The date of Ethereum migration to PoS algorithm has been set
Ethereum is the second largest cryptocurrency by market capitalization after Bitcoin and is currently running on a Proof-of-Work (PoW or Proof-of-Work) consensus protocol, the same as Bitcoin, and plans to switch to Proof-of-Stake (PoS, proof of ownership).
PoW is a power-intensive means of verification that allows Ethereum’s decentralized network to produce and authenticate complex mathematical transactions, which are then added as blocks to the Ethereum blockchain. Miners compete against each other by solving these mathematical problems to create a new block. Miners who successfully create a new block are rewarded for creating new Ethereum coins (ETH).
Because of the competitive process where everyone is trying to be the first miner to confirm a transaction and get new ETH coins, huge computing power is used to win this competition. The Ethereum Foundation believes that in order to secure and decentralize the Ethereum network, the proof-of-work algorithm uses the energy equivalent of a medium-sized country such as Austria every year. Therefore, Ethereum developers are working on converting the blockchain to the PoS algorithm.
Proof-of-stake works to achieve the same goal as proof-of-work – a secure decentralized network – but with a different process. Instead of miners competing to create new blocks, validators are chosen to solve these puzzles. Validators put their own Ethereum coins (ETH) to compete in solving new puzzles, and are chosen at random by an algorithm.
Ethereum validators need to have 32 ETH or be part of a pool that has 32 ETH to be part of the validation process. Validators can lose some or all of their share if they fail to validate transactions or if they engage in abusive behavior that could damage the blockchain. Because of the random nature of choosing who validates a block, the processing power required to run PoS consensus is only a fraction of the comparable competitive PoW consensus.
When will the update to Ethereum 2.0 be released
According to the Ethereum Foundation, moving to PoS has always been a key part of the community’s strategy to scale Ethereum through upgrades. However, setting up PoS correctly is a big technical challenge, and it is not as easy as using PoW to achieve network consensus. For now, the Beacon Chain update (stacking allowed) is up and running, the merge (PoW and PoS) is expected later this year, and Shard Chains (Ethereum transaction and data capacity expansion) will be rolled out in 2023.
According to the Ethereum Developer Portal, they are constantly facing various technical challenges and problems that they are solving. They tentatively plan that Ethereum’s transition to Proof-of-Stake will happen on September 19-25 this year. But for this to happen, the transition in the Goerli test network, scheduled for August 11, must be successful. Earlier in June, the Ropsten test network was switched to PoS.
Why the PoS Consensus Matters for Traders
One of the main complaints about Bitcoin and Etherium is that the PoW model uses enormous amounts of electricity to verify transactions. Various models predict that Etherium consumes more electricity than Italy, Saudi Arabia, or Mexico per year, while other estimates show that one transaction of Etherium can power a U.S. household for six days.
This energy consumption has been one of the main targets for regulators over the past few years as they try to deal with both the climate and energy crises. A leaner, greener Ethereum will be better prepared for the future and any upcoming regulation because PoS uses 99% less energy than the current PoW model.
In addition, the current Ethereum model is expensive to use because of its gas fees – the fees to perform a function in the Ethereum blockchain are a serious problem for users. This applies to traders who will look for other networks that can perform the same functions at a lower cost. One of the main advantages of Ethereum’s new PoS model is the speed of transactions.
Ethereum transactions are currently slow – thought to be around 30 transactions per second – while the new PoS model is expected to eventually be able to process up to 100,000 transactions per second, mostly because of Shard chains. Lower fees and higher transaction speeds make Ethereum’s PoS model much more attractive to traders.
Ethereum vs Bitcoin
Ethereum has outperformed Bitcoin in some metrics over the past two years, but still lags behind its peer in terms of market capitalization. This superiority is partly due to Ethereum’s plan to move to Proof-of-Stake and the fact that it allows a wide range of other companies to develop on its blockchain. With Ethereum’s full upgrade expected in 2023, this superiority could continue in the coming months.
The weekly Ethereum/Bitcoin spread chart shows a multi-month outperformance of Ethereum and a bullish technical mood, a “cup-and-handle” figure that is clearly visible. This technical pattern suggests that Ethereum will outperform Bitcoin, returning the ETH/BTC spread to multi-year high levels.