“The Merger”: What Ethereum’s Transition from Proof-of-Work to Proof-of-Stake Means for Cryptocurrencies

"The Merger": What Ethereum's Transition from Proof-of-Work to Proof-of-Stake Means for Cryptocurrencies

This is a major transition that the Ethereum platform must address starting on September 15. Nicknamed “the Fusion” (“the fusion”), and repeatedly postponed due to technical difficulties, consists of changing the platform and the associated cryptocurrency, ether, from a protocol based on proof of work (work test) to another based on proof of stake (proof of stake). A choice that comes after long debates and several years of research by Ethereum founder Vitalik Buterin and developer Vlad Zamfir, which may have serious implications for the industry.

The “proof of work”, the basis of bitcoin

Cryptocurrency networks like bitcoin are first and foremost digital ledgers, the activity of which is sealed by a “blockchain” (or block chain), which compiles network transactions. To ensure the validity of this registration and reliable operation, users must operate according to common rules.

It was in the white paper that introduced bitcoin in 2008 that Satoshi Nakamoto, the pseudonymous inventor of the cryptocurrency, popularized the notion of work test. Imagined by academics from Harvard and the Weizmann Institute in 1993, this computer protocol was once used to combat spam. The concept authorizes access and participation in a network through the execution of a task, and therefore the use of resources, in the same way that an Internet user is often forced to solve a “captcha”, a manual identification test for show that he is not a robot.

With bitcoin, the production of blocks that integrate transactions is carried out by “miners”, computers whose resources are dedicated to protecting the network. To produce a block and continue the continuity of the chain, it is necessary to perform calculations. The first miner to successfully complete the operation is rewarded with bitcoins. The more network participants there are, the more complex the calculations will be.

Therefore, the method is expensive in terms of energy. A desire of its creator to curb the ardor of malicious actors: compromising the integrity of the network actually implies spending phenomenal resources. In the case of bitcoin, the computing power required by the network is such that a maneuver of this type, according to estimates by the Crypto51 and GoBitcoin sites, would cost between 18.7 and 22 million euros a day in electricity costs, to which It is due to this we must add the cost of the hardware of the mining computers, estimated between 15 and 30 billion euros. A prohibitive cost in this case but much lower for other less used cryptocurrencies, such as Vertcoin, Ethereum Classic or Bitcoin Gold, corruptible for sums sometimes less than ten thousand euros.

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A protocol criticized for its environmental impact

In short, with proof of work, the security of a blockchain is correlated to the amount of energy resources deployed. With an annual consumption of 86.6 terawatt hours (TWh) according to the University of Cambridge, the bitcoin network is between Belgium (81.2 TWh/year) and the Philippines (90.9 TWh/year) or similar consumption “to that of a big city, like Los Angeles”as former miner Marc Bevand preferred to qualify with the World, in June 2021.

A legitimate waste of energy, for supporters of bitcoin, its inventor evokes a model in the white paper “analogous to gold prospectors spending resources to add gold to circulation”. Jack Dorsey, founder of Twitter and electronic payments startup Block, and Tesla executive Elon Musk so consider that “Bitcoin promotes renewable energies”. On the contrary, others, such as Greenpeace, rightly vilify the exorbitant energy cost of this model in favor of proof of stakeproof of participation.

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“Proof-of-stake”, a less energy-intensive alternative…

Unlike the proof of work, this consensus method that appeared in 2012 with the Peercoin cryptocurrency does not require the execution of a task to participate in the network but to prove the possession of the cryptocurrency in question. To do this, it is necessary to hijack part or all of your capital to be able to participate in the validation of transactions and the creation of blocks. With this consensus, potential criminals are this time sanctioned with the loss of their capital. The trusteeship, therefore, theoretically ensures that good behavior is guaranteed.

To compensate for the temporary unavailability of funds, users are rewarded by receiving the coin created simultaneously with the new block. Here, the proof of stake is reminiscent of a French bank book: the more funds are locked and the longer they are, the greater the reward in the form of interest.

For most cryptocurrencies that use “proof-of-work” consensus, the material cost of participating in the network is limited to owning a simple computer, or even a mobile phone, which is a paltry sum compared to the cost of machines dedicated to bitcoin mining. (between 2,000 and 10,000 euros on average). On the other hand, if the first euro is spent, the detainer of the type of monnaie peut en théorie hopes to receive a remuneration, with the protocol favoring the plus gros portefeuilles: plus the capital is great, plus the chance to receive the reward. also.

… But a potentially more centralized model

In the case of Ethereum, the code requires the escrow of 32 ethers to participate in block validation. Given the current price of an ether (1,578 euros), Ethereum will request a security deposit of approximately 50,000 euros.

A cost criticized by supporters of the proof-of-work mechanism, who believe that the proof-of-stake system goes against the idea of ​​a fairly distributed peer-to-peer network. “Proof of stake consumes much less power than proof of work, but the flip side is that it creates much more centralization”, criticized Pierre Rochard, an economist at the American cryptocurrency trading platform Kraken. A criticism dismissed by Vitalik Buterin who, in an article published in May on the technology site Hackernoon, estimated that “The minimum necessary to go into receivership is relatively low and attainable for most people.”

There remains the question of possible errors caused by the transition from one protocol to another. In May, in the case of Ethereum, the test blockchain that was intended to merge with the current version experienced a form failure. a rearrangement of its history. And more recently, in August, a flaw was detected in the main client that uses the protocol. Real setbacks for a technology that is supposed to guarantee the immutability of your registry.

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