top of page
  • Tiena Sekharan

The time is ripe for Ethereum to move to Proof-of-Stake

Updated: Apr 15, 2021

There is an urgent need to find solutions to the scaleability problems plaguing the Ethereum network. High gas prices and clogged networks could derail the fledgeling DeFi platform built on it.

Also, Proof-of-Work (PoW) has a huge negative externality in the form of environmental damage. The more successful the currency becomes, the more miners it attracts, the more difficult the hash problems become, and the more electricity is consumed.

The solution that the community is banking on is called Proof-of-Stake (PoS). Now that Ethereum rollout has reached Stage-4, Serenity (Ethereum 2.0), the transition to PoS is irrevocably on its way.

But is PoS secure enough? Are we sacrificing security for speed?

=> I argue below that PoW is (without a doubt) more secure, but Ether is strong enough to be safe with PoS level of security

One thing that must be fully understood about all forms of money, (whether stable fiat like USD, unstable fiat like Bolivar, Proof-of-Work cryptocurrency like Bitcoin, Proof-of-Stake cryptocurrency like Atom or Metal currency like Gold), is that they all have value because we believe that they do. If tomorrow, the collective consciousness of 7 billion people believe that gold is useless then it will no longer carry value. The robustness of any currency is the robustness of our belief that the currency has value.

The USD was originally backed by physical gold. Once users began to trust in its value, the government was able to sneakily remove the gold standard. Today the USD is not backed by any physical asset.

To anyone who thinks that Bitcoin and Ether are scams because it can be created out of thin air, I’d argue that if governments can make money from nothing, give credit to Bitcoin and Ether that at least they require miners to compete and solve difficult problems to earn coins.

Bitcoin and Ether currently have perceived value because they’re backed by mining infrastructure and electricity whose value can be expressed in fiat currency terms, and we all agree that fiat currencies have value. Once, the world is convinced of Bitcoin and Ether’s value, it might be safe to remove the backing of physical mining infrastructure. This is the direction in which Ether is moving.

The incentive system: in PoS works like PoW, where it is in the interest of those entrusted with securing the system to not misbehave (verify wrong transactions, allow double spend, not be online 24/7 etc). Bad behaviour invites penalty in the form of stake being slashed. Also, all stakers are aware that behaviour that undermines the blockchain will lead to a drop in the value of the coins they have staked.

PoS does not help the rich getting richer any more that PoW does

There is a perception that PoS leads to the rich getting richer. In order to win block rewards and transaction fees, one needs to already own some ETH. Stake the ETH that you own. Win more ETH. If you don’t own ETH then you’re out of the race. PoW, on the other hand, isn’t as evil. You can earn bitcoins by using your ingenuity to solve math problems. So it doesn’t help the rich getting richer, except in the sense that the rich can afford better resources to educate themselves on math skills.

Well actually!!! This isn’t true. The math problems that PoW requires you to solve aren’t the kind that requires a creative/educated/insightful mind. It requires a robotic mind and hence is most efficiently solved by a robot. Or more specifically, a human who can afford expensive robots. So PoW is also a mechanism that helps the rich get richer. If fact, it is more so. In PoS, you can participate with a small number of coins, while in PoW, you need to find land in a location with cheap electricity, buy land, buy mining equipment and maintain the infrastructure. All this means that you need to be a lot richer to participate.

PoW is more secure, but once security is firmly established, it may be safe to move to PoS

The high cost of participation described above has the positive effect of making PoW more secure than PoS but Ether is unlikely to become mainstream if it can only confirm 15 transactions per second, if the network gets clogged by single DApps like Cryptokitties and if the cost of confirming transactions shoots up every time the network gets clogged. If we don’t move to PoS, Ether would risk becoming yet another asset class for hobbyists (like art or wine) instead of achieving the ambition of becoming a global decentralised supercomputer.

Ethereum was launched with a PoW consensus mechanism, and 5.5 years later the move to PoS has been initiated. During the PoW stage, it attracted committed stakeholders who invested in long term mining infrastructure and secured the system. Now that the currency has achieved a certain level of mainstream acceptance, it seems safe to move to PoS. Who knows! In the future, it might be safe to move from PoS to Delegated Proof-of-Stake (DPoS)

8 views0 comments

Recent Posts

See All

Why is it so hard to ban bitcoin?

It is in the interests of central banks, legacy traditional banks, politicians, and weapons manufacturers to ban bitcoin. With bitcoin: * Central banks will no longer be able to control the money supp


bottom of page