Ethereum, the pioneering blockchain platform to revolutionize decentralized applications and smart contracts, underwent a fundamental transformation in 2022: the Merge, accelerating a transition from Proof of Work (PoW) to Proof of Stake (PoS).
In the wake of this monumental shift, many questions were asked: Why did Ethereum make the transition? How has Ethereum adapted to the new PoS consensus mechanism? What challenges were encountered during the transition, and what progress has been made? It has been over a year since the Merge, as it was called, and yet for some these questions remain unanswered still.
In this blog, we delve into the intricacies of Ethereum PoS, exploring its evolution, current status post-upgrade, and the road ahead. Join us as we unravel the complexities of Ethereum transition to PoS and assess the implications of PoS on one of the world’s most influential blockchain platforms.
Ethereum 1.0, Ethereum 2.0, Eth2, Ethereum Merge and Ethereum PoS: Explained
First, it is important to understand how various terms surrounding the Ethereum Merge are different.
- Ethereum 1.0: Also known simply as Ethereum, this was the initial version of the Ethereum blockchain, designed to support decentralized applications (dApps) and smart contracts. Built on a PoW consensus mechanism, Ethereum 1.0 allowed for the creation, execution, and management of smart contracts and decentralized digital applications across a distributed network of computers. Ethereum’s native cryptocurrency, Ether (ETH), is used to compensate miners for performing computations and validating transactions.
- Ethereum 2.0: This refers to the series of upgrades to the Ethereum blockchain to improve its scalability, security, and sustainability. These upgrades mark a shift from the original Ethereum or Ethereum 1.0- we’ll discuss this later on.
- Eth2: Often used interchangeably with Ethereum 2.0, it specifically refers to the version of Ether that would be used within the Ethereum PoS ecosystem.
- Ethereum Merge: The Merge marked the official transition of Ethereum’s consensus mechanism from PoW to PoS. It represents the joining of the original Ethereum blockchain (execution layer) with the new Beacon Chain (consensus layer). Post-Merge, the network no longer relies on miners to validate transactions; instead, validators who stake ETH are responsible for securing the network and validating transactions.
- Ethereum PoS: It stands for Ethereum Proof of Stake. It refers to a consensus mechanism used in the Ethereum blockchain network where validators are chosen to create and validate new blocks based on the amount of cryptocurrency they hold and are willing to “stake” as collateral. This replaces the traditional PoW mechanism, where validators compete to solve complex cryptographic puzzles to validate transactions and create new blocks. Ethereum PoS has some benefits over the Ethereum PoW, which we will discuss shortly.
So, now that we have developed your understanding of the basic terminologies surrounding Ethereum PoS, let’s answer the main events around transition: why did Ethereum switch to PoS, its journey over the years, and what does the future hold?
Why did Ethereum Switch To PoS?
The transition of Ethereum from PoW to PoS took place to address some inherent challenges in PoW to leverage the benefits PoS offers. Here are the main reasons for the switch:
- Energy efficiency: PoS significantly reduces the energy consumption associated with securing the network. PoW requires substantial amounts of electrical power for mining, as miners compete to solve complex mathematical problems. PoS, however, eliminates the need for such energy-intensive computations, making the network more environment-friendly.
- Security: PoS enhances the security of the network by making certain types of attacks more expensive and less feasible. In PoS, validators stake their own cryptocurrency as a form of security deposit. Malicious actions can lead to the loss of their stake, creating a financial disincentive for attacks.
- Decentralization: PoS can potentially lead to a more decentralized network. In PoW, mining is often dominated by entities with significant resources to invest in specialized hardware, leading to centralization concerns. PoS allows for more participants to secure the network without the need for expensive hardware, lowering the barrier to entry.
- Scalability: The switch to PoS is also seen as a step towards improving Ethereum’s scalability. By eliminating the need for energy-intensive mining, Ethereum aims to implement further upgrades more easily, such as sharding, which can significantly increase the network’s capacity.
- Economic sustainability: The PoS model changes the incentive structure for participating in the network. Instead of relying on new coin issuance (block rewards) as the primary incentive for participation (which in PoW leads to constant selling pressure from miners to cover operational costs), PoS relies on transaction fees and staking rewards. This can create a more sustainable economic model.
Now, let’s look at the journey of Ethereum from its inception to its transition to Ethereum 2.0.
Ethereum 1.0 to Ethereum 2.0: Ethereum’s Journey
Ethereum PoS’s journey from its inception to the transition towards Ethereum 2.0 has been marked by a series of significant upgrades, each aimed at improving the network’s scalability, security, sustainability, and user experience. Here’s a detailed overview of the major milestones in Ethereum’s development timeline:
Frontier (Launch in 2015)
The launch of Ethereum introduced the world to smart contracts and decentralized applications, setting the stage for a new era of blockchain technology.
Homestead (2016)
As Ethereum’s first major upgrade, Homestead stabilized the platform, making it safer and more reliable for developers and users, signifying Ethereum’s readiness for mainstream adoption.
DAO Fork (2016)
The DAO fork was a controversial but necessary response to the DAO attack, where an insecure DAO contract was drained of over 3.6 million ETH. This fork aimed to refund the lost funds to affected parties, leading to the split between Ethereum and Ethereum Classic.
Tangerine Whistle and Spurious Dragon (2016)
These forks were responses to DoS (denial-of-service) attacks on the network. They introduced adjustments to gas pricing and operational codes to prevent future attacks and debloat the blockchain state, enhancing network security and stability.
Byzantium and Constantinople (Part of Metropolis Update, 2017-2019)
These updates introduced improvements such as reduced block rewards, delayed difficulty bomb, and new functionalities to improve transaction efficiency and contract flexibility.
Istanbul (2019)
Istanbul improved network resilience against DoS attacks, enabled interoperability with privacy-focused blockchain Zcash, and further optimized gas costs for certain operations.
Launch of the Beacon Chain (2020)
The Beacon Chain was introduced as the foundation of the new PoS consensus mechanism. Unlike the PoW mechanism that Ethereum originally used, PoS does not require miners to solve complex mathematical puzzles. Instead, validators are chosen to propose and vote on blocks based on the amount of cryptocurrency they hold and are willing to “stake” as collateral.
Features include:
- Users can stake their ETH (minimum 32 ETH) to become validators, contributing to network security and earning rewards.
- Shifts Ethereum from an energy-intensive PoW to a more energy-efficient PoS system.
Completed in December 2020, the Beacon Chain ran parallel to the existing Ethereum blockchain, marking the first step towards Ethereum 2.0 without yet processing transactions or smart contracts from the mainnet.
The Merge (2022)
This stage involves merging the existing Ethereum mainnet (execution layer) with the Beacon Chain (consensus layer), officially transitioning Ethereum’s consensus mechanism from PoW to PoS.
Features of Ethereum PoS:
- The traditional mining process is replaced by Ethereum staking, drastically reducing the network’s energy consumption.
- As discussed earlier, the PoS mechanism introduced new security dynamics, making certain types of attacks more expensive and less feasible.
- The Merge set the stage for further scalability improvements, such as sharding.
Completed in September 2022, Ethereum Merge has successfully transitioned Ethereum to a PoS consensus mechanism without expanding affecting transaction speeds and costs.
Introduction of Ethereum WebAssembly (eWASM)
Ethereum WebAssembly (eWASM) aims to replace the Ethereum Virtual Machine (EVM) with a more efficient and flexible execution environment for smart contracts and dApps. eWASM is designed to improve execution speed, enhance security, and enable compatibility with multiple programming languages, making it easier to develop and deploy on Ethereum.
Features:
- eWASM allows for faster execution of smart contracts compared to the EVM.
- Developers can write smart contracts in multiple languages, not just Solidity.
- Designed to be more easily upgradable than the EVM, facilitating future improvements.
The introduction of eWASM is still in the research and development phase.
London Hard Fork (2021)
Introduced EIP-1559, altering the network’s fee market mechanism. This update aimed to make transaction fees more predictable and introduced a mechanism that could potentially make ETH deflationary.
Shanghai (2023)
The Shanghai upgrade allowed for Ethereum staking withdrawals, enabling validators to withdraw their staked ETH. This upgrade was crucial for providing liquidity to stakers and further incentivizing participation in the network’s security.
Ethereum Roadmap Ahead
- Ethereum’s Dencun upgrade, introduces Proto-Danksharding with EIP-4844, focusing on scaling Layer 2 (L2) chains through a method that allows for sharding “blobs” of data. This upgrade is a combination of two parts: the Deneb upgrade for the Consensus Layer and the Cancun upgrade for the Execution Layer.
- Key proposals in Ethereum’s Dencun upgrade include EIP-4844 for Shard Blob Transactions, EIP-1153 introducing transient storage opcodes, EIP-5656 adding a memory copying instruction, and several others aimed at enhancing Ethereum’s execution efficiency, security, and data availability.
- Proto-Danksharding, as part of the Dencun upgrade, is particularly noteworthy for its potential to significantly reduce gas costs for users by improving Ethereum as a data availability layer.
- This upgrade allows rollups to post data on Ethereum at much lower costs, expected to be at least 10 times cheaper, which could dramatically enhance scalability. This method changes the way data is posted and verified on Ethereum, introducing a new transaction type called a blob-carrying transaction that can post more data at reduced costs.
- The Dencun upgrade is seen as a transformative step for Ethereum, making it a more scalable and efficient blockchain network. It is expected to pave the way for Ethereum to reach full-rollup scaling, with the ultimate goal of achieving over 100,000 transactions per second (TPS). The focus post-Dencun will likely shift towards further scalability improvements, including the adoption of verkle trees, which aim to make proofs smaller and verification simpler.
- This upgrade is part of Ethereum’s ongoing evolution, following previous significant upgrades such as The Merge and Shanghai (Shapella), and is a key component of Ethereum’s roadmap towards improving its scalability, security, and overall efficiency as a leading blockchain platform for decentralized applications.
While The Merge has been successfully completed, the full implementation of sharding and additional optimizations are ongoing, with no definitive completion date as these developments depend on extensive testing and community consensus.
Ethereum’s Evolution: Navigating the Merge, Surge, and Beyond
Along with Merge, you may have heard of several terms like Surge and Purge for the ongoing Ethereum developments. For Ethereum PoS, let’s decode these ‘eras’:
The Merge
As discussed, The Merge represents the transition of Ethereum from a Proof of Work (PoW) to a Proof of Stake (PoS) consensus mechanism. This change aims at improving the network’s energy efficiency, reducing its carbon footprint by approximately 99.95%.
It also lays the groundwork for future scalability and security enhancements. For users and ETH holders, The Merge does not require any action, and it does not aim to directly reduce gas fees or increase transaction speeds. However, it is a critical step towards a more sustainable and scalable Ethereum network.
The Surge
Following The Merge, the Surge is focused on improving Ethereum’s scalability through sharding. Sharding divides the blockchain into smaller segments, enabling parallel processing and significantly increasing the network’s capacity. This upgrade aimed to reduce congestion and lower transaction fees by improving throughput.
The Verge
The Verge aims to optimize data storage on Ethereum, making it more efficient for validators to process transactions without requiring extensive data storage capabilities. This upgrade enhances the network’s decentralization by enabling more participants to run nodes without facing prohibitive data storage costs.
The Purge
This upgrade intends to streamline Ethereum’s data history, eliminating unnecessary historical data and reducing the overall size of the blockchain. The Purge will help in optimizing the storage and improving the network’s performance by focusing on current and relevant data.
The Splurge
The Splurge is essentially a series of miscellaneous improvements and fine-tuning following the major upgrades. It will address any additional features, optimizations, and minor adjustments needed to ensure the Ethereum network runs smoothly and efficiently after the significant changes implemented in the previous upgrades.
These upgrades are part of Ethereum’s long-term vision to become more scalable, secure, and sustainable. Each phase addresses different aspects of the network’s functionality, paving the way for Ethereum to support a larger scale of decentralized applications and users while maintaining its commitment to decentralization and security.
Advantages of Ethereum PoS
The concept of Ethereum PoS offers several advantages:
- Energy efficiency: PoS requires less energy compared to PoW as it doesn’t involve intensive computational tasks. This move also attracts more environmentally conscious investors.
- Decentralization: Since it’s more affordable to participate in Ethereum staking than mining (as in PoW), more users are encouraged to run nodes, promoting decentralization.
- Scalability: PoS can handle more transactions and is generally faster and more scalable than PoW. Future scalability improvements could support more applications and users, potentially driving up the demand for Ether.
- Security: Validators in PoS systems have a financial stake in the network, incentivizing them to maintain network integrity.
Is Ethereum More Centralized Now?
After the transition to PoS with The Merge and subsequent Shanghai upgrade, concerns have been raised about Ethereum potentially becoming more centralized. Several factors contribute to these concerns:
- Ethereum staking and centralization: The transition from PoW to PoS was intended to improve scalability and reduce energy consumption. However, this has led to an increase in Ethereum staking, which resulted in a more centralized network. The centralization arises because entities with larger stakes have a greater chance of being chosen to validate transactions, potentially leading to a concentration of power.
- Maximal extractable value (MEV): MEV refers to the value validators can extract from transaction ordering in a block, which introduces centralization fears. The concern is that only a few specialized coders with the ability to develop MEV searcher bots can capture this value, leading to a concentration of power among those validators. Although Flashbots launched MEV-Boost to democratize access to MEV and reduce centralization risks, the compliance with regulations like those from the US Office of Foreign Assets Control (OFAC) introduces new centralization concerns due to censorship of certain transactions by a single entity.
- Liquid staking protocols: The rise of liquid staking, especially through platforms like Lido Finance, has also been pointed out as a centralization risk. While liquid staking allows users to stake their ETH without needing to own 32 ETH, the concentration of staked ETH in a few platforms can act as a central point of failure and potentially undermine the decentralized nature of Ethereum.
So, while The Merge and subsequent updates have brought significant benefits to the Ethereum network, they have also introduced new challenges related to centralization. Developers, network participants, and the wider community must remain vigilant and work on solutions to prevent the network from becoming too centralized lest Ethereum loses its charm.
Future of Ethereum PoS
The upcoming upgrade to Ethereum is all about making it faster, cheaper, and safer to use. They’re doing this by introducing: Ethereum Improvement Proposals (EIPs). One of these proposals, called EIP-4844 or proto-danksharding, is going to be part of the Dencun upgrade, as mentioned. After this change, people using Ethereum can expect to pay less for transactions on layer two (L2), which is good news for everyone using the platform. These upgrades aim to increase transaction speeds, improve data storage and processing, and ensure the network’s long-term resilience.
The future of Ethereum PoS is promising and poised to play a significant role in the evolution of blockchain technology. As blockchain projects continue to grow and gain mainstream acceptance, PoS is likely to become increasingly popular. The ongoing development and refinement of PoS algorithms and protocols will contribute to its continued adoption and evolution, making it a key driver of innovation in the blockchain space.
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