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Ethereum Transforms to PoS -- The Environmental Trend of Cryptocurrencies?
14 May 18:11
At 6:06 am on May 13th, Elon Musk tweeted that Tesla would suspend the use of Bitcoin (BTC) as a payment option due to concerns about the massive energy consumption involved with Bitcoin mining and transactions. It’s not only Musk, the trendsetter in the cryptocurrency field that is environmentally conscious, many investors are concerned about the surprising environmental impact of Bitcoin.
As can be seen from the figure below, Bitcoin's annual electricity consumption is 129 TWh, while Argentina consumes only 125 TWh of electricity a year. A joke about cryptocurrency says that; “a whole country is working hard to mine.” Now the joke becomes reality. Although Ethereum uses far less energy than Bitcoin, it also consumes as much electricity as Hong Kong each year.
When it comes to energy-saving, power consumption per transaction is a crucial parameter for a green and sustainable public blockchain system. According to data from digiconomist, a single Bitcoin transaction consumes 1130 kWh of electricity, while Ethereum consumes 83 kWh, less than a tenth of BTC. It is obvious that Ethereum has higher energy efficiency than Bitcoin, and Ethereum hopes to reduce the energy consumption of each transaction by 100 times through the transformation of the consensus mechanism from PoW to PoS. This has to be attributed to the visionary plan of the founder of Ethereum in 2014.
Data source: digiconomist database
What is ETH 2.0?
The founder of Ethereum, Vitalik planned to replace the current Proof of Work mechanism with a Proof of Stake mechanism. However, the progress was too slow, so they abandoned their original strategy of rebuilding the main network and launched ETH 2.0 in December 2020. ETH 2.0 adopts the parallel method of PoS and original PoW temporarily and plans to fully implement PoS by 2022.
Why PoS is more energy-efficient than PoW
In a Pow system, computing power determines the benefits. The more you work, the more you get. The better the performance of a mining machine, the stronger the computing power, and the higher the coin output. For Bitcoin, people compete for bookkeeping rights by computing hash algorithms, so as to get rewarded. The verifier shows the result of the calculation, which can be easily verified by anyone. Bitcoin uses a PoW consensus mechanism, which explains why machines are clustered for Bitcoin mining, as it requires high computing power. This directly causes a huge consumption of electricity.
PoS is a certificate of ownership, a direct proof of your holding of shares, which can be interpreted as distributing coins according to your asset. Two main factors determine the quantity of coin output, the quantity of coins held and the holding time. The PoS mechanism is like a perpetual growth stock, where the dividend is the new crypto coin created. The more coins you already have, the longer you hold them, the higher your reward. Therefore, the difficulty of mining under PoS has little to do with computing power, and there is no high-cost power consumption.
Why does Ethereum need PoS?
Ethereum aims to be a world-class Decentralized computer. To achieve this goal, Ethereum needs to take into account three elements, centralization, scalability and security. Only then can they build a better open source public blockchain platform for building and running DAPPs. POS is the solution for Ethereum to find the correct balance point among these three elements.
1. Be fully Decentralized
Decentralization is one of the core characteristics of blockchain but Ethereum is highly centralized. According to Ethereum’s own calculation, the top 8 big mining pools account for nearly 75% of the network's computing power. The PoW mechanism leads to concentrated pools of minerals, which is against the idea of decentralization. Moreover, the mining pool needs a large amount of early capital investment, so that only wealthy people benefit from it. Only these rich capitalists can build pools, miners who mine on their own GPU get little. But in the PoS mechanism, ordinary people don't need to compete with mining pools. The amount of pledge coins is quite low (to 32), and personal computers satisfy the hardware condition, so the admittance threshold of mining is greatly reduced. In this way, PoS reduces the benefits of centralized participation, and greatly increases the benefits of ordinary users.
2. Increase the scalability of the ETH public blockchain
The trading speed of Ethereum 1.0 based on PoW mechanism is 15TPS(transactions per second), which cannot meet the demand of existing users. Bitcoin, which uses the PoW mechanism, has also been criticized for its speed -- 6 TPS.
With the development of Ethereum's ecosystem, more and more DAPPs will be built on the platform, and the demand will also surge accordingly. Ethereum has to address the lack of scalability in order to become a world-class computer.
3. The more authenticators, the safer ETH 2.0 is
In terms of security, the PoW and PoS mechanisms are still similar. Under the PoW system, attackers need computing power, while in the POS mechanism, the attackers need to have enough tokens. Both take very high costs for doing any wrong. It should be noted that PoS requires a certain number of tokens to be pledged at the node. These pledged tokens will be confiscated, thereby deterring the perpetrator. Therefore, the more verifiers in Ethereum 2.0, the more pledged tokens per node, the lower the return for the verifier. The cost does not outweigh the benefits, making the Ethereum system more secure.
Generally speaking, the main reason for the transformation of Ethereum 2.0 into a PoS consensus mechanism is to improve the degree of decentralization and the extensibility of public chains. In the long run, this change is beneficial to the ecological development of Ethereum. With green policies being taken on the agenda of many countries, the concept of carbon neutrality will also gradually gain the attention of investors in the traditional financial market. The rise of energy saving and environmental issues in the blockchain field is a blessing for humanity.
Author: Gate.io
Researcher: Roxy T.
Translator: Edward H.
* This article represents only the views of the researcher and does not constitute any investment suggestions.
*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.
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