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It is almost here the Ethereum merge, projected September 15, 2022!! It seems since crypto has been going through a correction (or nosedive), everyone has been holding their breaths for the transition of Ethereum from Proof of Work (POW) to Proof of Stake (POS). Is this transition a good or bad thing for cryptocurrency or should we just leave things alone? I personally believe any advancement in cryptocurrency is a good thing and can help validate this technology as an alternative to normal banking institutions. So why is there so much hype on this transition, I plan to explain the importance of this.
Introduction
Ethereum or ETH is one of the most important developments for blockchain technology and cryptocurrency. After Bitcoin, which essentially is digital currency, Ethereum allowed programmers to build decentralized apps, non-fungible tokens and create contracts. In addition, ETH was another form of digital currency. Once developers/programmers learned the power of the blockchain and its uses, ETH became the gold standard for blockchains. But of course, with that other blockchains would form and take their shot at besting ETH. Solana and other blockchains would find success in scalability, faster transactions, less fees, and different ways to validate transactions. Due to this and other reasons, the merge of ETH is a critical process.
Proof of Work (POW) vs Proof of Stake (POS) (aka: Layer 1 vs Layer 2, respectively)
POS is the opposite of the current POW, simply because POW utilizes current mining to confirm transactions within the blockchain. As you may or may not know, mining uses a lot of energy and is not as environmentally friendly as POS. In addition, security issues were seen more prominently in the POW system. POS uses validators to confirm blockchain transaction, in doing so, will prevent the competition usually seen with mining. In the POW system, if you have better computer systems or more mining rigs then you would be likely to solve the algorithm for the blockchain transaction and get paid. The benefits of a POS system are energy consumption, as explained earlier, more trustless and decentralized, safety, rewards distributed equally.
Trustless and Decentralized
POS is more trustless and decentralized due to it mechanism of validating transactions. In POW, the majority or those who can afford the equipment end up with more rewards. The ability to control the market or rewards could lead to centralization or big corporations reaping all the benefits. Whereas in the POS the validation of transactions within the blockchain are based on authority within the holders and stakers. Obviously, the more you stake the more rewards, but at least you can get something as opposed to all or none with POW.
POS can withstand security risks, like 51% attack and forking. A 51% attack is when the blockchain network is disrupted and miners monopolize the control of the hash rate or computing power. Essentially, controlling all the rewards and getting paid. Forking is dividing the blockchain transaction, when doing so miners would have to divide their mining power from the old blockchain to the new blockchain. The reason why POS is safer is due to being more expensive to cause a malicious attack. Not to say it's not impossible, but you would have to pay a lot of funds and be extremely quick to be successful in a POS hack.
Distribution of Rewards
Both the POW and POS reward base on validation of blockchain transaction. The POS distribution and reward is based on staking/collateral to verify the transaction. Factors controlling who validates is based on staking size and longevity of the stake. The more crypto staked and longer, will increase the success of being a validator and thus more rewards. But as stated before, even if you stake something most likely you will reap rewards.
Risk of POS
The risk of POS is due to a complex system. When staking is based on validation errors could occur in the blockchain. Bias in the fact that those who have the money to stake more are likely to control the validation and rewards. Developers/programmers know this, and many are trying to develop better ways to randomize the rewards based on staking. Through randomized block selection, coin age selection and fisherman regulators.
Randomized Block Selection
Randomized block selection basically selects the lowest hash value or computer power with the largest stake sizes, in POS. In the POW system, hash values are basically a measure of the miner. The faster the hash rate, more profit. This will help keep the ecosystem running in theory.
Coin Age Selection
Coin age is the period the cryptocurrency has been staked. So, if you stake a coin for 20 days, after the blockchain has been made (forged), your time resets back to zero, essentially making it fair for others to stake their crypto. You just start over.
Fisherman Regulators
Prevents fraudulent activity within the blockchain. This is done by finding validators that pose a threat to the network, if they do the validator can lose all their funds staked and be blacklisted from being a validator ever again. In theory.
Conclusion
There has been a cold winter in cryptocurrency assets in general. Many people are worried that cryptocurrency has lost its momentum in “sticking it to the man,” so to speak. I’m not here to agree or disagree with that sentiment. I will say the I believe ETH and Bitcoin for sure are not going anywhere and although we want decentralization to stay regulation is looming. Therefore, ETH becoming a Layer 2, POS, and merging is important for its longevity. ETH’s technology uses and importance in blockchain and cryptocurrency cannot be taken for granted. So, the hype is real and although you may be looking at the decrease in price for 1 ETH, I would say keep investing the sun will come out tomorrow and eventually you will reap the rewards. Furthermore, you could increase your potential staking in ETH and reap the rewards that way also. All the best!! #WAGMI. Disclaimer: I am not a financial advisor, risks come with investing in any asset, this is for information purposes only, do your own research.
