Ethereum, the most popular cryptocurrency in the world after Bitcoin, has made a major decision: it will change part of its operation, and move from a so-called “proof of work” system to a “proof of stake” system. Here is all you need to know.
They’ve been talking about it for years, and it may soon be done: Ethereum will abandon proof of work (proof of work, in French). Instead, the blockchain will use proof of stake (proof of interest or proof of stake) for mining new coins.
The news was announced on May 18 by the Ethereum Foundation, which said in a blog post that “ within a few months, the transition to a proof of stake system will be completed. Although the terms are not easily understood, concretely, such news could completely change the way cryptocurrencies will be produced in the future, and have a huge ecological impact.
What is proof of work?
Proof of work, or POW, is today the main way to “mine”, that is to say to validate transactions and create new units of cryptocurrency. Concretely, it is a protocol which makes it possible to validate the integrity of the blockchain, and to create new blocks. It is this system in particular that makes the blockchain secure.
In order to validate this new block, the POW protocol requires all miners to solve very complex mathematical operations and calculations, which require very powerful computers. The first computer to respond to these calculations “wins” the right to mine the next block, and in return receives a reward in the form of cryptocurrency. It is therefore a kind of race for power that is being played out.
Why do you want to stop proof of work?
There are two major issues with this proof of work protocol, which largely motivate the Ethereum Foundation’s decision to use another.
First, the PoW protocol causes calculations to become more and more complex over time. In the early days of cryptocurrency, mathematical operations were relatively straightforward, but today computers must be equipped with the most powerful graphics cards on the market and work in groups to hope to be able to complete the calculations on time, and so receive benefits in cryptocurrency.
Minors are thus partly responsible the shortage of graphics cards that is affecting the world right now. But this race for computing power poses, moreover, a problem of centralization: if only the most powerful computers or groups of computers manage to make money by mining, there is a risk that operations mining relies only on a few players in the future. Quite the opposite of the spirit of decentralized cryptocurrencies.
The second problem with proof of work is environmental. In order to perform their calculations, the miners’ computers require a lot of energy. A Cambridge University study published in February 2021 showed that the annual electricity consumption for Bitcoin mining was similar to that of Argentina, and that the cryptocurrency emitted as much greenhouse gases as the metropolis of London. A completely absurd environmental cost for a virtual currency used by only a handful of people.
The demand for energy from miners is such that it is now criticized from all sides: China has been seriously considering since 2019 to completely ban mining on its territory, and three of the most important Chinese banking federations have just called on the others to no longer accept or use cryptocurrencies. And since May 13, the Tesla company has refused bitcoin payments because of its enormous environmental cost.
What is the difference with proof of stake?
Proof of stake, or POS, is also a protocol that validates the integrity of the blockchain. However, unlike proof of work, it does not require solving calculations before creating a new block. With this protocol, to gain the right to mine the next block, you have to put part of your cryptocurrency holdings into play. On the Ethereum site, it is explained that 32 ETH (more than 66,000 euros) will have to be put into play in order to be able to “participate” and try to become a validator, that is to say the person in load the mining of the next block and check the validity of blocks created by the other validators. ” Validators will be chosen at random “, It is specified,” and the cryptocurrencies involved will be used to ensure the good behavior of validators. “
The fact of putting all or part of their possessions into play guarantees the integrity of the blockchain: the more cryptocurrency a person has, the less it is in their interest to falsify it, hence the name proof of stake. ” For example, if a validator disconnects when creating a block or does not validate it, he may lose some of his money for harming others », Specifies the Ethereum website. Conversely, validators who have done their job well will receive rewards. For now, Ethereum has not given more details on its compensation mechanism.
What does it change ? First of all, proof of stake consumes much less energy. There is no need to power farms with overpowered computers, because there is no need to solve complex calculations; there is therefore no need to produce large quantities of graphics cards either. The Ethereum Foundation estimates that the switch to proof of stake will reduce energy consumption by 99.95%.
A huge figure, but which has not yet been confirmed by studies: the Ethereum Foundation also recognizes that these are only estimates, because ” there are no concrete statistics on energy consumption, nor on what equipment would be used “. We must therefore take this figure with a grain of salt, even if some experts in the subject agree that the switch to proof of stake will reduce energy consumption.
Does it work ?
The protocol is already used by other cryptocurrencies, such as Tezos, NXT, Cardano or Peercoin, the most popular of the four and which works with proof of stake since 2012. These currencies are not among the most important, and are still relatively little known, so there is still little feedback on how POS works on a large scale.
However, we know that there are advantages to proof of stake. In particular, it reduces the risks of centralization, since computer farms will no longer have the advantage of computing power, the validators being selected at random. The POS would also be safer: having more validators would reduce the risk of attacks (especially so-called “51%” attacks).
However, there are drawbacks to proof of stake. Already, the fact of having to have at least 32 ETH in order to try to become a validator obviously hinders diversity and risks in the long term favoring a small group of minors, as is already the case with proof of work. and computer farms. Above all, as Ethereum officials admit, proof of stake is still a ” very young protocol », Which has not been often tested, and on which we have little feedback.
What consequences for Ethereum and other cryptocurrencies?
Potentially, the fallout from a switch from Ethereum to POS would be immense in the cryptocurrency arena. In addition to the ecological impact, it would be a major philosophical change in the design of blockchains., which mostly use proof of work. If proof of stake is proven over time, one could possibly imagine that other cryptocurrencies would follow the example of Ethereum.
However, there are still many questions. Already, there is no precise date announced for the transition from proof of work to proof of stake, the Ethereum Foundation simply talking about a change that will occur ” in the coming months “.
Indeed, moving from proof of work to proof of stake is not a simple procedure. It is even a very risky operation, nicknamed “the Merge” (convergence) as explained by the Anglo-Saxon magazine Quartz. ” For this to work, all miners must update their systems at the same time », Announces researcher Alex de Vries, interviewed by Quartz. It is estimated that there are around 16,400 miners, which implies a titanic preparation and organization work upstream.
” And if all the miners don’t update at the same time, whether it’s due to miscommunication, an act of active resistance, or whatever, the Ethereum market could split up », Warns Alex de Vries. ” This is what happened in 2017, when an argument between Bitcoin miners caused the blockchain to split into two, with the minority becoming a new cryptocurrency called bitcoin cash. “.
The Convergence is therefore far from being a trivial event. Alex de Vries also warns the owners of NFT: If the Ethereum blockchain has any issues and its integrity is compromised, they could lose them. As NFTs, the non-fungible tokens, are overwhelmingly based on the Ethereum blockchain, there would also be serious consequences for the nascent digital art market.
Are there other protocols?
Other protocols exist, but they are currently only used by a minority of blockchains.
Among the existing protocols, we find:
- The proof of authority, which resembles the functioning of the proof of stake, but which requires a “super majority” for the validation of new blocks, and which requires that the identity of the validators be public, and verifiable by a third party.
- The proof of elapsed time, developed by Intel and very similar to the proof of work, except on one central point: computers do not have to solve complex problems, but must wait, for a period of time. random duration. This protocol is much less energy intensive than the proof of work.
- Proof of importance, a protocol very similar to proof of stake, but which conditions the selection of the validator on other parameters. This includes recent account actions, the number of cryptocurrency units the account has, and the amount of time the account spends on the network.
There are currently no plans to make these protocols more popular, or to use them on a larger scale.