Ethereum’s switch to PoS. Pros and cons
Ethereum is scheduled to switch from the Proof-of-Work (PoW) consensus algorithm to the Proof-of-Stake (PoS) algorithm in September 2022. The initiator of this transition was personally Ethereum founder Vitalik Buterin. According to him, the transition to the new algorithm will simplify and scale the mining process.
Also, Buterin is convinced that the new approach will change society’s attitude towards cryptocurrency, and the network will get a considerable boost in the number of users.
Is the Proof-of-Stake algorithm good enough, and what are its advantages and disadvantages compared to PoW?
Eco-friendliness: PoW consumes so much electricity that it takes a huge amount of resources to produce it. Emissions of harmful substances into the atmosphere have reached a scale that has forced regulators of many countries to start restricting mining. More and more laws and regulations to limit miners appear in the U.S., Europe, and Asian countries. In New York State, a ban on mining has been issued. The PoS algorithm does not have this disadvantage and is considered more environmentally friendly. In addition, it will not cause landfills of discarded and unusable equipment.
Energy efficiency: PoS is much more energy efficient than PoW. This means that the user no longer needs a powerful computer for mining. This point allows network members to align their goals and incentives better.
Scalability and speed of the network: PoW mining adds a high level of latency for creating new blocks and confirming transactions. In blockchains running on the PoS protocol, verifications are performed by nodes with a large supply of currency, so the speed of the process is higher. This has a positive impact on the scalability and speed of the network.
Decentralization: unlike the PoW protocol, where in large mining groups, the network is centralized in a small group, the PoS protocol diversifies and democratizes participants’ access to network tasks.
The financial inexpediency of a “51% attack”: if a hacker, using the PoW protocol, gains access to 51% of the group’s processing power, s/he can manipulate blocks as desired and benefit from the whole process. In the case of PoS, such an attack is possible if the attacker owns 51% of all coins. However, if such an attack is made, the token’s market value will fall, and the hacker will not benefit. This dependency is a restraining factor against a “51% attack”.
How will the algorithm switch affect Ethereum users?
It’s worth noting here that by actually being more decentralized and democratic, the PoS protocol gives an advantage to users who have “spent” more coins on staking to record and verify blocks. This can lead to increased centralization of the network because, after the change of the consensus algorithm, nodes with a balance of no less than 32 ETH will validate and record blocks. To defend the algorithm, its mechanism is designed so that there will be no requirements for users to have a minimum stack for deploying nodes. It will be possible to do so with a zero balance. But such nodes will not be able to take part in validation.
Also, the switch will harm the owners of mining equipment. Since the PoS protocol does not need powerful machines, users mining Ethereum with graphics cards will be left “overboard”. This can lead to miners simply switching to another cryptocurrency.
Another disadvantage can be considered the danger of hacking attacks on validators. The PoS consensus mechanism relies on nodes deployed by validators, rather than users, to verify transactions. This shifts the attention of hackers specifically to validators, as well as to efforts to exploit their functions.
In addition, users of the updated network need to understand that until the merger of the first and second versions of Ethereum is complete, there will be no opportunity to withdraw coins. This process may take up to a year and a half.
We should not forget about the problem of profitability. The network, which runs on the PoS consensus algorithm, has a yield from tokens blocked for staking ranging from 1.8% to 18% per annum. As Justin Drake, one of Ethereum’s developers, noted, the average return on staking will be about 5% per year. These disadvantages can be circumvented by using Ethereum’s group staking pools, but there is a possibility that this point will reduce users’ interest in the network. Also, this disadvantage can be mitigated by an increase in the currency’s value. Currently, the price is low due to high commissions and low throughput. By switching to blockchain version 2.0, these problems will disappear.
Nevertheless, despite all the disadvantages, the network’s transition to the PoS consensus algorithm will take it to the next level. The network speed will increase many times, while the commissions will be lower. This will allow Ethereum to develop the network, further establishing itself in the market’s leading position.