Bitcoin‘s price has fell by roughly half since its ultimate. Additionalabstract projects, for exampleDogecoin, have seen their prices plummet even more. While this might be disheartening to day traders and those searching for quick profits, there are exciting developments in cryptocurrency for long-term investors.
For one thing, the industry continues to push for more exchange-listed funds and trusts. A key debate in a technical area is whether proof-of-stake protocols are the future of cryptocurrencies.
The debate over proof-of-work vs. proof-of-stake boils down to one question: how to ensure a cryptocurrency‘s integrity.A proof-of-work mechanism is used by the majority of legacy cryptocurrencies, for example Bitcoin. A proof-of-work operation is when you see a picture of a mining facility with thousands of computers. Complicated algorithmic puzzles are solved by computers. Miners are rewarded with tokens of the underlying cryptocurrency in exchange for their efforts.
What Is Proof-of-Stake?
Proof-of-stake, on the other hand, relies on validators to keep the cryptocurrency running. Owners of tokens put up their tokens as collateral in a proof-of-stake model. In exchange, they gain control over the token in proportion to their stake. Token stakers typically gain extra ownership in the token over time as a result of network fees, minted tokensnewly, or other reward mechanisms.
Proof-of-work was appealing at first because it required only a standard computer to mine coins. To mine the most popular proof-of-work tokens nowadays, however, specialised expensive equipment is required. Many mining operations are now carried out by large, well-funded pools, effectively removing the general public from the equation.
The former may be more democratic in the debate between proof-of-stake and proof-of-work. Anyone with tokens can participate in the decentralised finance (DeFi) ecosystem as a validator or staker. Analysts have focused on the environmental impact of proof-of-work protocols in general.Bitcoin, in particular, has left a significant environmental footprint as it has grown in popularity. Proof-of-stake drastically reduces this environmental cost by eliminating advanced cryptographic puzzles.
Proof-of-stake opponents argue that it departs from the original vision of cryptocurrency.Because the database or blockchain record was inherently valuable, Bitcoin stood out from other financial assets. While inefficient in terms of energy, the mining process created a unique and tamper-resistant record of entire financial transactions. Proof-of-stake has some flaws, at least in its most basic forms.
The “nothing at stake” problem, for example, is based on the fact that when there is no cost to creating forks or introducing incorrect information into the consensus, malicious behaviour is encouraged. The energy cost of proof-of-work limits manipulation by default; proof-of-stake, on the other hand, requires more sophisticated methods to address these security concerns.
The debate over proof-of-stake vs. proof-of-work has largely remained technical. Cardano is a notable leader in proof-of-stake, but the most important projects have remained proof-of-work. However, Ethereum’s plans to switch from proof-of-work to proof-of-stake has brought this issue to the forefront.Ethereum’s foray began in earnest in 2020, when the proof-of-stake Beacon Chain was launched. Phase 1 is expected to launch later in 2021, with the full transition to proof-of-stake for Ethereum taking place over the next year.
It’s Difficult Switching to Proof-of-Stake
So, given the advantages of proof-of-stake, why has it taken Ethereum so long to switch? “The trouble of migrating the main smart contract network Ethereum from proof-of-work to proof-of-stake has undoubtedly been the main impediment to faster adoption of proof-of-stake,” states head of product at the Telos Foundation, Justin Giudici.”Changing Ethereum’s consensus mechanism has been compared to “fixing a plane while it’s in the air.” This is because the migration challenge is significant, with thousands of existing smart contracts on the Ethereum chain and billions of dollars in assets at stake.”
To put the challenge in context, consider the following numbers. “Ethereum’s ability to change and thus scale has far outpaced its development.” When you consider the DeFi phenomenon, which has seen an industry grow from zero to $76 billion in the last year, it’s easy to see why. Non-fungible tokens then took off in the first two quarters of 2021, bringing in $2.5 billion.According to the CEO of Rublix Development, David Waslen, a blockchain and smart contract software company, “Building on the Ethereum Network has been fashionable at avolatile rate, while the switch from proof-of-work to proof-of-stake is a long, arduous process.”
In a vacuum, switching from one technology to another is simple.However, given the widespread adoption of Ethereum’s decentralised finance system, it’s critical to maintain network stability. “Before the merge, there could be unforeseenserious bugs or circumstances that are difficult to predict. This is a compelling reason to avoid hastening the transition “The Golem Network’s community manager, Mattias Nystrom, says
“The timeline of Ethereum can be seen as a result of its strength: decentralisation.” It’s a large-scale project with many stakeholders, and it’s also censorship-resistant and permissionless in social terms. This means that anyone can join the project and contribute to network changes.For things to move forward, you’ll need consensus among the coders and the broader community,” Nystrom says.
Proof-of-Stake and Transaction Expenses
Another factor is the recent drop in cryptocurrency prices, which has resulted in a significant increase in the amount of mining power dedicated to proof-of-work protocols. The mining network is supported by transaction fees on Bitcoin, Ethereum, and other leading proof-of-work projects.Transaction fees have decreased as the value of crypto has decreased. However, even if the average transaction fee is reduced from $25 to $5, this can still represent a significant reduction in smaller decentralised finance transactions.
“Languishing on slower, additionalluxurious consensus technology has a huge impact on innovation.””The switch from proof-of-work to proof-of-stake and other high-speed consensus models is analogous to the switch from dial-up to broadband internet,” Giudici says.”Quite simply, as entrepreneurs release products that couldn’t be imagined even using gentler, more inadequate technology, the number and types of use cases, level of adoption, and impact of the technology increase by orders of magnitude.”
Over the next year, Ethereum is expected to implement proof-of-stake. However, similar to the transition from dial-up to the broadband, do not be astonished if proof-of-stake takes some time.”Although the transition from proof-of-work to proof-of-stake will begin in 2021, the final outcome will be years away. VitalikButerin, the founder of Ethereum, has even suggested that after the scheduled hard forks and eventual chain merge, there will be an extended period of ‘cleanup’ before Ethereum platform issues like scalability, charges, and overcrowding can be bellicosely addressed,” Waslen says.