Beyond the Hype, What Does Blockchain’s “Proof of Work” to “Proof of Stake” Shift Mean?

Starting on September 6, Ethereum will be fundamentally transformed. The blockchain will fully transition from its current energy-guzzling Proof-of-Work (PoW) state to the 99.95% more energy-efficient Proof of Stake (PoS).

However, the second largest crypto, with a market cap of $192,894,011,946 and currently trading at $1,577, has been struggling to gain ground lately. It has fallen around 8% in the last week.

Naturally, investors are experiencing anticipatory jitters in the wake of this mega-merger, given that the crypto community, especially PoW miners, is divided over it. Also increasing inflation rates globally, and consequently interest rate increases, are pushing people towards investing in less risky, conservative asset classes such as debt.

But how will this merger affect blockchain and the cryptoverse at large?

Vikram Subburaj, CEO of Giottus Crypto Platform, says: “The braid is the transition of the Ethereum (ETH) blockchain to the Proof-of-Stake (PoS) consensus mechanism, which will result in a 90% net drop in annual issuance of ETH. On the cards in the long term, the merger could mean high volatility in ETH prices depending on its success and results.”

“However, in the long term, this will make Ethereum a stronger crypto asset. The merger could lead to forked chains similar to Ethereum Classic (ETC) that split from Ethereum in 2016,” he adds.

What will change for ETH?

Lots of things. First, there is approximately 99.95% less energy consumption on the way. Then there is speed. The current chain processes around 30 transactions per second. After the merger, it will be equipped to take on 1,00,000 transactions every second.

This speed is achieved via cutting. Look at it this way. If you have 10 official tasks to complete in a day, you will be overwhelmed. Chances are you’ll want to slow down. But if you delegate five of them to others, you will have more hands working on them. Naturally, the work will be done faster.

Right now, all transactions on the ETH blockchain run on a single blockchain, which has consecutive blocks. After cutting, there will be several chains running in parallel. That will make scaling easier, which will lead to greater usage and, ultimately, demand for Ethereum.

Dileep Seinberg, Founder and CEO of MuffinPay, Bill Payment & Utility Crypto, says: “Ethereum’s successful adoption for PoS will demonstrate that such a massive system is capable of operating at a significant scale while consuming minimal energy. This is expected to encourage the development of even more ambitious Web 3.0 initiatives on the network.Miners no longer need to solve cryptographic puzzles to validate new blocks when proof of stake is implemented.Alternatively, they will add ether tokens to a pool. Think of these tokens as lottery tickets: the right to validate the following block and the associated prizes is yours if your token number is called. The market appears to be generally optimistic about Ethereum’s transition and long-term potential.”

However, there will be no reduction in transaction costs or gas taxes, contrary to popular belief. Gas costs have often been a contentious topic for ETH users. Their prices had reached as high as $40 in May this year. As of August 2022, however, it stood at $1.60.

Since the transaction costs are a function of the network demand and its processing capacity, there is nothing significant to change this. According to the Ethereum website: “The merger is a change to the consensus mechanism, not an expansion of network capacity, and will not result in lower gas fees.”

Even when it comes to processing speed, not much improvement is expected. Right now, ETH’s main PoS chain, i.e. Beacon, adds a new block every 3/13. second. After the merge, it will only take 10% less time to do so. And since the speed of layer 1 remains the same, nothing is set to change as such.

What’s in store for developers?

It’s no secret that developers are flocking to Web 3.0 in droves. According to the 2021 Electric Capital Developer Report, since 2021, the number of developers in the area has skyrocketed by 80%.

Out of this, ETH has the lion’s share, with 4,000 developers joining each month on average. Its popularity is such that one in five developers choose Ethereum to start with. And they find these minor upgrades in speed and processing time after merging to be insignificant.

“Currently, the majority of the decentralized apps (DApps) are built on the Ethereum blockchain. As it is more energy efficient and faster, the number of projects on this blockchain will increase, thanks to improved bandwidth. Also, the so-called Ethereum killers may be under pressure as they can lag behind in attracting new and more projects, notes Seinberg.

What should investors do?

Not much, says Subburaj. “For now, investors should only hold Ethereum on a wallet or exchange that supports the merger and any new forks. All coins will be automatically transferred to the new blockchain, while any new fork coins will also be issued to the investor. NFT holders are encouraged to hold NFT -ones in private wallets.”

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