Blockchain Ethereum (ETH) is just one step away from a major and serious update. If successful, this will significantly reduce the electricity consumption of the block network. This, in turn, will lead to increased acceptance of Ethereum by policy makers and financial institutions around the world. According to ING analysts, the move to proof of stake could be an important step for a leading decentralized finance platform for widespread adoption.
The integration of the Ethereum network, an ambitious update of the second most important blockchain in the world
After a long wait, the world’s second blockchain will likely switch from Proof of Work (PoW) to Proof of Stake (PoS) consensus algorithm later this month. This means that transactions on the Ethereum blockchain will not be recorded by miners who need a lot of computing power to prove that they have worked hard to verify each one.
Once linked, the transactions will be processed by validators who sacrifice their ether rather than computing power (depositing margins of appropriate value) to maintain the stability and liquidity of the ecosystem.
Discussing the pros and cons of PoS vs PoW is as old as Bitcoin, and we can’t make all the arguments here. What matters to us is the fact that switching to PoS could increase the acceptability of Ethereum and all the applications built on it for policy makers and regulators over time. This in turn could provide an impetus for traditional financial institutions to develop services based on Ethereum – ING forecasts in its latest analysis.
Ethereum is not the first blockchain to adopt PoS. But it is widely considered the most important blockchain after Bitcoin, being the building block of the world of decentralized finance (DeFi).
Moreover, Ethereum has no intention of stopping even for a moment to update the network. Instead, as ethereum.org described it, the new “on-the-fly” PoS engine will be replaced. Journey hosts different apps, codes, and platforms. Many things can go wrong.
Ethereum upgrade rate is high
In fact, while the Ethereum community has spent a lot of time testing PoS (the PoS beacon chain has been in operation since December 2020), implementing such a basic update while the network is still running is both ambitious and very challenging.
Anyone who has ever tried to quickly update the operating system on their computer knows that unexpected problems almost always arise and end up taking longer than expected.
– We expect top Ethereum developers to spend whole nights glued to their screens during updates – ING adds.
Another question during the update is how the Ethereum miners themselves will react. They have invested a lot in dedicated hardware, usually GPUs, which can no longer be used to mine Ethereum after upgrading to PoS. Some miners may choose to continue maintaining the Proof-of-Work blockchain by creating a “fork” in the network. Such copies of the blockchain with all its tokens create many problems, for example for exchanges and traders. Fortunately, the crypto community has gained experience managing such ramifications over the years, including the example of Bitcoin.
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A successful update will make Ethereum more widely accepted…
Given the challenges mentioned above, one might wonder why Ethereum implemented this project at all? Besides the improved scalability, the main reason is the sharp reduction in electricity consumption. Ethereum.org claims that after switching to PoS, the network will need 99.95% less.
An important non-technical consequence of this massive drop in electricity demand is that it could make Ethereum more friendly to policy makers and regulators. When the European Parliament discussed the regulation of EU crypto-asset markets earlier this year, sustainability was an important topic.
Politicians are not comfortable with the high electricity consumption through the Proof of Work consensus mechanism. PoW vs PoS pros and cons certainly fuel a basic and often heated debate that has far more nuances than the – impressive kWh figures suggest.
The switch to PoS obviously removes power consumption, which is one of the main concerns for regulators. This, in turn, removes the obstacle to traditional financial institutions and other companies from offering services based on Ethereum, although others will still get in their way.
…although Proof of Stake isn’t the answer to all problems either
Selling points are not only superlatives, but also some disadvantages. For example, its code is more complex than proof of work. This can create new vulnerabilities. No doubt, hackers will investigate the new infrastructure for hidden flaws. Another point is that POS creates a new form of inequality. With PoW, there was a feeling that anyone could join and start cryptocurrency mining.
On the other hand, in the case of PoS, you must have at least 32 ETH to be able to become a validator and win prizes for verification. An alternative is PoS pools that provide additional income opportunities for those who don’t have a lot of Ether. On the other hand, in the case of PoW, gone are the days when an old laptop was enough to mine coins profitably.
Some are concerned about the increased potential for network censorship by point-of-sale auditors. In principle, however, worklines miners can implement censorship as well. Nor is it clear that PoS will lead to a more focused landscape of validators than PoW, where miners have long collaborated on interconnected pools. After all, it is not technology that makes the difference, but rather the attitudes – and regulations – of those who use it.
In general, there is a trade-off between resistance to censorship, anti-money laundering policies, and the penalties required for regulators to approve cryptocurrency. In the end, you have to find concessions – ING summarizes.
Ethereum’s upcoming move from PoW to PoS could be the biggest event planned in the cryptocurrency market in years. Migration itself and its consequences are fraught with dangers and will be closely monitored. A successful migration would be complementary to the Ethereum community: it would also remove an important obstacle to the regulatory acceptance of Ethereum and thus to the development of Ethereum-based services by traditional financial institutions.
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