One of the biggest announcements in the blockchain sector in recent times was the Ethereum Foundation confirming that it would be switching to a proof-of-stake (PoS) protocol. This news sent shockwaves across the industry and a plethora of speculation.

What would this mean for the world’s second-largest cryptocurrency? Would it overtake Bitcoin as a result? What would happen to the miners? Truly, this shift has significant implications for the larger blockchain industry, some of which we will discuss in their article.

 

What is a Poof-of-Stake Protocol?

As we all know, cryptocurrencies run on blockchain networks, and in these networks, there are mechanisms in place for confirming transactions and for creating new cryptocurrencies. These two processes are intertwined closely in what is referred to as block confirmation.

When a transaction is initiated using a cryptocurrency, it needs to be validated by the network. In a proof-of-work mechanism (what Ethereum and Bitcoin currently use), users sign up to validate these transactions by completing complex mathematical puzzles using special hardware devices.

For each block of transactions that are completed (mined), the validators receive a certain number of tokens in return.

In a proof-of-stake protocol, the way that transactions are validated and tokens are given to validators is not through the completion of complex puzzles but through ‘staking’. In this system, users who already have the native cryptocurrency of the network agree to lock away their tokens for a certain amount of time.

While these tokens are locked away, they are used for the validation of transactions and after each block is validated, tokens are given to those who had staged previously.

 

What Does This Mean For Ethereum?

Ethereum switching to a PoS system is very significant for both the network itself and its users. First, it means that the Ethereum network will be less energy-intensive. One of the major downsides of the proof-of-work system is that the completion of the mathematical puzzle using specialized equipment uses a lot of energy.

In fact, the cryptocurrency industry has been criticized for years for its energy consumption. But by the Ethereum Network’s estimations, up to 95% of its current energy use will be reduced after the full switch to the PoS system.

For the users, it means fewer barriers to entry in order to become validators. The proof-of-work system would require them to buy special equipment and pay high energy fees in order to mine tokens.

With the PoS system, they only need to buy and stake tokens, which is much cheaper.

 

What Does This Mean For the Industry? 

For the wider industry, Ethereum’s switch means a lot of things. First, it shows that in the long-term, PoS protocols might prove to be the most sustainable option, both for the planet and for crypto users.

For all the criticism that the proof-of-work system has received, it is clear that changes will need to be made. Should Ethereum see a lot of benefits from this switch, many more blockchains could follow suit and the PoS system could eventually become the default.

Share This