From Proof of Work to Proof of Stake

After many months of waiting, the launch of the new Ethereum update, simply called 2.0 or Serenity, began on December 1st thanks to the deployment of the Beacon chain. This event marks the start of phase 0, which aims to set up the basic infrastructure for this future version of Ethereum.

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The challenges of Ethereum 2.0

This news had been enthusiastically received by Ethereum supporters. Indeed, the year 2020 had been marked by an unprecedented enthusiasm around DeFi: the total value locked in the sector (TVL, Total Value Locked) was estimated at around 13 billion dollars at the end of December.

This boom is unfortunately accompanied by major inconveniences for users, including network congestion and rising transaction fees. Fees peaked in September with an average amount of $12.

The complications caused by this increase remind many of the “Cryptokitties” phenomenon which had already demonstrated the scalability problems of the blockchain. Ethereum 2.0 is supposed to improve the speed and efficiency of the network to process more transactions, with an estimate of 100,000 transactions per second, according to Vitalik Buterin.

It also comes with a major change in its consensus mechanism: from Proof-of-Work (PoW) to Proof-of-Stake (PoS).

The Choice of Consensus: Proof of Work vs Proof of Stake

These two processes are the most used to mine a cryptocurrency. In more precise terms, they are consensus algorithms to solve the problem of trust between the participants of the blockchain. PoS relies on the deposit of a certain amount of tokens to allow a user to access validator status: for Ethereum, a validator must have 32 tokens. The launch of phase 0 was conditional on reaching a minimum number of validators of 16,384, a quota reached a few hours before the launch of the “Beacon chain”.

The main advantage of PoS is its ecological argument, thanks to the reduction of the energy cost necessary for the creation of new tokens. However, this mechanism has drawbacks: the most notable is that it is less secure than PoW. A PoS blockchain is particularly vulnerable to “Nothing at stake” which becomes possible when the blockchain splits into two branches. A forger (the equivalent of a miner on PoS blockchains) can indeed validate two concurrent versions of the chain to maximize his gains, which is impossible on a PoW blockchain. The Ethereum team is working on a penalty model that would penalize validators looking to take advantage of this situation. Another disadvantage is at the level of decentralization: the concentration of a large percentage of tokens in circulation in the hands of one or more players is possible, and the wealthiest then have significant power.

PoW remains for many the most robust model since it has been working without major hitches for almost 10 years. That of PoS has yet to prove itself.

What to expect from Ethereum in 2021

According to information available on the Ethereum site, the completion of the final phase of Ethereum 2.0 could still take a few years: shard chains should arrive during 2021, depending on how quickly work progresses after the launch of the Beacon Chain. The founder of ConsenSys, Joseph Lubin, is more confident and said during an Ethereum conference on December 3, 2020:

People familiar with the ecosystem are very optimistic about how quickly the project could evolve, as the most complex task was accomplished during the launch of phase 0.

But by then, other blockchains might be able to supplant Ethereum. There is for example Polkadot, described in a Bloomberg article as an “Ethereum killer”.

We can also mention Cardano: the Quantstamp company predicted that Cardano could become the second smart contracts platform in the crypto ecosystem.

There is also Solana, the blockchain on which Sam Bankman Fried of FTX chose to build his DeFi project, Serum.

This delay worries some users for whom scaling solutions should be implemented as soon as possible. According to them, too long a delay could call into question the long-term viability of Ethereum. But Vitalik Buterin believes that scalability solutions already exist thanks to second layer “layer 2” technologies which, essentially, keep transaction data on-chain and shift the computational load to a parallel chain. For him, it is necessary to democratize the use of these solutions until the implementation of “sharding”.

After following a “bullrun” similar to Bitcoin at the start of the year which brought it closer to its ATH, the price of Ether has just recorded a sharp decline. At the same time, the cost of gas has reached new heights, with an average of 10 dollars on January 4th. Despite its weaknesses, Ethereum continues to be the go-to platform for DeFi and smart contracts: it benefits from a well-established reputation and a large community that make Ether a relatively safe bet in the cryptocurrency world. His progress for this year remains to be watched.

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