Ethereum was initially developed as a Proof-of-Work (PoW) blockchain, which requires miners like Bitcoin. But in mid-2015, the concept of the difficulty bomb was introduced to force the network to migrate to the more scalable Proof-of-Stake (PoS) consensus algorithm. The new Ethereum 2.0 upgrade promised to bring additional benefits to the network and also to the users.
About 66% of the Ethereum community support the PoS model, with the belief that the update will have positive impacts on Ethereum price and the trading volumes of Ether.
However, that doesn’t mean Ethereum’s transition to PoS doesn’t have some disadvantages. So, let’s take a look at some potential pros and cons the PoS algorithm could have on the Ethereum network.
PoS Vs PoW
Before talking about the pros and cons of PoS, it is good to first understand the distinction between Pos and PoW consensus algorithms.
In proof-of-work, crypto miners compete for the privilege of adding the next block to the Ethereum blockchain by making use of some sophisticated computer hardware that helps them solve resource-intensive computations. A miner gets rewarded for adding the next block to the blockchain only if he is the first to reach the correct answer. The miner receives a block reward as compensation for the hard work.
While PoW has been effective in keeping the Ethereum network secure, it has some major flaws too – it is relatively slow and extremely energy-intensive. Therefore, there is a need to seek an alternative way to achieve consensus in the blockchain network – that’s where proof-of-stake comes in.
Although PoS also involves some levels of competition between miners (this time, they are called validators) on who gets the privilege to add a block to the blockchain, the process is faster and doesn’t require resource-intensive mining. Instead PoS relies on users ‘staking’ their coins to validate transactions on the Ethereum network.
Staking and Validators
The concept of staking simply refers to the process of placing your coin as collateral to validate the next block on the Ethereum network. This is similar to what the miners do in the PoW algorithm, but here, participants are held more accountable for their actions. For instance, if you promote invalid transactions, you will likely lose a portion or all of your stake.
Unlike in PoW, the process in PoS requires no real-world costs – ‘miners’ don’t have to pay for their hardware, electricity, or facility maintenance. Instead of getting block rewards, miners are compensated with the transaction fees that are paid for using the network.
Validators, on the other hand, are individuals chosen randomly to validate transactions after they have staked their coins. Although they are chosen at random, users with a larger stake usually have a better chance of being selected.
What Are the Pros and Cons of PoS
- PoS encourages scalability and security of the Ethereum network while also enhancing its decentralization.
- PoS is more energy efficient compared to PoW where miners expend a lot of electricity to get their work done.
- Anyone can participate since there is no expensive investment in hardware is required.
- It ensures more transactions per second – up to 100,000 compared to the 64 transactions per second experienced with PoW.
- Network transactions can be cheaper and faster with reduced gas costs.
- PoS will also increase ETH requests because users get staking rewards and also use ETH in DeFi (decentralized finance) applications.
- The price of Ethereum will likely be stable considering the fact that the holder of the coin will be motivated by the profit to hold them instead of selling to purchase mining equipment.
- No specialized experience is required to participate in staking
- Once a coin is staked, it is impossible for you to sell that particular coin until the stipulated staking period has elapsed.
- PoS is still new and its security is not as proven as PoW
- The reward for staking is not as much as the reward got from mining
- Users who hold a large amount of coins can have an outsized influence on the consensus process
What Other Cryptocurrencies Use PoS?
Although Ethereum is just making the move to switch to PoS, the concept is not new at all. There are some other cryptocurrencies that use different variants of proof-of-stake consensus. However, none of the largest three cryptos – Bitcoin, Ethereum, and XRP currently use it.
Some cryptocurrencies that use the PoS consensus mechanism include
- EOS (EOS)
- Cardano (ADA)
- Tezos (XTZ)
- Lisk (LSK)
- Cosmos (ATOM)
Transitioning from proof-of-work to proof-of-stake has always been part of the upgrade process of Ethereum. The upgrade has been on since December 2020 with the final launch slated to happen anywhere in 2022. PoS has several advantages over PoW, including being less energy-intensive and relatively faster.
However, there are also some cons that come with the new consensus mechanism. It is still very fresh and lacks any proof of sustainability. Notwithstanding, looking at both the pros and cons, experts still believe switching to PoS algorithm is one of the best things that would ever happen to Ethereum – so it’s worth the move!
Interesting related article: “What is a Cryptocurrency?”