In just a few weeks, Ethereum is scheduled to undergo the most significant change in its seven-year history. Until now, the Ethereum blockchain has been secured using a method called “proof of work,” which consumes more electricity than the entire nation of Belgium. Next month’s switch to a new method called “proof of stake” is expected to reduce Ethereum’s power consumption by a factor of 1,000.
The stakes are high. A failed transition could spell chaos for the many crypto projects built on top of Ethereum. A smooth transition would be the culmination of years of careful planning by Ethereum’s core developers. Over the past year, the developers have repeatedly pushed back the date of “the merger” to give themselves more time to prepare. They completed a final dress rehearsal on August 10, clearing the way to make the switch in mid-September.
The most immediate consequence of a successful merger will be to put the world’s Ethereum miners out of work. In the last seven years, thousands of people have bought high-end graphics cards to help maintain the Ethereum blockchain and earn newly created ether in the process. The new system for upgrading the Ethereum blockchain doesn’t require the same kind of robust hardware, nor the huge electricity bill that comes with it. So the price of used graphics cards could keep falling as Ethereum miners exit the industry.
But the move to proof-of-stake is much more than just a power-saving measure – it’s a major overhaul of the Ethereum network. Ethereum founder Vitalik Buterin believes that the merger will lay the groundwork for a series of future upgrades that will allow the network to handle a much higher volume of transactions for years to come. But critics worry that the new scheme could make the Ethereum network too centralized and therefore vulnerable to government regulation.
From Proof of Work to Proof of Stake
At a high level of abstraction, this is how any blockchain works: someone on the network proposes a block that contains a list of recent transactions. Then other network participants verify that the block follows the network rules. If a sufficient number of other network participants accept the block, it becomes the next “official” block in the chain. As long as the majority of network participants are honest, users can trust that transactions accepted by the majority of the network will not be deleted or changed later.
The big challenge for any blockchain project is to prevent a malicious party from creating many puppet accounts to “stuff the polls”, outvote honest participants, and thus manipulate past transactions. The great idea of Bitcoin’s pseudonymous founder Satoshi Nakamoto, the one that made Bitcoin possible, was that this problem could be solved using the “one hash, one vote” principle. On the bitcoin network, whoever has the most computing power, specifically, the ability to compute SHA-256 hashes— has the most influence over which blocks are added to the blockchain. As long as honest miners have more hash power than malicious miners, users can trust the integrity of the blockchain and thus the integrity of payments made through the bitcoin network. (Look at our bitcoin detailed explanation for details on how this works).
When Vitalik Buterin launched Ethereum in 2015, he used a variant of the Nakamoto scheme. At that time, bitcoin mining was already dominated by specialized silicon optimized to calculate large amounts of SHA-256 hashes, which excludes ordinary bitcoiners from the mining game. Then Buterin developed a new mining algorithm designed to be “memory hard” and therefore difficult to speed up with custom hardware. As a result, Ethereum mining is still largely done with standard graphics cards, allowing common Ethereum users to participate.
But the economics of the two networks are fundamentally similar. As the values of bitcoin and ether increased, it became profitable for people to spend more and more money on mining hardware and electricity to generate new coins. While this has made the networks more secure, it has also meant that both networks consume astronomical amounts of electricity and thus create more and more carbon emissions.
The bitcoin and Ethereum communities have responded to this problem very differently. Satoshi Nakamoto disappeared from public view in 2011. In his absence, bitcoin culture has become increasingly conservative. many bitcoiners strongly oppose changing the bitcoin mining system, fearing that the changes could open the door to centralization and ultimate government control. As a result, bitcoin is unlikely to move away from proof-of-work for the foreseeable future.