Ethereum merger: Will electricity consumption significantly decrease after turning to proof of ownership? What about miners?

Pengpai News Reporter Wang HuirongThe blockchain network Ethereum behind the world's second largest cryptocurrency, Ethereum (ETH), is expected to "merge" in mid September. What will be the impact of this move?On August 12th local time, Ethereum co founder VitalikButerin tweeted that the blockchain software upgrade, known as a "merger" in the encryption field, is expected to occur around September 15th, although the exact date depends on the hash rate

Pengpai News Reporter Wang Huirong

The blockchain network Ethereum behind the world's second largest cryptocurrency, Ethereum (ETH), is expected to "merge" in mid September. What will be the impact of this move?

On August 12th local time, Ethereum co founder VitalikButerin tweeted that the blockchain software upgrade, known as a "merger" in the encryption field, is expected to occur around September 15th, although the exact date depends on the hash rate.

Twitter post by VitalikButerin, co-founder of Ethereum

According to foreign media reports, the developers of Ethereum will finalize a specific merger date this week.

Transition from proof-of-work to equity certificate

The merger means that Ethereum will transfer the consensus mechanism from proof-of-work to PoS through the merger of two blockchains. As early as 2013, VitalikButerin released the Ethereum white paper, which stated its vision to make Ethereum an energy-saving proof of rights network.

The Ethereum blockchain currently used by people is called the "main network", which is different from various "test network" blockchains that are only used by developers. In December 2020, Ethereum developers created a new network called Beacon Chain. The beacon chain is essentially a new Ethereum.

Beacon chain is a proof of equity blockchain that has been in operation since its creation 18 months ago. The validator adds blocks to the beacon chain, but these blocks do not contain any data or transactions. The merger requires the transfer of data stored on the Ethereum main network to the beacon chain, making it the main blockchain on the Ethereum network. In the preparation stage of the merger, Ethereum developers have been conducting stress testing on this new blockchain, running data and transactions through various Ethereum testing networks.

"Ethereum initially used the proof-of-work algorithm, which requires tens of thousands of mining hardware devices to run continuously to support and protect the network." Yu Jianing, executive director of the Metacosmic Industry Committee of the China Mobile Communications Federation, co chairman of the Blockchain Special Committee of the China Communications Industry Association, and president of Huoda Education, said to the reporter of Pengpai News (www.thepaper.com), "Compared with proof-of-work,The proof of rights algorithm has reduced the resource consumption caused by mathematical operations to a certain extent, and its performance has also been correspondingly improved. However, it is still based on hash operation competition to obtain accounting rights

Yu Jianing mentioned that this merger is the merger of Ethereum's "main network" and the beacon chain network using proof of ownership. After the merger of Ethereum, the consensus mechanism of the network will officially transition from PoW to PoS, bringing about a substantial transformation. The Ethereum network will be freed from the constraints of proof-of-work. The network will be faster, faster, more efficient, easier to use for new users, and reduce the power expenditure to maintain the operation of the Ethereum network to save energy.

The previous PoW mining method had low network efficiency, with an average of about a dozen transactions processed per second. Due to Ethereum's main goal being to run smart contracts, which required a large amount of network confirmation, high network efficiency was required. However, the efficiency of more than a dozen transactions per second was far from meeting the system's requirements. "A virtual currency observer told The Paper News (www.thepaper. com), Especially for every online confirmation, a certain gas fee needs to be paid. The quantity of this fee is determined by bidding, and the higher the bid, the requests sent will be prioritized for confirmation, while the requests with lower bids can only wait slowly. Therefore, during the relatively hot market last year, the gas fee for a contract confirmation reached tens or even hundreds of dollars. This greatly hindered the promotion of Ethereum applications. Therefore, after changing to PoS mode, it increased the The efficiency of network confirmation will also reduce the cost of using the Ethereum network

Why the Ethereum merger has not yet "landed"

The Proof of Rights (PoS) consensus algorithm actually means that network members who want to participate in bookkeeping can participate by pledging (Stacking) Ethereum, and each transaction is verified by awarding a certain commission to the node in proportion to the number of assets owned by the node. The more relevant assets the node owns, the longer the holding time, and the greater the chance of obtaining bookkeeping rights. The core of PoS lies in Stacking. This has a first-mover advantage for industry pioneers, similar to the early low-cost acquisition of Ethereum by 'giant whales', which can easily receive more rewards on the new Ethereum blockchain, resulting in the Matthew effect of the strong being strong and the big being big, "said Yu Jianing.

Yu Jianing predicts that in the future, as the Ethereum PoS consensus is reached, more and more Stacking service providers will emerge, and the reliability of service providers and the security of their storage of Ethereum coins cannot be effectively controlled. The phenomenon of platform theft, bankruptcy, and even money laundering in the crypto market is not uncommon. Although the Stacking field is a very promising track in the future, there will inevitably be risks from service providers in the foreseeable future.

It is worth noting that due to the complexity of technology related to proof of equity and the increasing financial risks, the Ethereum merger has been postponed multiple times. The merger is part of Ethereum 2.0 and a series of upgrades aimed at reshaping its blockchain foundation.

Yu Jianing pointed out that the main difficulties encountered in mergers are differences of interests and transitional technologies. "The most important impact of the change in the consensus mechanism is the miners who have benefited previously. Although Vitalik Buterin is also encouraging miners who support the proof-of-work algorithm to turn to the Ethereum classic, it is clear that the profits of miners will still suffer a lot. Perhaps also under such a divergence of interests, the merger of Ethereum has not been implemented yet."

The above virtual currency observers also raised the same viewpoint: One of the difficulties in merging Ethereum is the reconstruction of a new underlying logic that requires market adaptation and acceptance. In addition, there are many application contracts and assets on the Ethereum network now, and it is also important to avoid technical errors. This will also involve the interests of a large number of miners, and there will be a certain game between miners and the Ethereum development team. Therefore, the merger of Ethereum has been ongoing in the past two years Delayed, this should be the closest to a formal merger now

Yu Jianing believes that during the merger period, there will be a series of technical issues involved, and even if there are previously undiscovered vulnerabilities, it is highly likely to cause chaos in network operation, causing significant damage to funds and applications. Therefore, before the merger, Ethereum developers must be cautious and consider various small possibilities in order to successfully implement the merger.

Jon Charbonneau, a digital analyst at Delphi, a cryptocurrency analysis company, said that Ethereum developers are very careful to ensure that different client validators can work together during mergers. But the Ethereum "client" (software that can read Ethereum data and mine blocks) may encounter some bugs, which may even take several months to fix.

The energy consumption of cryptocurrencies is staggering, and turning to proof of equity is expected to reduce energy consumption?

Opponents of cryptocurrencies typically believe that cryptocurrencies such as Bitcoin and Ethereum are useless and consume a large amount of electricity.

Assuming someone wants to mine cryptocurrency, they need a powerful computer, a "mining rig", to run the software. This "mining rig" will compete with thousands of "miners" around the world, solving complex encryption puzzles through calculations. If the encryption puzzle is solved, then the right to "verify" the block is won and new data can be added to the blockchain. Bitcoin "Miners" can earn 6.25 Bitcoins for each verified block, while Ethereum "Miners" can earn 2 Ethereum coins and Gas transaction fees.

In order to gain more opportunities in competition, people usually utilize many computers. The consensus mechanism of "proof-of-work" is the operation mode of Bitcoin and Ethereum blockchain, which allows the blockchain to guarantee security while being decentralized.

This is the so-called Sibyl resistance mechanism, "Charbonneau explained, as each blockchain requires the use of a scarce resource that cannot be monopolized. For the proof-of-work blockchain, this resource is the power required to run the "mining" operation.

Ethereum is composed of hundreds of thousands of computers from around the world. To "monopolize" Ethereum means controlling 51% of its computing power, but doing so would cost billions of dollars. Therefore, the consensus mechanism of "proof-of-work" has protected Bitcoin and Ethereum blockchain from hackers in the past.

But the drawbacks are also obvious. As encryption puzzles become increasingly complex and more "miners" compete to solve them, energy consumption skyrockets.

According to foreign media CNET, Bitcoin consumes approximately 150 terawatt hours per year, exceeding the annual electricity consumption of 45 million people in Argentina; Ethereum consumes approximately 62 terawatt hours per year, close to the annual electricity consumption of 9 million people in Switzerland.

If Ethereum merges the two blockchains and successfully transitions from proof-of-work to proof of equity, the encryption puzzle will no longer be a part of its network system. The Ethereum Foundation stated that as a result, Ethereum's electricity expenditure is expected to decrease by 99.65%.

Ethereum's shift to PoS has indeed reduced the drawbacks of encrypted assets to some extent, mainly in terms of energy consumption. "Yu Jianing analyzed that the global energy system is currently in turmoil, and the tightening of energy supply has led to severe shortages, leading to a surge in electricity and fuel prices.

Fatih Birol, Executive Director of the International Energy Agency, said at the Global Energy Forum in July that the world has never seen such a major energy crisis, and the global energy supply tension may further deteriorate. "Although PoW consensus mechanism has its unique advantages, in the context of the current energy crisis, its huge power consumption is bound to attract the attention of relevant departments in various countries. Although the whole industry will be transformed to wind, solar, hydropower and other clean energy in the future, clean energy will become the dominant energy in the industry. For the moment, transforming PoS is not an option." Yu Jianing said.

Where will the 'miners' go

The transformation and upgrading of Ethereum from PoW to PoS means that the relevant 'miners' also need to undergo transformation.

After the merger of Ethereum, there is still the role of 'miner', but the approach has changed. "The virtual currency observer explained," Strictly speaking, miners should be called packaging nodes. The role of miners is to keep accounts and then broadcast the ledger to the entire network

He stated that the core of blockchain is the security of intermediaries and networks, which involves the issue of accounting rights. Blockchain solves security issues by allowing everyone on the entire network to participate equally. He gave an example, for example, if A transferred 100 yuan to B, and someone in the network snatched the accounting right, he would record it and tell the entire network that A transferred 100 yuan to B. In order to reward the bookkeeper, the system will allocate a fixed amount of tokens, such as Bitcoin or Ethereum. Due to incentives, everyone is willing to come and keep accounts, so they begin to compete for accounting rights to determine who has a faster calculation speed. This process is commonly known as "mining".

He pointed out that due to the large number of nodes in the network, everyone synchronously stores the ledger. Even if some nodes are destroyed, the other nodes still retain the ledger, making the entire network difficult to destroy and secure. But this security is brought about by redundancy and will inevitably affect efficiency. PoS has changed the consensus mechanism, but the role of accounting node still exists. PoS has transformed the pure struggle for bookkeeping rights from a competition to a model of pledging tokens. PoW is like a referendum, with one person, one vote, and each node can vote. PoS, on the other hand, has a somewhat similar role to a company's board of directors. Someone pledges tokens into the system to have the right to confirm bookkeeping. The incentive method has also changed from using spell power to receive rewards to using pledge incentives. Therefore, after Ethereum transitioned from PoW to PoS, the traditional miners who rely on spell power to compete for bookkeeping rights no longer need it, but the role of network confirmation nodes still remains There is, but the incentive method has changed from mining rewards to pledge rewards

Application and Regulatory Trends after Ethereum Merger

The virtual currency observers mentioned above stated that the biggest change for Ethereum from PoW to PoS is the improvement of network efficiency and a decrease in usage costs for applications. As for whether it will reduce the drawbacks, it cannot be concluded. As an infrastructure, Ethereum's transition from PoW to PoS can only be said to be sacrificing some security in exchange for improving network efficiency

The observer believes that from the perspective of decentralization and fair distribution, the PoW model is definitely superior to the PoS model, and decentralization represents network security in the blockchain world. The more secure the network, the more redundancy it has, resulting in lower efficiency. However, as Ethereum is a smart contract platform, its main value lies in its widespread use, so improving network efficiency is also an important consideration. As for the relevant regulatory review, there is no difference whether Ethereum's mechanism is PoW or PoS, as these are only internal technical solutions. In terms of regulation, the first thing to confirm is whether Ethereum is a commodity or a security, and with qualitative analysis, relevant regulations can be applied to regulation. Before formal qualitative analysis, it can only be a vague and approximate regulation

Yu Jianing also stated that the merger of Ethereum is only a major upgrade of the Ethereum network itself, and for regulatory agencies, the consensus mechanism adopted by Ethereum is not the focus of their consideration. The early United States Securities and Exchange Commission (SEC) stated that due to sufficient decentralization, Bitcoin and Ethereum are not securities. Digital assets outside of this will be regulated through the Howey Test to determine whether they constitute securities issuance, which is particularly representative in regulatory models in various countries and has become a standard for defining digital assets within their jurisdiction in some countries. At present, the transformation of Ethereum into PoS will not cause regulatory agencies to adjust their attitudes, but if the centralization level of Ethereum network changes in the later stage, it is not ruled out that regulatory authorities, including the SEC, will adjust relevant regulatory reviews

Editor in charge: Wang Jie

Checked by: Zhang Yan