What proof-of-stake is: CRYPTO

CRYPTO

This is Proof of Stake

 Now that we’ve furnished proof of a medium-rare cut, let’s transition to the world of digital assets and talk about proof-of-stake, the next security foundation for Ethereum. The blockchain will complete its migration to PoS in the coming months, the Ethereum Foundation said yesterday.  

Ethereum is the clear platform of choice for Web 3.0. Created in 2015, the Ethereum blockchain has emerged as a globally distributed computing layer for all manner of decentralized applications, from financial services to one-of-a-kind tokens. 

• Ether, the cryptocurrency that powers Ethereum, is up 255% this year (but down 25% over the last 24 hours). It’s the second largest crypto by market value after bitcoin. 

But with $ETH’s uptick in adoption comes growing pains. The network is more congested than the highways of Los Angeles, as decentralized apps and services sap capacity. 

Here’s what proof-of-stake means and how it can help solve Ethereum’s congestion issues...and then some. 

Before diving in, let’s cover the basics basics

• What proof-of-stake is: A consensus mechanism
• What's that? An algorithm that keeps blockchains—distributed networks of nodes—humming
• What’s the status quo? Bitcoin’s blockchain uses proof-of-work (PoW), and so does Eth 1.0.

PoW requires mining, a computationally (and therefore energy) intensive process of solving complex cryptographic puzzles. “Ethereum will use at least ~99.95% less energy post merge,” its foundation said yesterday. 

So, how does it work? 

Network participants “stake,” or put up, their ETH as validators to reach consensus on transactions and establish new blocks of the ledger. The cutoff to become an Ethereum validator is a cool 32 ETH (~$88,000). At random, the network tasks validators to create new blocks on the chain or ensure that others’ are legit. These nodes are paid ETH as a reward. 

• If your node isn’t available when called upon to validate, you could lose a portion of your staked ETH. If you try any funny business, your stake could be confiscated. 

Drawbacks? The biggest is that PoS is more of an unknown quantity. There are smaller and newer cryptocurrencies, such as Cardano, that already use PoS. But PoW is the only model that has truly stood the test of time. Plus, migrating to PoS is no easy affair. The Ethereum developer community has delayed the transition, which is occurring in phases.

Bottom line: When Eth 2.0 finally rolls out in full—an event that is expected early next year—it will act as the largest proving ground yet for the PoS method. 

Click here to read an extended cut of this explainer. —RD