be emulated.
But functionally and conceptually, the difference is significant: the validation is found de facto in the hands of the largest carriers of ETH. The operation is therefore modeled on more traditional systems, such as that of banks (even if it is not completely similar), but with de facto trusted third parties (large carriers of ETH).
In this case, what becomes of the decentralization and apparent fairness of current cryptos (already undermined via mining pools)? Will users still find it beneficial to participate in such channels? Is there not a risk of finding ourselves in a situation similar to the private blockchainssuch as those based on Hyperledger, where the validation is entrusted to a manager (by construction this time)? These blockchains have not found their audience. Will this partial centralization via proof of stake suit the libertarian spirit of many crypto users?
The SEC gets involved
Certain assets fall, due to their nature, within the scope of the SEC (Securities and Exchange Commission). This may seem restrictive to some, but the SEC’s objective is to prevent the world of finance from becoming far west for investors.
To date, proof-of-work cryptocurrencies do not pass the test of Howey determining whether an asset is a security, and are not considered supervised assets by the SEC. On the other hand, ICOs are already considered as such most of the time, which has put many investors off.
However, shortly after The Merge, Gary Gensler, Chairman of the SEC, warned : Ether in its Proof-of-Stake form was likely to be considered an asset within the scope of the SEC. Indeed, one of the main criteria of this test, namely a promise of profit for the contributor, which was not fulfilled for the proof of work (where the gain was probabilistic), seems to be for proof of stake, since pledging Ether earns interest. The Howey test has other criteriabut this specific criterion which ruled out the usual cryptos would be met by ETH PoS style!
If Ether became a security, one can imagine the consequences both on this chain and on the future of proof of stake, which today seems the only alternative to the wasteful (energy) proof of work.
What will become of the miners?
Those who have invested heavily in expensive mining hardware are obviously opposed to this change, since their computing power becomes useless for Ether Proof-of-Stake. The logical result, already seen several times in the world of cryptos (if only with Bitcoin Cash in 2017, but also for Ether in 2016 following a hack), is a fork. The old Ethereum chain will continue to operate in proof-of-work mode. The associated cryptocurrency will become ETHW (and not ETH as erroneously indicated in a previous version of the article).
Price of ETH and ETHW on 09/21 (source coinmarketcap.com): Not quite the same thing…
Following this fork, ETH in proof of work will live its own life and have a separate course from Ether 2.0, which could undermine (pun intended) the profitability of miners and cause a lot of breakage, with a refocusing predictable on professional miners and quite a bit of damage on occasional miners. Ether was one of the most profitable cryptocurrencies for miners, but will it last?
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Ethereum moves to PoS (Proof of Stake)
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