Ethereum’s PoS adventure

As cryptocurrency becomes mainstream and more and more people understand how it actually works, Bitcoin and Ethereum, the largest players in the field, are facing more and more criticisms, accusing them of keeping the blockchain running. The implementation of mining operations damages the environment.

According to Digiconomist’s data, these two networks alone consume more energy than the entire Thailand (population: 90 million). In May of this year, Tesla CEO Elon Musk announced that the company will no longer accept Bitcoin as a payment method because of concerns that “the use of fossil fuels for Bitcoin mining and transactions is increasing rapidly. “. In the same month, Greenpeace stated that it would stop accepting Bitcoin donations, even though the organization has been accepting Bitcoin donations since 2014.

The recent boom in NFTs (non-homogeneous tokens, that is, digital art and other limited-edition collections encrypted on the blockchain) has made Ethereum the focus of attention, and most NFTs are carried out on Ethereum Buying and selling. At present, the electricity consumed by an Ethereum transaction is equivalent to the average electricity consumption of a U.S. household in a week, and its carbon footprint is equivalent to 140,893 Visa credit card transactions or 10,595 hours of watching YouTube videos. And millions of dollars in NFT sales have also paid a high price for the planet.

But sometime in early 2022, will be via Ethernet Square, once called ” merger ” (The Merge) of the event to launch its most significant upgrade ever, promised to reduce network energy consumption more than 99% , this will start in 2015 The blockchain network is positioned as a ” green ” choice for encryption users and developers . After more than five years of research and development, the clear goal of Ethereum 2.0 (ie Eth2) is to make this fast-growing blockchain “more scalable, safer, and more sustainable” .

Behind this major shift

The most important part of this upgrade is to fundamentally change the transaction verification method of this decentralized network (that is, its ” consensus mechanism “). Similar to Bitcoin, the current Ethereum network uses the so-called PoW (Proof of Work) consensus mechanism. In Eth2, Ethereum will switch to a brand new PoS (Proof of Stake) consensus mechanism, which will completely eliminate consumption. Enabling cryptocurrency mining is replaced by “staking” (staking).

We know that when you pay someone with a debit card or an application like Venmo, you are trusting a central third party (such as a bank) to verify the transaction, that is, to confirm that the payment request is legitimate, and then from your account Debit and record the transaction correctly. In a decentralized payment system (such as a blockchain), transaction verification and recording are carried out by thousands of ” nodes ” (usually called “miners”) distributed throughout the network . In theory, these nodes do not know each other, they are just computers run by individuals or teams. So, how does a decentralized network ensure that nodes are honest and will not attempt to execute fraudulent transactions or otherwise cause the network to collapse?

One of the methods is through PoW . Currently, as transactions proceed through the Ethereum network, miners in the network will compete to aggregate, verify these transactions and record them in a new encrypted “ block ”, where each block is A permanent record of all verified transactions on the network at a given time. In return for this work, Ethereum miners can get ETH rewards, And additional transaction fees paid by the user . Creating a new block is like a high-tech unlocking game, and this game is to solve a deliberately designed mathematical problem .

This kind of calculation requires a powerful computer and a lot of energy to maintain operation. The cost of this calculation brings a function similar to a “game skin”, making it a barrier to entry, preventing (attackers) from arbitrarily acting on the blockchain. Attack and make the attacking system unprofitable. Once a miner digs a new block (that is, solves the above mathematical problem), the new block will be transmitted to other peer nodes on the network for verification. And if a miner tries to pack a fraudulent block on the chain, the block will be rejected, and the miner will also lose the block reward and the electricity cost in order to pack the block.

The stronger the computing power of a miner, the greater the chance that he will “win” the block and receive a reward. The increase in the price of ETH (from $300 a year ago to $2200 in late July this year) and other cryptocurrencies triggered an ” arms race ” where miners gathered professional computers and often joined forces to increase their mining rewards (This is a threat to the decentralized utopian ideal of blockchain technology).

In this low-profit game, energy cost is a key variable, so mining operations tend to be concentrated in areas with cheap electricity, such as China’s Sichuan and Yunnan, where hydroelectric power is abundant, or Xinjiang, where cheap electricity is obtained through coal-fired power plants. . Before the Chinese government started cracking down on cryptocurrency mining operations in May this year, it was estimated that 65% to 75% of Bitcoin mining globally took place in China. Insiders interviewed by Fortune magazine stated that only six or seven companies handle most of the Bitcoin mining.

In contrast, Ethereum’s new PoS model will rely on a network of “validators” instead of letting miners compete to solve mathematical problems to obtain the privilege of creating new blocks (and obtaining block rewards). These validators Need to pledge at least 32 ETH (valued at approximately US$72,000 as of the end of July). The algorithm will semi-randomly select which validator will create a new block in the network; validators who pledge more than 32 ETH will increase their chances of being selected, which is a bit like buying more lottery tickets to increase the winning rate .

The newly created “candidate” block will be verified by the rest of the validators in the network. This is similar to the old model of PoW, but the validators will not get a fixed reward for each mined block like PoW miners do. The annual income obtained depends on the size of their pledge deposit. If a verifier is found to have created a fraudulent block, the verifier will be ” punished “, that is, a part of the verifier’s pledge deposit will be “destroyed” and the verifier will be expelled from the network; and malicious participants will be exposed Of validators will be rewarded.

Compared with the high-performance gaming computers or specialized equipment required for PoW mining, the technical barriers to becoming a PoS validator are lower: only an ordinary laptop and a reliable, online Internet connection . The hope of the Ethereum core development team is that by allowing more people to participate in protecting the network, it will be able to make Ethereum more secure in the long run (although Eth2 does not prevent validators from joining forces to create a larger pool of staking).

A test version of Ethereum’s new PoS system, the beacon chain , was launched on December 1, 2020 and has been running continuously. There are currently more than 16,384 active validators running simulations, despite the current beacon The chain has no real transaction data. The beacon chain will be merged with the current Ethereum chain that saves the history of Ethereum transactions to create Ethereum 2.0 .

Solve other problems of Ethereum

Ethereum is not the first encrypted network to adopt the PoS consensus model. Many young competitors are already using PoS, including Solana launched in 2018, Ava Lab’s Avalanche platform, NBA Top Shot developer Dapper Labs’s Flow blockchain, and Ethereum co-founder Charles Hoskinson’s Cardano platform. These emerging platforms follow in the footsteps of Ethereum and provide lower transaction fees and faster speeds to attract the next wave of blockchain-based app developers.

Due to its growing popularity among so-called dApps (decentralized applications running on the blockchain) developers, the Ethereum network has become slow and crowded. Currently, Ethereum can process up to 30 transactions per second; in contrast, Visa processes approximately 1,700 transactions per second and claims to be able to process up to 24,000 transactions. Network congestion pushes up the transaction fees that users need to pay to miners. For those who want to make small blockchain transactions, the transaction fees on Ethereum may exceed the amount actually transferred, which prompts some people to look for cheaper alternatives .

Patrick Barile, chief operating officer of DappRadar, said: “In the early days of blockchain, most of the activities were (crypto users) higher-value transactions on financial dApps-tens of thousands, hundreds of thousands or even millions. This year, More NFTs and emerging games use blockchain.” DappRadar is a data collection and analysis company that tracks dApps on multiple blockchain platforms.

These user-driven applications require faster transaction speeds and lower costs. As the first blockchain to provide so-called smart contracts (allowing to run dapps), Ethereum has an early advantage among developers. “In 2015, this was a real innovation,” Barile said. “But now, Ethereum developers are routing more transactions to other chains that have supported PoS from day one. This mechanism makes them faster and cheaper.”

In late July this year, at the EthCC (Ethereum Community Conference) held in Paris, Ethereum co-founder Vitalik Buterin talked about these issues and urged developers to expand the Ethereum network beyond DeFi applications , and emphasized the imminent efforts to improve The scalability of Ethereum solves its high transaction fees and congestion problems .

However, “merger” alone cannot do this . The Eth2 FAQ (Frequently Asked Questions) page states: “The “merger” is limited to upgrading Ethereum’s consensus mechanism. In practice, it will not have any impact on the current user experience of Ethereum. “

However, Phase 2 of the Eth2 plan will directly address network speed and cost issues by introducing highly anticipated features and functions. These include ” Rollups ” and ” sharding “. The former can bundle multiple transactions into one transaction and process them off-chain, but store transaction records on the Ethereum blockchain. The latter is a type of Ethereum The database of Fangfang is divided in order to achieve a faster retrieval method. Buterin has stated that these two and other improvements may eventually allow the Ethereum network to process 100,000 transactions per second .

CoinDesk analyst Christine Kim said that these so-called Layer 2 solutions “will help users and dApps transition to a more flexible system in the short term, which compromises decentralization and security, but will provide users with them. The required low fees and fast transactions.” Kim also said that although other chains currently have advantages in transaction speed and cost, “Ethereum has accumulated an ecosystem of dApps developers and users that other chains do not have.”

Disputes in the community

Even in the “merger” occurred before , the cost of Ethernet Square market changes controversial proposal EIP-1559 (Ethernet upgrade will be implemented when London Square August 4) is also likely to lead to lower costs moderate, or at least It brings more predictability of expenses to users of the Ethereum network. EIP-1559 will replace the current “highest price auction” process of Ethereum transaction fees. Instead, the agreement automatically generates a minimum ” base fee ” for a specific transaction to determine the transaction fee.

However, perhaps more importantly, EIP-1559 changes the incentive mechanism of Ethereum miners: transaction fees that used to flow directly to miners will be destroyed after the implementation of this proposal , except for users who selectively pay “ Tips ” to allow themselves Transactions are processed faster. The destroyed ETH will be removed from circulation, thus helping to curb the inflation of ETH. (Unlike the total limit of 21 million Bitcoins, Ethereum does not set an upper limit on the total number of ETH that can be minted.)

Various estimates have concluded that the loss of transaction fees may reduce the income of miners by 20% to 35% . Even after switching to the PoS mechanism, there are still risks in the change of Ethereum’s incentive model, which may force some dissatisfied miners to leave the network, try to destroy it or start a competitive chain. In fact, some large miners protested against EIP-1559’s fee changes, which prompted Ethereum developers to speed up the timetable for “mergers” to prompt potential troublemakers to leave the network faster.

Most analysts expect that the shift to PoS will push up the price of ETH, at least in the short term. This is because the amount of ETH in circulation is expected to decline. This is because a large amount of ETH is pledged, and some ETH that is “destroyed” as a transaction fee will be removed from circulation. CoinDesk’s modeling also shows that under the PoS system, new ETH will be minted more slowly.

There is no official “merger” date yet, and analysts expect it to take place early next year. “However, just before they estimated that the beginning of next year, they said there would be a merger at the end of this year,” Kim said. “The technical risks are great, so I won’t be surprised if the merger is delayed further. An upgrade of this scale is extremely risky. Therefore, developers will face a lot of pressure and need to check their code repeatedly. But There is no doubt that it will happen.”

Written by: Adam Bluestein

Source: Fortune Magazine

Editor: South Wind

 

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/ethereums-pos-adventure/
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