This is it, we are there !
After years of development, Ethereum, the second largest blockchain on the planet, is about to change its consensus algorithm from Proof-of-Work to Proof-of-Stake.
This change, dubbed "The Merge", is a historic event in two ways :
No blockchain (at least of this size) has ever changed its consensus algorithm. Ethereum has not seen such a radical change since its inception in 2015. The Merge, which is expected to take place around 14 September, is highly anticipated because it will allow Ethereum to significantly reduce its carbon footprint.
How ? By switching to Proof-of-Stake, which does not require cryptos to be mined (we explain everything below). Instead of miners, there will be validators whose activity is much less energy consuming.
However, the switch to PoS is not without questions, especially on security and decentralization... To help you understand everything about Merge and its potential consequences, we have prepared a special report.
1/ What is Proof-of-Stake ? There are two main consensus algorithms for cryptocurrencies today. There is the Proof-of-Work (PoW) and the Proof-of-Stake (PoS).
Used by Bitcoin, and Ethereum for a few more days, PoW is based on a fairly simple system: mining. To produce a block and record transactions on the blockchain, miners, who use computers, will perform complex calculations and be rewarded in bitcoins according to the power they make available to the network (energy is the proof that they are working). The more participants in the network, the more complex the calculations, and the more energy is needed!
Proof-of-Stake works differently and uses much less energy as there is no need to "mine". To participate in the network, you have to "validate" the blocks by proving that you have the network's cryptocurrency. In this case ether.
In order to guarantee the security of the network, the validators must "stake", i.e. immobilise cryptos. Those who try to cheat lose their immobilised capital. Those who play the game and secure the network are rewarded with newly created cryptos.
2/ Why didn't Ethereum opt for Proof-of-Stake from the start ? Ethereum was conceived in 2014 and launched in 2015. At the time, there was only one other major cryptocurrency, bitcoin, and it worked with Proof-of-Work. So it was a no-brainer for Ethereum's designers to build on an already proven technology.
"In the beginning, there was a lack of insight into Proof-of-Stake consensus. The first ones, like Tendermint and Tezos, had barely been documented, so it was complicated to start with this consensus," says Jérôme de Tychey, president of the Ethereum France association and organiser of the EthCC, one of the largest global events in the ecosystem.
But from the start, Vitalik Buterin and the Ethereum team had explained that the PoW was just a step before the transition to the PoS. "It was obvious that the Proof-of-Work would one day be discarded because of its energy consumption," adds Jérôme de Tychey. And that day has now arrived.
3/ To what can we attribute the repeated delays of The Merge ? According to the initial roadmap, the switch to Proof-of-Stake was supposed to take place in 2017, i.e… five years ago! What happened to explain such a delay? Quite simply because making such an upgrade is anything but simple. "Designing a good proof of stake is a real challenge," explains Jérôme de Tychey. "Not all proofs are equal and we had to guarantee the decentralisation of Ethereum in the long term," he adds.
Due to a lack of consensus among Ethereum developers, the Merge has been postponed several times. The paradox is that many "competitors", less energy intensive like Tron, BNB Chain, Avalanche, Solana and others have taken advantage of this to launch and take a share of the market.
According to analytics site DeFi Llama, Ethereum and its ecosystem account for 64% of decentralised finance activity; by early 2021, it was 97% 🤔.
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