In Bitcoin’s Proof of Work, the investment is hardware. Almost every 10 minutes, Bitcoin miners compete to solve puzzles. The winner will add the next block to the chain and request a new Bitcoin in the form of a block reward. But finding a solution is like trying to win the lottery. You have to guess many times until you are lucky. The more powerful your computer, the more guesses you can make.
The vast server farms around the world are dedicated to that, throwing trillions of guesses per second. Also, the larger the mining work, the greater the cost savings and therefore the greater the market share. This goes against the concept of decentralization. Systems that use Proof of Work are naturally recentralized.
In the case of Bitcoin, this ended up with a small number of large companies managing the network.
But early in Bitcoin’s history, crypto enthusiasts have sought other consensus mechanisms that can maintain some degree of decentralization-and not as wasteful as work evidence to destroy the planet.
How the proof of stake works
Proof of Stake, first proposed on July 11, 2011 in an online forum called BitcoinTalk, is one of the most popular options. In fact, according to the white paper that first described the new blockchain in 2013, it was thought from the beginning to be a mechanism to protect Ethereum. Think it’s impossible. So Ethereum instead launched the Proof of Work model and set about developing the Proof of Stake algorithm.
Proof of Stake eliminates miners and replaces them with “validators”. Instead of investing in energy-intensive computer farms, invest in the system’s native coins. To become a validator and earn block rewards, lock or bet tokens on smart contracts (bits of computer code running on the blockchain). When you send a cryptocurrency to the smart contract’s wallet address, the contract retains that currency. It’s like depositing money in a safe.
As Ethereum is slowly migrating in the Proof of Stake system, we will invest 32 Ethereum (currently worth $ 100,000) to become a validator. If such a spare replacement is not available and many do not, participants can jointly participate in a staking service that acts as a validator.
The algorithm chooses from a pool of validators based on the amount of funds the validator has locked up. The more stakes you have, the more likely you are to “win the lottery”. If you are selected and your block is accepted by a committee of “Atesters” (a group of validators randomly selected by the algorithm), you will be awarded a newly created ether.
Ethereum proponents argue that an important advantage of Proof of Stake over proof of work is an economic incentive to act according to the rules. When a node validates a bad transaction or block, the validator faces a “slash”. This means that all ethers are “baked”. (When a coin is burned, it is sent to an unusable wallet address where no one can access the key, making it virtually useless forever.)
Proponents also argue that stake proofs are safer than work proofs. Attacking the Proof of Work chain requires more than half the computing power of the network. In contrast, Proof of Stake requires you to manage more than half of the coins in your system. As with Proof of Work, achieving this is difficult but not impossible.
Ethereum’s Proof of Stake system has already been tested on the Beacon chain launched on December 1, 2020. So far, 9,500,000 ETH (currently worth $ 37 billion) has been bet. The plan is to integrate with the main Ethereum chain in the coming months.
Other upgrades will follow. After the blockchains have been merged, Ethereum will introduce sharding. This is a method of splitting a single Ethereum blockchain into 64 individual chains, all coordinated by the beacon chain.
Shardchain enables parallel processing, so networks can extend and support far more users than they do today. Many consider the inclusion of shard chains to be the official completion of the Ethereum 2.0 upgrade, but it is not planned to take place until 2023.
Later, a technique called “rollup” accelerates the transaction by executing it off-chain and sending the data back to the main Ethereum network.
Dangerous movement
This comes with risks. Switching to Ethereum’s Proof of Stake is a huge task. Thousands of existing smart contracts operate on the Ethereum chain, with billions of dollars in jeopardy.
Staking doesn’t do as much direct damage to the planet as a warehouse full of computer systems, but critics say stake proofs are less effective than work proofs to maintain decentralization. I’m pointing out. The person who bets the most money makes the most money.
Proof of stake has not been proven at the scale of the proof of work platform. Bitcoin has been around for over 10 years. Some other chains (Algorand, Cardano, Tezos) use Proof of Stake, but these are smaller projects compared to Ethereum. Therefore, new vulnerabilities may surface as new systems are released widely.
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