Ethereum is revolutionizing the world of cryptocurrencies. This will reduce power consumption

In August, the Ethereum network moves from proof-of-work to proof-of-stake; This change is known as the merge, and its first public test will take place on June 8. The merger could turn out to be one of the most important events in cryptocurrency history as it will have a technical and economic impact on the Ethereum network, comments Mads Eberhardt, Cryptocurrency Market Analyst at SaxoBank.

  • The Ethereum network’s transition from proof-of-work to proof-of-stake — known as “mergers” — is fast approaching
  • According to Mads Eberhardt, it could be argued that the proof-of-stake protocol is economically fairer for ethereum holders than proof-of-work.
  • The analyst warns that if cryptocurrency developers have been working on the merger for years, it could fail or be further delayed.

Mads Eberhardt, cryptocurrency market analyst at Saxo Bank, points out that since the publication of the first ethereum cryptocurrency white paper in 2014, network developers have made it clear that they eventually want to implement the proof-of-proof protocol. participation instead. proof of work, but due to technical difficulties this has not been possible so far.

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Currently, however, the cryptocurrency’s transition from proof-of-work to proof-of-stake – known as “merger” – is fast approaching and reports that the first public test merger will take place on June 8, which will be followed by seven other minor tests.

– The current ropsten testnet will merge on the same day. If the connection to the ropsten network is successful, the Ethereum network will connect two other test networks that already exist before the actual merger, explains Mads Eberhardt.

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According to him, given the news and information from the Ethereum Foundation, there are indications that the merger will take place in August, provided that the tests go well. As such, an analyst from Saxo Bank explains how the merger will technically and economically transform the network.

Changing the transaction verification method

The most significant change will be the switch from proof-of-work protocol to proof-of-stake protocol, which will fundamentally change the method by which the network verifies transactions.

– Instead of the huge computing power made available to the network by cryptocurrency miners, ether owners will verify the transaction. This means that they will have the ability to lock Ethers as collateral so they can verify transactions – in other words, stack the Ethers they have. In return, they will receive transaction fees as well as security cost coverage – comments Mads Eberhardt.

He also points out that for the time being, as part of a financial incentive for miners, the costs will be covered in the form of newly issued Ethers, while later this will apply directly to stackers to verify the transaction.

– The main security benefit of the proof-of-stake protocol is that stakeholders remain under tight control. If the network determines that a stacker has acted unethically — such as trying to reverse a transaction — the network may withdraw some or all of its stacked Ethers, Mads Eberhardt explains.

The analyst points out that implementing the proof-of-stake protocol, the network will reduce power consumption by about 99.95%. Concludes that to understand why this happens, it is necessary to re-examine the differences between consensus mechanisms.

– For the Ethereum network, a new block is now finalized approximately every 13 seconds. During those 13 seconds, each miner scrambles to be the one to finalize the block. It consumes computing power and therefore requires electricity. In the end, however, only one miner finalizes the block and verifies the transactions, despite the fact that others have devoted huge amounts of energy to the same block, the analyst points out.

– As part of the proof-of-stake protocol, a validator is randomly selected to finalize a block based on the number of ethers staked. This happens before the block is created so that no other stacker tries to finalize the same block, which ultimately reduces the power consumption of the Ethereum network by around 99.95%. said Mads Eberhardt.

The economic side of the “merger” of the Ethereum network

Due to the drastic decrease in the amount of energy needed to verify transactions on the network, security costs can also decrease significantly.

– Under the proof-of-work protocol, the costs of securing the Ethereum network amount to approximately 5.4 million ETH per year. This means that 5.4 million new Ethers are issued each year, up to the current supply of around 120 million Ethers to encourage miners to verify the transaction. At the time of the merger, security costs will drop to around 0.5 million ETH per year in compensation for stackers, says Mads Eberhardt.

– This is a significant reduction in Ethereum inflation that could even lead to deflation, as the transaction costs paid are expected to exceed the costs of securing Ethereum. Regarding transaction fees, a significant part of them will be “burned” and therefore removed from the offer. Over time, this could create a supply shock, as the market is used to absorbing 5.4 million newly issued Ethers per year, when suddenly only around 0.5 million Ethers need to be issued. , comments an analyst from Saxo Bank.

According to Mads Eberhardt, it could also be argued that the proof-of-stake protocol is more economically fair to ethereum holders than proof-of-work.

– With Proof of Work Protocol, you can de facto verify transactions without the need for ethers, provided you invest heavily in processing capacity. This means that ETH holders are not compensated for inflation or transaction fees, which dilutes the cryptocurrency. With proof of stake, holders are fairly rewarded for inflation and transaction fees, says Mads Eberhardt.

12.8 million ETH to unlock later

Mads Eberhardt points out that the merger as such will not make the Ethereum network much more scalable.

– If successful, this will reduce block creation time by around 13-12 seconds while maintaining the same block size. Ultimately, this will increase trading efficiency by 7.5%, but not much more. Under the current timeline, the scalability of the Ethereum network will not improve until 2023, according to the analyst.

Mads Eberhardt points out that on December 1, 2020, a proof-of-stake version of the Ethereum network, known as Beacon Chain, was launched.

He explains that Beacon Chain is the version that will realistically be connected to the Ethereum proof-of-work network at the time of the merger.

– From the moment it starts, Beacon Chain finalizes empty blocks to ensure it works as expected. For verification of these blocks, Ethereum holders were able to stack Ether as part of the Beacon Chain. Currently, the Beacon chain cumulates more than 10%. the total supply of ethers – around 12.8 million ETH – reports Mads Eberhardt.

– However, by stacking ethers in the Beacon chain, those ethers were blocked. Originally, it was planned to release the stacked ethers at the time of the merger, but to technically simplify the merger process, the Ethereum network developers decided not to release the stacked funds at this date. Unlocking will probably take place 6 months after the merger and will cover the amount of 12.8 million ETH and ether stacked at a later date – comments Mads Eberhardt.

Mads Eberhardt says the merger should not affect ETH holders or will require any activity from them. Indicates that the connection will be transparent to ETH holders and should not affect tokens or affect decentralized applications currently using Ethereum. This means, he says, that tokens and smart contracts on the Ethereum network will work as they did before the merger.

– Although the developers of the Ethereum network have been working on the merger for years, the merger may fail or be further delayed. As with every other aspect of the cryptocurrency market, there are simply no guarantees, concludes Mads Eberhardt.

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