Top Facts to Know About the Ethereum PoS Merge

Top Facts to Know About the Ethereum PoS Merge

August 2022 is the planned date for the Ethereum blockchain to transition to the new Proof-of-Stake (PoS) consensus mechanism. At the ETH Shanghai summit, the Ethereum co-founder Vitalik Buterin confidently stated this announcement at the end of May 2022.

The tedious transition process from Proof of Work to Proof of Stake has been running for several years. Today, Ethereum became the first blockchain in the world capable of evolving from one consensus mechanism to the another. Anticipation levels are high, while many investors wait for a good time to buy more ETH.

What is Ethereum?

The Ethereum blockchain was launched in 2015 and has become the runner-up to Bitcoin. It has the basis for decentralized applications, smart contracts, monetization platforms, crowdfunding initiatives, and more. However, from the day the project was launched, users were constantly reminded that Ethereum would inevitably transition to the Proof-of-Stake algorithm.

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Thanks to the sharding technology implementation, the Ethereum Merge should increase the security, scalability, and carrying capacity of the ecosystem. Sharding allows splitting a blockchain into 64 mini-chains called shards. The latter is going to process the transactions and data in parallel. As a result, the promised throughput of Ethereum 2.0 is 100K transactions per second against the current 30.

So, what is the difference between the two algorithms?

What is PoW?

PoW, or Proof of Work, protects the decentralized blockchain network of Bitcoin. The miner solves a complex cryptographic task using their equipment and sends the solution result to the system, comparing the solution to the model. If they match, the miner gets rewarded in bitcoin for completing the job.

As the difficulty of block completion increases, miners join each other in pools, where the power of their equipment adds up, resulting in a quicker solution to the complex problems. The reward is split among the miners who solved the puzzle and completed the block.

What is PoS?

The PoS, or Proof of Stake, algorithm does not require mining rigs. It is enough to possess a wallet with a certain amount of ETH coins and a simple computer or a smartphone. Members with more coins in their wallets gain the upper hand in validating the transactions.

Staking implies freezing a desired amount of cryptocurrency. The entry threshold is 32 ETH. The PoS algorithm chooses a validator among the participants who check if the generated blocks meet the blockchain requirements and gets a commission for completing a transaction using a smart contract. The resulting sum is much lower than from mining using PoW technology, but on the other hand, the PoS expenses are far lower.

The race for expensive equipment is replaced by another problem—how do you get a large sum for staking? So now users have a new goal: the more Ether tokens they get, the higher the chance of earning profits.

PoW vs. PoS

The main advantage of PoW before PoS is the advantage of the known before the unknown. The network applying the PoW algorithm has been stable since 2009 and has demonstrated its reliability. PoW is thoroughly tested and is used in many crypto projects.

Given the current computational technologies, DDoS attacks are impossible for the blockchain using PoW. However, the same factor may be considered a minus. The high energy costs and negative impact on the environment don't just result in mass media ostracizing this technology, but it also leads to mining centralization and low transaction throughput. As a result, solo mining has become near to impossible—the system strips simple users of a single chance to ever get the mining reward.

The PoS algorithm, on the other hand, offers higher energy efficiency, scalability, and transaction throughput. Moreover, the new model prevents groups of people from dominating the network just for the gains. Instead, the ones committing to the network by freezing their coins get rewards proportionate to the invested sum.

How Will PoS Change Ethereum?

Although the creators of Ethereum have used mining for network security and for earning more Ether, they have always been planning to switch to a safer and more efficient protocol. Following the transition, Ethereum should evolve to a new level. According to analysts, this will allow blockchain to take an even stronger hold at the top of the altcoin ratings.

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The update is supposed to solve three key problems of the existing Ethereum network:

  1. The need for high-performance equipment to produce ETH
  2. Transaction speed limitations
  3. and the decrease in blockchain stability levels

Those owning 32 ETH may become network validators directly and get the ETH cryptocurrency for block validation. If you still want to be a validator but don't have 32 ETH on your account, the cryptocurrency services providing staking opportunities with minimal sums are here to help.

Since the Ethereum 2.0 throughput will increase while the transaction charges decrease, this should attract both individual crypto investors and large technology companies. The latter may want to participate in a potentially profitable project. Besides that, the new coin issue volume will plummet by 90% due to the transition to the new network version. This, in turn, decreases the supply and increases the demand. As a result, optimistic forecasts suggest that the price of Ether could return to its all-time high of $4,800.

Ethereum PoS and Web 3.0

The transition to Etherium 2.0 will pave the way for Web 3.0, a still young and evolving ecosystem.

While Web 1.0 had a static structure, the more familiar Web 2.0 supports the format of reading and writing—a system of user-generated content and social networks. However, this system implies that the users' personal details come into possession of a small group of technological giants such as Google, Microsoft or Facebook and can also be stolen by hackers.

In contrast, the Web 3.0 concept has decentralization at its core. It is still under development, but the end result should be a system of peer-to-peer Internet solutions where users themselves control the use of their data. Cryptocurrency will form the basis of a natural system of payments in Web 3.0, making the transition from the banks and centralized payment systems possible.

By increasing TPS (throughput) and making transactions cheaper with Layer 2 solutions (L2, Rollups), Ethereum 2.0 opens up new opportunities to create larger projects in Web 3.0. In the case of success, you can expect that current standards will soon be forgotten: there will be fewer and fewer systems or applications for Web 2.0.

Conclusion

So, after the full transition to Ethereum 2.0, it will be impossible to mine new ETH coins. Miners will be forced to switch to other PoW-based networks or sell equipment on the secondary market and invest in ETH. Due to the influx of users and running-in of the algorithm, the stacking profits could be much lower than those from mining.

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