Ethereum is moving to Proof of Stake, and that will change everything

Ethereum is moving to Proof of Stake, and that will change everything

By completely changing its model by September 20, the second cryptocurrency in the world could well launch a great paradigm shift.

The world of cryptocurrencies is about to experience a major generational upheaval. Ethereum, the second cryptocurrency in the world behind the essential Bitcoin, is indeed preparing to completely change its technological model to switch to Proof of Stake (PoS) — a transition that should greatly reduce its environmental impact, and which could well mark the beginning of a large-scale transition in this entire industry.

Indeed, the main criticism addressed to these exclusively digital currencies concerns their catastrophic contribution to global warming. According to works published by the prestigious Columbia University in May 2022, Bitcoin would consume the equivalent of 150 terawatt-hours of electricity per year… more than the whole of Argentina with its 45 million inhabitants.

And all this electricity has to be produced somewhere; even though some observers feel that 40-75% of this energy would come from renewable sources, the carbon impact of bitcoin remains globally very significant. The observation is essentially the same for most other cryptocurrencies, each on its own scale.

The Proof of Work model, an energy abyss

This energy consumption is directly linked to the main interest of cryptocurrencies, namely the decentralized structure on which they rest — the famous blockchain. In practice, it is a register of transactions. Let’s take the example of Bitcoin ; each time a user wants to transfer some, the transaction is verified by the other users before being registered in the blockchain in the form of a new block.

However, to add this famous block, you must first have a key that can be obtained by solving a mathematical equation. And the first member of the blockchain who succeeds in authenticating a transaction and registering it in this virtual ledger is rewarded for his contribution directly in Bitcoins.

With a very powerful system, we can therefore solve these equations in industrial quantities in the hope of winning the bitcoins in question; we then speak of mining. The problem is that this principle, dubbed Proof-of-work, has gradually led to the emergence of a real race on a planetary scale.

Since only the first computer to solve the problem can win this highly sought-after lot, the miners have gradually equipped themselves with more and more powerful machines; Today there are heaps of cryptocurrency “farms” where heaps of serially connected graphics cards grind equations all day long.

These powerful machines are by definition very energy-intensive, which is already exploding the carbon impact of these technologies. The other concern is that all the electricity consumed by the other miners who lost this race has absolutely useless, apart from heating up hundreds of computers. And in the current context, it becomes very important to find a new model that is more relevant to our environmental objectives.

The Proof of Stake, a model looking to the future

And this is precisely what the Ethereum Foundation aims to do with its transition to Proof-of-stake. Here, the process that allows the entire blockchain to come to consensus is different. Participants must bet a certain number of tokens (“stakes“) for a chance to add blocks to the blockchain.

In practice, this sum serves as a deposit; if the user (we speak of “validator” in this specific case) engages in dubious manipulations, he can immediately lose his entire bet. He has then every interest in respecting the integrity of the blockchain.

This approach presents many advantages and some significant flaws that we will not detail here; the most important element of them is undoubtedly the immense energy savings that it allows to achieve.

With the Proof-of-stake model, there is no longer any need to put lots of overpowered machines at the service of a process where the majority of the energy is sacrificed; any user can hope to snatch a token. Just drop a ” stake which, in the case of Ethereum, amounts to 32 ETH (which is still just over €50,000 at the current price).

Towards a complete transformation of the crypto ecosystem?

Ethereum is not the first virtual currency to begin this great conversion; but knowing its status as the leader of the crypto ecosystem, it is still a major step in the history of this technology.

According to the Ethereum Foundation, this cryptocurrency consumes around 112 TWh per year. Or the equivalent of the Netherlands. Its carbon footprint is equivalent to that of Singapore with around 53 megatons per year. The transition to Proof-of-stake, which should start today and end between September 10 and 20should make it possible to reduce the energy bill by over 99%!

Suffice to say that all eyes will be on ETH in the days and weeks to come. The transition promises to be extremely complex from a technological point of view; but if it goes smoothly and the proof-of-stake works as intended on a large scale, without deleterious side effects, it will be a huge paradigm shift to which the whole industry will probably have to convert since the carbon footprint of cryptocurrencies based on Proof-of-work will become almost indefensible.

We can also expect some regulatory changes. For example, last March the European Parliament voted against a bill aimed at purely and simply banishing the PoW model; if successful, Ethereum may well force lawmakers to reconsider their position.

We could then move towards a global model that consumes less energy and is therefore much healthier and more sustainable. And this is indeed the main interest of this transition; Proof-of-stake could help cryptocurrencies integrate into the mainstream economy, whereas today they are mainly used for speculation. It will therefore be advisable to observe this transition carefully, but also and above all its repercussions, which will undoubtedly be significant.

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