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Proof-of-Stake Explained (Ethereum 2.0)

Ethereum is currently transitioning to what they call as “Ethereum 2.0”, which would introduce some massive changes – such as the transition of their consensus algorithm from to Proof-of-Stake (PoS). This algorithmic change is one of the most anticipated crypto events in 2020 (assuming there’s no delay until 2021). But, what is Proof-of-Stake, exactly? And how will Ethereum implement it?

Ethereum’s Current Situation And Proof-of-Work

Ethereum’s idea to adopt Proof-of-Stake is nothing new. Ethereum’s main figure, Vitalik Buterin, has expressed his idea to transition from Proof-of-Work to Proof-of-Stake since many years ago. However, It is incredibility complex and would take multiple transition phases to actually implement it. It cannot be done by just a simple switch. 

So, at this point, the developers are still testing and developing the first phase of Ethereum 2.0 implementation into the mainnet. There have been rumours circulating around the net. One core developer of Ethereum claimed that he’s 95% convinced we would be able to see Ethereum 2.0 launch in July 2020. But let’s take it with a grain of salt. In the development world, it is extremely common to be disappointed when it comes to timelines and ETA.

How about now? Well, right now Ethereum is still using the classic Proof-of-Work (PoW) consensus similar to Bitcoin blockchain. We won’t get into much details about PoW here but basically it is a type of algorithm where miners can confirm transactions and produce new blocks to the chain. To do this, miners need to solve mathematical puzzles and compete against other miners to get the rewards by the network.

If you are wondering “what is the mathematical puzzle to solve in a PoW system”, well, it is technically an issue that needs significant computational power to solve. For example, integer factorization, guided tour puzzle protocol, and hash function. 

The problem with PoW is that there will be a huge amount of resources wasted to maintain the blockchain when the blockchain itself gets more popular, more expensive, and has less mining rewards (many popular PoW blockchains adopt deflationary supply model).

Also, due to the PoW structure, Bitcoin and other older generation of altcoins find it difficult to scale. Their transactions per second (TPS) can be improved with various scaling solutions but it will be difficult to help them achieve significantly higher numbers.

What Is Proof-of-Stake (PoS)?

Different from PoW, PoS is meant to speed up the transactions inside the blockchain as well as to minimize the upcoming issues with computing resources and power. On a PoS system, the miners are known as “validators”. The idea is that these validators need to stake their cryptocurrencies as a form of collateral before they can participate in the transaction validation process.

How many coins need to be staked would be dependent on the rules of the blockchain platform itself. But, the point is, you need to have a certain amount of the native cryptocurrency of the blockchain just to be able to participate in the transaction confirmation process. And yes, your work (as a validator) would be rewarded with even more coins.

Due to the “higher” barrier of entry, it’s often perceived that a popular blockchain platform with a PoS system would have fewer validators compared to the amount of miners in a PoW blockchain platform (assuming both platforms have the same level of popularity and valuation). And obviously, a PoS system should be able to speed up the transaction confirmations in the blockchain, as they do not need to solve hard mathematical puzzles with their expensive mining rigs.

To disincentivize bad actors, a PoS system would take your staked coins if you try to verify bogus transactions. That is why your staked coins are often referred to as collaterals.

How About Ethereum’s Upcoming Proof-of-Stake?

So, let’s talk about PoS implementation specifically in the Ethereum blockchain. It is claimed that a validator in Ethereum 2.0 would need at least 32 Ether (ETH) to stake in order to participate. The claim was stated by Collin Myers himself, who is the head of Global Product Strategy at ConsenSys (Ethereum-focused company owned by Joseph Lubin, the co-founder of Ethereum). 

The yearly interest in the ETH’s staking rewards would be somewhere between 4.6% to 10.3% (approximately). The announcement attracted plenty of big interests from crypto enthusiasts.

It is also important to know that Ethereum’s upcoming transition from PoW to PoS would not be instant. The upgrade to PoS would start as a hybrid PoW/PoS mechanism until all the complex PoS features are implemented into Ethereum’s mainnet. 

The whole implementation project to upgrade Ethereum for PoW to PoS is called “Casper”. At the moment, there are two different Casper implementations for the PoS upgrade. They are called Casper FFG (Friendly Finality Gadget)  and Casper Correct-by-Construction (CBC). Vitalik Buterin himself is the leader of Casper FFG, which will be implemented directly on the first phase of Ethereum 2.0.

Ethereum 2.0 And The Future Of Mining

Truthfully, nobody knows what will happen to the Ethereum miners after the full implementation of Ethereum 2.0. It is very important to acknowledge that the beginning of PoS upgrade would be a hybrid of PoW/PoS (as explained above). However, the miners might not want to keep mining Ethereum when their mining rewards become less due to this hybrid mechanism.

They might decide to mine other altcoins with their mining rigs or they might try to sell their mining rigs to buy more ETHs due to the temptation to stake ETHs. Either way, it is exciting to see what will happen with the mining world of Ethereum.

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