The long-awaited ethereum merge is set to take place in September 2022, and after a successful final test run, it seems there will be no delays.
The blockchain shift from PoW to PoS has been in the pipeline for a while, responding to energy consumption and security issues. Many in the crypto community are, however, divided. A change as significant as the shift in consensus mechanism is hugely complex, eradicating the need for miners.
Some fear the move from the tried and tested PoW to the newer PoS could result in security and centralization issues. In contrast, others fear a hard fork initiated by miners, causing complications and possible devaluations.
The move has highlighted a difference of opinion on consensus mechanisms. Fintech Nexus contacted some of our expert sources to try and gauge the market view of PoW vs. PoS.
BS – I think it’s going to revolutionize the ethereum chain. The biggest drawback of the PoW mechanism was the high energy consumption. This was something that the chain was heavily criticized for as well. Because of the merge, there will be an estimated drop of 99.95% in energy consumption. I think this is huge and will attract many users to the ethereum chain. I believe that we can only move towards a more sustainable future for the ethereum chain by ensuring efficient energy consumption.
The merge will set the ground for sharding that will change how transactions occur on the ethereum blockchain. I am excited to see how things will unfold.
FS – The next upgrade is ethereum’s most important so far, as it will reduce the network’s energy consumption by ~99.95% and reduce token inflation. It is a significant step toward a more sustainable, secure, and scalable ethereum ecosystem.
YL – After a long delay, ethereum’s merge should take place in September this year. This is a very important step for the network and the blockchain industry, with the network operating as a base layer for diverse areas such as DeFi, NFTs, and dApps. In addition to the merge, many improvements will be implemented around this date. Among them are scalability solutions and rollups.
JV – ETH has been pushing the merge since 2017 every year. I am not sure it’s ready, and also, I am worried it might not work as intended and make crypto markets tank. I also think probably all the miners will switch to ETC.
Will it change the ecosystem, and if so, how?
BS – I believe ethereum is the foundation of the new era of the web, digital identity and ownership, and how we will interact with the blockchain. A software upgrade this significant is rare. Not every day do we see infrastructure like ethereum being upgraded to become energy efficient, more secure, and faster.
I believe the merge will open doors the countless opportunities and will onboard a significant number of users to Web3 and blockchain. I see the merge as a bridge that will make the ethereum blockchain accessible, efficient and scalable. When that happens, we will see the true potential of blockchain and its impact on our lives.
FS – The upcoming merge will not change the ecosystem, aside from improving its energy efficiency and becoming a more environmentally friendly network. It represents the first of many steps toward additional upgrades such as danksharding, which will make it cheaper for L2s to settle on ethereum and improve the scalability of the entire ecosystem.
YL – With the increase in the number of transactions per second and the different rollup solutions implemented, the transaction price can be expected to fall and the speed of execution to increase. It should allow new projects to emerge, reinforce the attractiveness of existing projects, and consolidate ethereum’s market dominance.
JV – I hope so. Enabling the scaling of transactions on-chain up to a significant number is a fundamental change compared to the now, especially when you see gas prices and how bad things get when the network is congested. I hope it creates the financial incentives to test and create more options for the internet of the future.
What are the functional differences between the PoW and PoS consensus mechanisms?
BS – PoS uses staked ETH while PoW uses computational power to reach a consensus.
Proof-of-Work has been tried and tested over the years. It has kept both bitcoin and ethereum secure for many years, so it is natural for users to trust the Proof-of-Work mechanism. Not only this, but for many users, proof-of-work is easier to implement than proof of stake. It also doesn’t require users to have ETH to get started. Simply put, it is user-friendly.
The biggest benefit of Proof-of-Stake is the significant drop in energy consumption, making it more environmentally friendly. The PoS mechanism also makes the chain more secure, reducing transaction security risk. The mechanism makes the chain truly decentralized by staking, which allows the chain to be more decentralized.
CB – Functionally, they provide the same result, providing a means to determine the next iterative changes to the network. Under the hood, though, PoW and PoS differ drastically.
PoW is notoriously energy-intensive, consuming large amounts of electricity to run a mathematical game of “hide and go seek.” On the bitcoin network, this plays out in the form of a miner using an application-specific integrated circuit (ASIC) to acquire BTC. BTC is hidden amongst complex code, and computational brute force is needed to uncover it. This process results in validating the block containing the BTC, so the network is updated accordingly.
While there are multiple variations of PoS, generally, this mechanism selects a validator based on the amount of capital committed to the protocol. This allows for greater energy efficiency, as it does not require much computational effort.
FS – In PoW, a network’s security is proportional to the energy spent. It is significant and needs to be compensated for with higher token rewards because of lower profit margins. PoS, on the other hand, operates at almost zero expense.
PoS relies on the fact that to attack the network’s consensus, one would need to accrue enough tokens to be a majority staker, creating an incredibly high barrier for an established network. Such an attack would also be self-sabotaging. In other words, a network’s security depends on the attack’s cost.
YL – With PoW, the consensus bitcoin uses, the first miner to verify the accuracy of new transactions receives a block reward. Currently, block rewards are 6.25 BTC. As BTC’s nature, these block rewards are halved regularly, with the next coming in May 2024. This incentivizes miners to create innovative ways to beat the competition, with Application-Specific Integrated Circuit (ASIC) miners being the most notable. All of this activity drives up the hash rate of the bitcoin network, which is directly correlated to its security. This is an extremely taxing method of computing, prompting scrutiny of its environmental impact.
On a PoS network such as Polkadot — with ethereum soon to follow — validators must commit tokens and cryptocurrencies to participate in the validation of blocks. This process is known as staking. The greater the amount of cryptocurrency staked, the higher the potential reward. This incentivizes users to commit more funds to the network, increasing the network’s efficiency. There is a process on PoS known as slashing, which deters behavior that would negatively impact the network, like validator downtime or double signing.”
JV – PoWs are heavy energy-dependent and rely on hardware investment, which depreciates swiftly as difficulty arises or as new efficient hardware gets developed (or difficulty increases during bull markets). A PoW has enabled a security and decentralized extra layer with miners that PoS does not have (but miners tend to get in pools, which are centralized in China in the case of bitcoin).
On the other hand, PoS relies on users becoming validators by “staking” a part of their funds, which makes investors with lots of funding and big pockets more likely to be selected often and increase their wealth. I would say that PoS are less costly and energy efficient but are less proven (as they do not have the 13 years of PoW running 100%).
How would consumers see a difference?
BS – The most significant difference consumers will notice will be the decrease in gas fees. Something that users of the ethereum blockchain have complained often about.
Consumers will also experience a significant improvement in the speed of transactions. Once the final phase of the upgrade is completed, consumers can make thousands of transactions per second. An amazing jump from the seven-15 transactions per second that the chain can handle now.
Shifting to the PoS mechanism will make the ethereum chain more secure and energy efficient. This will also address user concerns about high energy consumption and security issues.
I believe ethereum 2.0 is all about making the chain accessible and mainstream. It is made for the consumers.
CB – PoW will seem slower but more secure, while PoS will seem faster and cheaper to interact with.
FS – The consensus algorithm does not affect user experience unless they want to participate in securing the network.
YL – For the average consumer, using a PoS or a PoW consensus mechanism makes no difference. On a PoS network, consumers can stake some of their cryptocurrency to secure a blockchain and get a yield. This is not possible in a PoW consensus mechanism.
JV – I don’t think the average consumer notices anything. End of the day, you do not see what’s happening behind the code. You just want to move funds from one wallet to another, interact with dApps or dexs, and the current ETH network is heavily congested. The average user sees that sending 100$ of ETH makes you pay 10$ in commission for gas, while BTC does not.
When investors are looking into buying assets using either PoW or PoS, what should they consider?
CB – Doing your research is vitally important when purchasing these digital assets. Some of the main points that should be considered before making a purchase are:
Is there a real “hair on fire” problem that is actively being solved?
Is the code open source? Because it should be.
How many developers are working on the project, and what are their accolades?
Are there any notable investors in the project?
Do the annual percentage yield (APY) rates look outlandish?
Is there a functional product available to use?
What does the social media presence look like, authentic or padded?
How decentralized is the project, or is there at least a solid path to decentralization outlined?
YL – For investors sensitive to ESG criteria, it is clear that PoS cryptocurrencies are a superior investment option to PoW. However, concerning security, PoW networks with large market capitalizations are more resistant to attacks than PoS.
Investors should also consider the utility of cryptocurrency. How is it used on the network, and does it accrue value? Ask questions and conduct research. This is the only way to get an understanding of the strengths and weaknesses of a specific project.
JV – Always DYOR (Do your research). Investors’ profiles might differ a lot, and many might care about green energy, in which case the benefits of PoS are relevant. But others may value a code that did not have pre-mined or ICO like ethereum or that it forked to bail out The DAO.
They should consider what they value the most and what their strategy is. Do they want returns annualized? Do they want a possible hedge? Do they want to interact with Web3 and NFTs?
With over five years in the art and design sector, Isabelle has worked on various projects, writing for real estate development magazines and design websites, and project managing art industry initiatives. She has directed independent documentaries on artists and the esports sector and assisted in producing BBC Two's Venice Biennale: Britain's New Voices.
Isabelle's interest in fintech comes from a yearning to understand the rapid digitalization of society and the potential it holds, a topic she has addressed many times during her academic pursuits and journalistic career.