Proof of Work will soon be history for ETH, the network is on the home straight to the merge – the conversion of the consensus process to Proof of Stake. The long-awaited upgrade is expected to take place on September 15th. We clarify the five most important questions for you in advance.
1. Will the merge affect ETH power consumption?
Proof of Work consumes a lot of electricity, that’s an open secret. The “proof of work” in mining comes in the form of computing power – whoever contributes more increases the chances of processing a block and thus being able to collect the revenue.
A hard-fought competition: With the price increases on the crypto market, mining has become more and more lucrative, the network computing power – known as hash rate – for blockchains such as BTC and ETH has increased dramatically over the past few years. Consume both networks together according to Digiconomist currently as much electricity as Australia.
With the merge, mining at ETH also ends. Instead of miners, validators will secure the network with ether deposits in the future. This results in significantly improved energy efficiency, consumption is reduced by an estimated 99.95 percent.
2. Does scalability increase?
This is also no secret: ETH has a scaling problem. With a throughput of around 15 transactions per second, ETH’s performance is well below the requirements of being the largest smart contract platform. The deficit appears whenever transaction requests skyrocket, and with them transaction costs.
The bad news: the change of consensus itself does not change anything at first. The good news: the merge paves the way for subsequent scaling solutions.
After the upgrade, the focus in ETH development is on the integration of so-called Layer 2 solutions – sidechains that outsource the processing of transactions and transfer them to ETH in bundles. The network should be able to process thousands of transactions instead of 15 in the future. Full solutions are expected for the coming year.
3. How will investors benefit from the changeover?
The most obvious side effect of the merge: staking – the opportunity to earn returns on locked ether. Even with small amounts, you can indirectly earn money from the network security.
The entry hurdle for validators is high with ETH: 32 Ether – currently around 60,000 US dollars. However, small investors can pool capital via staking pools and thus participate in staking with fewer funds.
Residents lock their tokens and receive an annual percentage return (APY) for the provision, which is calculated based on the number of tokens deployed. On average, the profits are lower than with a “full” validator node. The costs are also much lower. Proof of Stake thus also enables small investors to participate financially in securing the blockchain.
4. Is the network now becoming more decentralized?
A Clear Jein: Since validators with higher stakes also have higher odds of winning, Proof of Stake tends to favor wealthy network participants. On the one hand, this reduces the degree of decentralization. On the other hand, Proof of Stake also favors network participation on more favorable terms than, for example, Proof of Work.
Participation in Proof of Work involves high costs: acquisition, operation and maintenance of mining rigs. Private miners have been pushed out of the business over the years, which has been monopolized by a few large players. In addition, large miners with a higher hash rate in Proof of Work also have a competitive advantage. The plutocracy effect balances out in both methods.
With the Proof of Stake, however, there are no further costs – apart from the stake itself. Access is more inclusive, protection is spread over more shoulders than before. This in turn increases the degree of decentralization through Proof of Stake.
5. Will ETH become the “world computer” with Proof of Stake?
Sustainability, scalability, financial inclusion, decentralization: With the consensus change, ETH is well on the way to making the vision of the “world computer” a reality. This is based on the idea of a global smart contract platform that can be used by everyone. Be it for decentralized applications (dApps), NFTs, DeFi trades or remittances.
The integration of scaling solutions is a crucial piece of the puzzle, only with consistently low fees and higher throughput can ETH fulfill its promise of the world computer. Even if there are still many small construction sites in the network, the merge brings ETH a good deal closer to the declared goal of the world computer.