If you are into crypto on any significant level either as an investor or as a user then you have heard of Ethereum’s decision to change its consensus mechanism from proof of work to proof of stake.
The consensus mechanism is the technique used to achieve agreement on data added to the blockchain. Also, consensus mechanism assist in avoiding what is called the “double spend” problem. Double spend is when an individual’s spending of a cryptocurrency occurs more than once which in turn creates a disparity between the spending record and the amount of that cryptocurrency available.
Cash doesn’t have a double spend risk because if you pay for a purse with a $100 bill, turning that bill over to the seller of the purse, you cannot then turn around and spend that same $100 bill with another vendor. When money is no longer tangible but becomes “energy in use,” double spending that same energy digitally is a risk, and using consensus mechanism is a way to prevent that risk.
Transactions that occur using digital currency like bitcoin (BTC) or ethereum (ETH) occurs digitally. And this creates a risk that details of a transaction can be copied and rebroadcasted in a way that allows the same BTC or ETH to be spent multiple times by a single owner.
The most popular consensus mechanism to date is the proof of work method. Currently the Ethereum and Bitcoin blockchains use the consensus mechanism “proof of work” to add transactions to the blockchain.
Proof of work basically is the use of miners to race to solve complex cryptographic puzzles. The miner that solves the mathematical problem first gets the opportunity to validate or add the transaction to the blockchain and in turn get rewarded with crypto in return. Miners of ETH receive 2 ETH as the prize. (Based on ETH’s value today that would equate to about $6530 per transaction solved) Miners of BTC receive BTC as the prize.
Miners are not like coal miners chopping away somewhere in a cave. Miners are computers and miners use processing power or hash power to solve computer math problems. The more hash power (i.e. processing power), the better chance the miner has in solving the problem and winning the prize.
Although proof of work is the consensus mechanism most people have heard about, there are other cryptocurrencies that don’t rely on so much computer power. These include proof of stake, proof of capacity, proof of activity, proof of burn, and proof of elapsed time.
Ethereum is merging its current blockchain that uses consensus mechanism of proof of work to its new blockchain that will use the consensus mechanism of proof of stake.
Some have described this Ethereum move from proof of work to proof of stake to replacing an engine of a plane while flying.
Using proof of stake as the consensus mechanism eliminates the competition that incentivizes miners to run their computers for long periods of time to solve the math problems for the prize.
Could Ethereum’s merge to proof of stake spell the end of crytpo mining?
Under the proof of stake model, crytpo owners who hold a certain amount of ether on deposit can become a “validator.” The validator replaces the “energy-hungry machines.” By switching to this model, Ethereum according to some conservationist will be using 99% less energy.
A validator stakes his or her ETH for a chance to validate and arrange other people’s transactions on the Ethereum blockchain and in return get the prize. Staking on the Ethereum network is like giving ETH you already own as security for participating in the running of the blockchain and maintaining security. When you stake your ETH, you also earn interest on the staked ETH.
To be a validator on the Ethereum proof of stake blockchain, you have to stake your own ETH and the more you stake, the more likely you are to be chosen as a validator. Because the validators are staking their own crytpo, this assumes they will be incentivized to better perform their jobs. If the validator doesn’t do a good job, the interest earned on their staked ETH dips.
Also, Ethereum will reduce the number of coins issued, which creates more scarcity for the virtual currency. This could help ETH like BTC become a good inflationary hedge investment.
Keeping the blockchain secure and reliable is key if the crypto believers want to create massive network adoption and institutional investor adoption.
Mark Cuban told Fortune that he’s “very bullish” on the Ethereum merge.
The merge is coming, but the date and time is unknown. The merge will come “when it’s ready.”
ABOUT THE BLOGGER
La Shon Y. Fleming Bruce a/k/a SHONSPEAKS is a blogger, speaker, certified brain health specialist, and lead creator of freeyourthinkingmind.com. I am also a lawyer and managing member of The Fleming-Bruce Law Firm, P.L.L.C. If you want to check out more of my writings that may not be released on this site, go over to my website at freeyourthinkingmind.com
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