Ethereum has announced that, provisionally, by the end of 2021, its consensus mechanism will change from Proof of Work (PoW) to Proof of Stake (PoS). This has been the recent trend given the advantages in terms of output that PoS has over the former.
Definition
Proof of Stake is a consensus mechanism that originates as an alternative to Proof of Work. It aims to eradicate the vulnerability to the 51% attack that POW has to face.
The Proof of Stake mechanism
Proof of Stake determines a miner’s ‘mining power’ based on the number of coins they possess. There is a direct correlation between the number of coins held and the amount of mining power a person has.
Instead of having a computer to solve mathematical puzzles – in which everyone has the same power, ability, and chance, the PoS consensus mechanism gives more power to high coin holders as there is a higher opportunity cost involved in them trying to hijack the system.
Competitive features
Higher energy efficiency
Of course, PoS still uses a decent amount of energy, however relative to PoW, it is a much greener option. Ethereum predicts that by making a switch to PoS, it will use ~99.95% less energy. This significant amount comes from the fact that PoS does not have a huge amount of computers to solve arbitrary puzzles. The only significant energy usages will be between sending information to and fro.
Higher energy efficiency also means cheaper costs in general. This gives crypto companies more budget to allocate to improving the quality of their products and services. Most crypto companies see this as a superior advantage over the PoW method. We can feel this sentiment as all new coins are now being established around a PoS consensus method.
Increased security
This should be taken with a pinch of salt. Yes, it is safer in the sense that by giving miners ‘power’ depending on their coin holdings, it protects itself from 51% attack. However, this method depends on the psychology that humans are unlikely willing to risk losing what they have to earn a little bit more when they already have a lot.
There will be exceptions to this rule, and we will find out if it is truly safer than PoW.
Potential weaknesses
High initial capital requirement
To have more mining power, the miner needs to have a high amount of coin holdings. This risks the system being too centralized, and the rich get richer whilst the poor stay poor.
Final thoughts
With a market cap of more than $200 billion, PoS is slowly staking its claim as the best consensus method. PoW, at the moment, has a market cap of over $1 billion. However, if we do not consider Bitcoin PoW, and PoS are virtually equal in terms of market cap.
Although a Bitcoin transition is unlikely, Ethereum’s move will definitely be one to watch as its successes (or lack of) will indicate which consensus method will dominate the market in the next few years.
