Understanding Ethereum’s Big ‘Proof of Stake’ Upgrade
Ethereum, the blockchain that underpins the world’s second-largest cryptocurrency ether, will soon undergo a major software upgrade that promises to cut the amount of energy needed to create new coins and complete transactions.
Here’s what you need to know about “Fletting,” as the shift is known:
“Proof of Effort”
The Ethereum blockchain is set to merge with its own blockchain, radically changing the way it processes transactions and how new ether tokens are created.
The new system, known as “proof-of-stake”, will cut the Ethereum blockchain’s energy consumption by 99.9%, developers say. Most blockchains, including bitcoins, gobble up large amounts of energy, drawing criticism from some investors and environmentalists.
The Ethereum Foundation, a prominent non-profit organization that says it supports Ethereum, says the upgrade will pave the way for further blockchain updates that will facilitate cheaper transactions.
High costs and slow transaction times are currently two of the main problems users have with the Ethereum network.
When does this happen?
Very soon. The merger is scheduled to be completed between September 10 and 20, although the exact timing is uncertain. Independent estimates point to September 15 as the likely date.
Major crypto exchanges, including Coinbase Global ( COIN.O ) and Binance, have said they will pause ether deposits and withdrawals during the merger. Users won’t have to do anything with their money or digital wallets as part of the upgrade, they say.
The merger has been delayed in the past. Most recently, ether fell around 8% on April 11 after a leading Ethereum developer said plans for the event set for June had been pushed back as tests on the software continued.
How big of a deal is this?
Ethereum backers say the merger is a monumental moment for the $1 trillion crypto sector.
Supporters believe the merger will make Ethereum more favorable compared to arch-rival bitcoin – the world’s top cryptocurrency – in terms of price and ease of use.
It could lead to Ethereum applications becoming more widespread. Investors are betting that the change will be significant for the price of ether, which has risen more than 50% since the end of June, compared with a small loss for bitcoin.
How proof of stake works
There are different ways transactions on the blockchain – the software that supports most crypto – can be verified. In the proof-of-work system currently used by Ethereum, new transactions are checked by crypto miners.
Miners use powerful computers that solve complex math problems and update the blockchain, earning new crypto tokens. Although this makes records on the blockchain secure, it is very energy-intensive.
In the “proof-of-stake” system, ether owners will lock fixed amounts of their coins to check new records on the blockchain, earning new coins on top of their “staked” crypto.
Limitations and benefits
While Ethereum developers say the proof-of-stake model has safeguards to ward off hackers, others say criminals could attack the blockchain under the new system.
If a single entity accumulated most of the ether stake to validate new transactions, they could alter the blockchain and steal tokens. Crypto experts also say there is a risk that technical glitches could derail the merger, and that fraudsters could take advantage of the confusion to steal tokens.
It could also make it easier for developers to build applications on the Ethereum network, potentially increasing adoption. Still, those updates are likely months, if not years, away.
