Many questions have followed the announcement that Ethereum will be changing from the traditional blockchain Proof of Work (PoW) verification method to Proof of Stake (PoS). Will the change affect Ethereum price on cryptocurrency exchanges? Will Ethereum’s change significantly alter how people engage in cryptocurrency trading and mining?
At Aus Merchant, we seek to help each crypto trader stay on top of major developments in cryptocurrency and blockchain technology. On top of teaching people how to buy, sell, and manage their crypto investments, we also make it a point to give in-depth explanations of the system’s more technical matters, like the upcoming changes to Ethereum. We believe education like this makes traders all the more successful.
Below you’ll find an explanation of the Proof of Stake model and how it differs from the current Proof of Work model. We’ll also explain why Ethereum is making this significant change and how it could affect traders and the future of cryptocurrency itself. No matter how much you invest, this change is going to make waves.
What is Proof of Stake?
Before we can explain Proof of Stake, we need to look at Bitcoin’s structure. Since most cryptocurrencies model themselves partly on Bitcoins infrastructure, it has become the standard for other coins. Specifically, they mimic the Proof of Work concept.
Every Bitcoin transaction gets saved to the public-shared ledger called the blockchain. When a transaction occurs, it must be verified using cryptography, wherein users pool together their computing power to solve complex and unique math problems before it gets added to and documented in the blockchain. Thus the authentication process can prevent the same action from being processed twice (intentionally or accidentally), among other security features. It also prevents the need to use a third-party service, like a bank, to perform transactions.
While multiple users may be working to authenticate a block, only the one who solved the equation receives compensation in a coin. Because the problems used to verify a block become more complicated as blocks get solved, users require more powerful mining machines to mine new coins. A lot of electricity gets used, even by those who ultimately don’t successfully verify a block.
Proof of Stake takes a different approach. Every user who wants to verify a block must deposit a set amount of coins (or more) into a wallet before contributing. Once the block is verified, everyone who contributed gets a percentage of new coins based on what they initially staked.
Why is Ethereum Moving to Proof of Stake?
Scalability has proven to be a significant issue with cryptocurrency, with many of the problems pointing back at the Proof of Work model. Due to the verification process, a single transaction can take up to 10 minutes and can only handle seven transactions a second, putting it far below the standards of major payment processors. As a result, transaction fees have steadily increased.
Of significant concern, however, is the environmental impact more popular coins are having. Incredible amounts of energy are needed to keep the network running, creating an estimated thirty-four megatons of carbon emissions. The total electricity used has been compared to small countries like Sweden and Argentina.
The calculations needed to solve a block under Proof of Stake aren’t as complex because they don’t need to be under this more carbon efficient algorithm. As a result, energy consumption goes down as there is no incentive to use a powerful computer, rather the incentive is in the size of your stake i.e your capital contribution. Because everyone involved is rewarded based on their stake, no single miner under Proof of Stake has an advantage over others.
Proof of Stake also solves a security issue present with Proof of Work called a 51% attack. In this scenario, one entity controls more than half the computing power used to solve a block. When this happens, the entity can alter the block for personal gain.
How Will This Impact Traders?
Those looking to mine or buy Ethereum should find the Proof of Stake system fairer and more environmentally friendly all around compared to Proof of Work. At the ground level of mining, it will require a smaller investment to get involved.
While this changeover date hasn’t been made official, traders are optimistic about what Ethereum’s changes could mean for cryptocurrency. As the second highest valued coin (behind only Bitcoin), Ethereum is seen as a leader in the cryptocurrency space. If the changes it makes set an example, it could create a knock-on effect in crypto trading by making the space more environmentally friendly, user-friendly, and profitable.
Trade Ethereum with Aus Merchant
The change to Proof of Stake is big news for users actively mining Ethereum, but mining isn’t for everyone. Can someone who wants to invest in cryptocurrencies still get involved in this exciting market?
Aus Merchant is a digital currency provider for investors and businesses. Our brokers help you navigate the often complicated and sometimes confusing landscape of digital currency. Whether you want to buy, sell, trade, hold, earn, spend or receive digital assets, Aus Merchant is here to help you realise your goal.
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