Why does Ethereum to Switch to PoS
Throughout the life of the crypto sphere, different approaches have been used to achieve this truthfulness, which is given by consensus. The very first of them, but one of the most reliable is Proof of Work (POW), which Bitcoin introduced. But this protocol has many drawbacks, some of which are really serious, and other cryptocurrencies, such as Ethereum, have been trying for several years to switch to other protocols, such as Proof of Stake (POS).
But there are many other options just as or more innovative and promising than Bitcoin or Ethereum, and some of them offer new ways for cryptocurrencies, decentralized finance (DeFi), tokens or smart contracts.
The origins of Bitcoin and its blockchain are inevitably linked to the original “proof of work”.
To turn his blockchain into reality, the mysterious Satoshi Nakamoto decided to provide Bitcoin with what is known as “proof of work” or PoW. And now we are not talking about the fact that he is old-fashioned and primitive, and we should stop considering his virtues, which he had at that time, and which he possesses now. In fact, following the BTC, many other cryptocurrencies decided to implement some kind of their own, a new kind of distributed registry protocol, but not all of them survived.
In general terms, PoW consists of solving complex cryptographic problems (which are actually a kind of mathematical equation). To do this, it uses as a regulatory tool the high energy costs associated with the consumption of computing power by distributed nodes of the Bitcoin network, and how much they should spend on solving these equations.
But, of course, the network was becoming unstoppable, as were its nodes, miners, and the exponential complexity of cryptographic problems that needed to be solved. All this has led to the fact that the voracious energy monster Bitcoin has become a continuous environmental disaster for the world media, transforming it into an important global problem.
Digressing from the topic, I would like to note that we understand the concern for the climate, but the fact is that there are many examples of wasteful use of energy, take, for example, the power supply of advertising facilities in major cities of the world. And if the BTC complex consumes electricity so much, then why was it necessary to destroy the market of renewable energy sources? But, this is a digression…
All these energy costs for the BTC can be avoided, especially when there are other, no less or more sustainable ways to ensure the consensus of the network block chain.
Indeed, Bitcoin was a great and revolutionary achievement, but since inventing the future is always a difficult task, unpredictable problems inevitably arise in it. The fact is that the BTC initially had a design error, making it a real waste of the energy that is so necessary.
Ethereum quickly realized that PoW was a mistake and chose a new concept, which, however, makes it difficult for the crypto world to make the leap.
PoS and lost time
Indeed, Vitalik Buterin and his Ethereum (the second most important cryptocurrency) have brought important innovations to the crypto space. Among them, the two most important are those smart contracts that led to the emergence of DeFi and the entire ecosystem around them (with or without Ethereum). The second novelty that Ethereum introduced was its intention to abandon the unnecessary and outdated concept of PoW, in favor of another alternative that provides the same reliability, with minimal environmental costs and a much more sustainable carbon footprint.
This alternative is called Proof of Stake (POS). With the help of PoS, the cryptocurrency miner stops solving puzzles by consuming energy. This prevents the dishonest party from hiding fraudulent transactions, and the node is at risk if it is “caught” using PoS. If someone tries to make a false transaction in the system, the PoS network punishes him by taking away the funds that he has placed. And this is proportional to the profit he would have received if it was considered good.
Thus, it is the cryptocurrencies of each PoS-based network that enhance the security of the Blockchain network itself. Therefore, these guarantees can be useful as a reward from the “gas” of commissions collected as a result of their activities to verify each transaction. This allows any cryptocurrency holder to get high profitability without any difficulties, simply allowing the use of their cryptocurrencies by the network itself as collateral. This is what is known as “staking“, and it can bring generous profits on a daily basis, reaching quite tangible amounts in percentages on an annualized basis.
Ethereum represents something more than just miners, as in the original concept of the Bitcoin universe. This figure is known as the validator. Thus, the validator participates in the Ethereum Blockchain network (or any other PoS-based cryptocurrency), verifying transactions and accepting them as true, along with all the other hundreds of nodes in the network. Remember that here, in a distributed network, transaction security is ensured not by the possibility of hacking a centralized node, as in traditional systems, but by the fact that the blockchain as a distributed network makes it very difficult to simultaneously hack hundreds or thousands of nodes. It is almost impossible to get the majority to confirm a fraudulent transaction and accept it as genuine
As an additional advantage, the PoS concept returns the crypto economy to its most natural principles of financial liberation and democratization of crypto money. This is what the visionary cyberpunk expected in the 90s.
And the fact is that one cannot ignore the fact that, although with staking and PoS, the network and its commissions are returned to the users themselves, the fact is that the Bitcoin network ecosystem is dominated by industrial miners, who also in practice occupy an unjustifiably dominant position in the market. At the same time, it can be said about the Bitcoin network that individual distributed miners have been virtually excluded from the Bitcoin ecosystem due to the high cost, complexity, or even inability to obtain the equipment necessary to create a mining team on a small scale.
In Ethereum, everything seemed not so rosy, and the reality is even more bitter
Up to this point, everything seems very good, and any reader might think that Ethereum has finally brought with its PoS a new, more developed concept of true financial freedom without compromising the environment. The problem is that this advancement in the Ethereum ecosystem has not yet been completed, although it has already begun a long time ago, and is now far from being in the early stages.
The second crypt on the market literally plunged into this endless process, which has been going on for several years, trying to make a leap from PoW to PoS, but without much success. Perhaps now, at last, it seems that things have supposedly gone, and that in 2022 we will finally be able to enjoy the famous Ethereum 2.0, based on the long-awaited PoS.
But nevertheless, since cryptocurrencies are mainly software (which runs on hardware, yes), throughout this long process Ethereum has faced the fact that other alternatives have already appeared on the cryptocurrency market. They have already replaced PoW, and have become widespread, quickly introducing alternative protocols or PoS itself.
Among these alternative crypto systems, one can single out the IOTA project, which is actually not based on the blockchain, but on its own alternative, called Tangle. Tangle offers high transaction speed and very low costs, which has always made it an ideal distributed network for micropayments and the Internet of Things from the very beginning.
IOTA implements a new form of consensus to confirm the veracity of transactions in a decentralized way, as well as in an end-to-end way, connecting two parties in the network. In addition, IOTA is changing the approach, and instead of implementing a single timeline with all verifiable blocks and transactions, IOTA was developed with a parallel implementation of multiple blockchains. And this, obviously, multiplies its scalability, in addition to the capacity and speed of transactions with a sharp reduction in costs.
After IOTA, other alternatives came to the cryptosystem, such as Cardano, based on PoS, or other, no less breakthrough protocols. In fact, one of the most promising alternatives to Bitcoin and its PoW, as well as Ethereum 2.0, is Cardano.
The project has achieved brilliant results, which made it the sixth most important cryptocurrency in the ranking on Coinmarketrate.com. Cardano initially implements its own PoS-based blockchain, called Ouroboros.
In addition, Cardano has brought other very breakthrough achievements that allow it to establish itself as one of the best alternatives currently available to enter the promising and massive tokenization market.
This has also been possible for many years on the Ethereum network, with its famous ERC20 tokens implemented using smart contracts, only Cardano includes this tokenization as a built-in feature in its source code. This eliminates the great risk of developing your own smart contracts for other options, allowing you to avoid frequent and potentially very dangerous and expensive human errors.
Other options that cannot be excluded are, for example, Algorithand (which implements pure PoS) or Decimal Chain (DEL), with DPoS consensus. Also Stellar, which does not stop in development to bring important advantages to more traditional cryptocurrencies.
In particular, regarding today’s topic of PoW or PoS, Stellar decided to implement its own consensus protocol, the so-called Stellar Consensus Protocol (SCP), which provides a very reliable, extremely cheap and fast network similar to Lightning.
In a short time, Stellar has also become a catalyst for the emergence in the Stellar network itself of an entire ecosystem of third-party cryptocurrencies with various characteristics and functions that are implemented by opening various “lines of trust” in Stellar’s own portfolio. Some examples may be stablecoins that reproduce the parity of the euro (there are several reliable alternatives), others indexed by gold, or many other very practical options that allow you to diversify risks and investments.
Conclusion
But with all this, with all the advances, protocols, PoW, PoS, or whatever you choose as crypto assets, remember that there is no 100% secure option here.
In addition to the fact that any investments have an obvious risk of theft or fraud, and that cryptocurrencies are no exception, the technical risk of the entire software is also added: it is impossible to ensure 100% security of your cryptocurrencies, even if you have a “cold wallet”, although they significantly increase security.
And don’t forget that even with these “cold storage” wallets, they only store your private keys that authenticate you on the network, and your money actually becomes resident in a distributed network of your choice.