Ethereum innovated by Vitalik Buterin’s team is one of the best performing cryptocurrencies in the market and has been struggling with scalability for the longest of time.
Ethereum started off mimicking Bitcoin’s blockchain as it set Proof-of-Work to be its consensus mechanism. In its early stages, Ethereum gained much publicity and appreciation from the community for offering open source codes to blockchain developers to build decentralized applications [dApps], it provided a platform for enthusiasts to develop ERC based tokens, they supported the community and incentivized miners like no other coin.
Amongst all the offerings, Ethereum was introduced to a whole new set of problems such as network congestion, underlying scalability issues, low transaction per second speed and more. To battle these limitations Ethereum decided to up its game by shifting to a different consensus mechanism as well as integrating solutions for better scalability through sharding.
Let’s understand Proof-of-Work [PoW] and Ethereum’s switch to Proof-of-Stake [PoS]
Currently, Bitcoin and Ethereum both use the Proof-of-Work consensus mechanism where complex scientific conditions have to be solved for confirmation and validating trades. This consumes an extremely large amount of electricity as computation power needs energy to work which is one of the significant reasons behind the lagging transaction speed on Bitcoin and Ethereum’s blockchain. Additionally, PoW is expensive, gives low ROI and also creates long transaction confirmation queues.
Proof-of-Work has quite a few disadvantages and a proposed answer to improve its transaction speed is to get in an adaptable and increasingly secure arrangement backed by the stake of validators AKA shift the consensus mechanisms to Proof-of-Stake [PoS].
The big players of the industry and experts including Vitalik Buterin consider Proof-of-Stake to be the solution to alter the problems of Proof-of-Work although many in the industry do acknowledge the fact that the advantages of PoS can also be converted to its disadvantages.
In PoS consensus mechanisms, the miners are replaced with validators. Instead of solving puzzles that require computation power, these validators stake their own wealth i.e.ETH tokens on the network for validating transactions.
In a Proof-of-Work arrangement, the voting control and implementing significant changes to the framework is distributed among miners, devs and other vital players of the network. On the other hand, in a Proof-of-Stake mechanism, the stakeholders gain the privilege to control and gain authority over the technical and economic aspects of the network.
These rights open doors for centralization. And the entire purpose of a distributed ledger technology is its decentralized behavior. The voting power given to the validators and the control over the network accelerates centralization of a blockchain. Which is why it can be said that PoS is not entirely a decentralized consensus mechanism considering its contradiction towards the principles of DLTs.
Although, Proof-of-stake eliminates some of the major security issues associated with Proof-of-work most importantly the chances of 51% attack. How? Let’s understand!
For a 51% attack to take place in a PoW system the attacker needs to hold 51% of the hash power of the network but in the case of a PoS system the attacker needs to hold 51% of the tokens circulating on the network which is pretty costly and hard to accomplish unless a founder or core team member who holds a lot of tokens on the network collaborates with other entities holding large amounts of tokens.
In a PoW mechanism, there are possibilities of mining pools collaborating and taking over the network. For example, the biggest mining pools of Bitcoin are located in China. If these mining pools come together they can take rewrite Bitcoin transactions, as well as indulge into double spending activities and more.
Similarly in PoS mechanism if a large amount of token holders such as Binance, Kraken, Coinbase etc these centralized exchanges or Ethereum whales come together they can take over the network with the stake they hold in no time.
Irrespective of the advancement in technology both these mechanisms are prone to a few vulnerabilities.
Recently, the Ethereum blockchain soft forked and activated Constantinople. The Constantinople upgrade is proposed to eradicate technical blockades that have prevented the project’s advancement. The fork paves the way for Ethereum to scale their chain as well as improve networks efficiency and fee structure.
In addition to this, Ethereum will soon launch its Casper proof-of-stake mechanism which is currently live on the Prysm testnet.
Ethereum 2.0 is one of the most awaited upgrades. It will release the much-anticipated update – Sharding.
Sharding consists of Shards which are interconnected secondary chains that manage smart contracts and transactions. These shards are connected to a mainchain, known as the “beacon chain.” The beacon chain is the coordinator of these different shards and stores the set of approved validators on the network. Beacon chain will also be providing “attestations,” that will decide which block should be added to the primary history of the Ethereum blockchain. The process is similar to how miners add blocks in a proof-of-work system.
Ironically, all these updates on the Ethereum network are supposed to give it better scalability, security, and decentralization. But as analyzed, it will open doors for attacks, centralization and will surpass levels of security due to its mechanisms vulnerabilities. Coming to the conclusion, is Ethereum’s switch from Proof-of-Work to Proof-of-Stake a good idea? Yes if it can manage to keep the project decentralized while raising the security bars. No, if they are still proceeding with their existing plans despite being acquainted with the vulnerabilities it encompasses.