With a newly developed consensus process, Ethereum has been present in the crypto market since the fall of this year. This replaced the proof-of-work procedure and moved to proof-of-stake. As is known, Proof of Work (PoW) has high power consumption due to large-scale mining and increasingly complex computing operations. Now, the ETH blockchain aims to put an end to that. What are the benefits of the new Proof of Stake process for users? What are the main pillars? And what role will Ethereum play in the future?
Disadvantages of proof of work
For many miners, the PoW method is an attraction to acquire sophisticated graphics cards and be the first to add new blocks to the blockchain by increasing their computing power. As a result of their participation, they are rewarded with the respective cryptocurrency and receive the so-called block reward. However, with the increasing participation of miners, it is becoming more and more difficult to find such a block. Miners must continually invest in new, more sophisticated computers and graphics cards with higher processing power to keep pace. Added to this is the increase in energy consumption that they must raise.
Increased sustainability through proof-of-stake
With the introduction of Proof of Stake (PoS), Ethereum decided to abandon the previous procedure. The reason for this is an approach towards more sustainability. Instead of miners, validators are now involved. Also, it is no longer about the highest computing power, but about stacking ether. Participants deposit a certain amount of their coins as a deposit. This requirement is the sine qua non for being part of the network. Then it is randomly determined which participants can benefit from the blocks.
With this approach, Ethereum’s energy requirements could be reduced by 99.5%. It does not require expensive graphics cards. Basically, mini computers are enough to participate. In addition, validators consume less power. So only 32 ether collateral deposits and the node, i. H the server performing the validation requires it.
The new consensus procedure harbors risks
However, the PoS process also carries risks. On the one hand, there are no fees, i.e. transaction fees. These fees are usually paid by the sender to network participants. Finally, they confirm and document the transfer in their respective block. Since the mining process is no longer performed, participants cannot earn additional profits. Moreover, there is no incentive for mining.
Participants only enjoy passive income in the form of staking rewards earned by holding Ether. But the scalability of the Ethereum blockchain is also crucial. Since the computing power no longer needs to be increased and only successful stakers can participate, there is initially no scalability. However, this gap should be closed soon: Ethereum is currently working on improving its scalability.
All of these factors show that more Ethereum is being burned than created. Therefore, it can be argued that Ethereum is increasingly becoming a deflationary currency. Due to the scarcity of supply, Ether is also gaining in value and giving investors the impetus to invest in cryptocurrency or participate in the staking network. However, the milestone set by Ethereum with the new consensus process is remarkable.
The power consumption of Ethereum in its old form and other blockchains to date is nothing short of alarming. The switch to an environmentally friendly and sustainable process is therefore timely. Ethereum also strives to compensate for imperfections such as scalability and to incentivize validators through rewards such as Stacker Rewards. In conclusion, it remains to say that the revised PoS procedure, unlike the energy-intensive proof of work, is clearly a milestone for Ethereum.
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Maximilian Schmidt is CEO of CPI Technologies. The company develops, among other things, an NFT-based digital identity and specializes in software development in the areas of blockchain, finance and AI as well as marketing and fundraising. https://cpitech.io/de/
Statements by author and interview partner do not necessarily reflect the opinion of the editors and publisher