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The price of Bitcoin fell by about 50% ever since it reached its all-time high. Other speculative projects, like Dogecoin, even fell further. Although this may discourage day traders and fast money seekers, long-term investors will enjoy the exciting developments in the cryptocurrency market.
Ensuring the integrity of a cryptocurrency is very important. Most cryptocurrencies, like Bitcoin, use a proof-of-work mechanism. A proof-of-work operation can be likened to an image of thousands of computers in a mining facility. The computers provide the solution to complex algorithmic problems while the miners are rewarded with tokens of the underlying cryptocurrency.
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What is Proof-Of-Stake?
Proof-of-stake depends on validators to maintain the cryptocurrency. A proof-of-stake model involves owners putting up their tokens as collateral. They then get authority over the token based on the number of tokens they stake. The token stakers usually get additional ownership in the token as time goes on through network fees, newly minted tokens, or other mechanisms of rewards.
The proof-of-work vs. proof-of-stake debate has remained in the technical realm. Cardano is a notable leader in proof-of-stake, but the largest projects have used proof-of-work.
However, this subject is now in the spotlight following Ethereum’s plan to move from proof-of-work to proof-of-stake. Ethereum launched its proof-of-stake Beacon Chain in 2020 and that marked the beginning of the cryptocurrency’s move.
The development is still going on as Phase 1 aims to launch later in 2021 while the full migration into proof-of-stake will happen next year.
Why is Ethereum Migrating To Proof-Of-Stake?
There have been lots of proof-of-stake vs. proof-of-work debates. Anyone that has tokens can participate as a validator or staker and get involved in the decentralized finance (DeFi) ecosystem.
Analysts have been paying attention to the environmental impact of proof-of-work protocols. Bitcoin has had a large environmental impact due to its wider adoption. Since proof-of-stake gets rid of the advanced cryptographic puzzles, it helps in drastically reducing the environmental impact.
Proof-of-work supporters argue that proof-of-stake does not align with the original vision of cryptocurrency. Bitcoin set itself apart from other financial assets due to the inherent value that the blockchain record has. Although the mining process is energy inefficient, it created a tamper-proof record of financial transactions. Proof-of-stake, on the other hand, is vulnerable in some areas.
The energy cost required by proof-of-work limits malicious behaviors. Proof-of-stake needs to use sophisticated methods to prevent manipulation and security threats.
It is Difficult to Migrate to Proof-Of-Stake
So, considering how important proof-of-stake is, why does Ethereum have to wait till now before adopting it?
The main reason is due to the difficulty in migrating Ethereum from proof-of-work to proof-of-stake. Due to the thousands of smart contracts on the Ethereum chain, coupled with assets (worth billions of dollars) that are at stake, the challenge is significant.
One can easily migrate from one technology to another in a vacuum. However, due to the wide adoption of Ethereum, it is important to keep the network stable. Since critical unexpected circumstances can occur before the merge takes place, it is important not to rush the transition.
