Popular Science | What are the advantages of PoS (Proof of Stake) that will be launched by ETH2.0?

On November 24, OKLink data showed that the balance of the Ethereum 2.0 deposit contract address had reached 524,288 ETH, meeting the minimum requirement for launching the Ethereum 2.0 genesis block.

This means that Ethereum 2.0 will be officially launched on December 1st.

When Ethereum was first designed, it was planned that at some point in the future , Proof of Work would no longer be used to determine which miner's block could be submitted to the main chain, but instead Proof of Stake would be used. Ethereum 2.0 will introduce partial Proof of Stake as a consensus mechanism.

So, compared with proof of work, what are the advantages of proof of stake? What changes will miners and investors face after the launch of ETH2.0?

Disadvantages of PoW (Proof of Work)

1. Large investment in heavy assets

ETH1.0, like BTC, uses the consensus mechanism of proof of work. The essence of proof of work is to compete with money. Whoever can buy more mining machines to contribute more computing power to the network will get more rewards.

Since a large number of mining machines are needed and a large amount of electricity is consumed, the investment cost is high. Electricity is one of the main expenses of these projects. When the price of the currency falls and the electricity expenses of miners are greater than their income, they can only choose to shut down the machines.

For mining investors, idle assets mean a longer payback period and losses.

2. Low network security

In the proof-of-work model, as long as the computing power exceeds 51%, an attack can be launched on the network. Popular cryptocurrencies such as Bitcoin, Ethereum, Litecoin (LTC/USD) and Monero (XMR/USD) are relatively safe due to their large network computing power. However, small currencies with long block intervals and low network computing power are at risk of such attacks.

Advantages of PoS (Proof of Stake)

1. Small investment in heavy assets

Proof of Stake is very similar to the process of raising funds, that is, the more ether you have in this virtual world, the higher the probability of successful submission after packaging, and the more rewards you will get. This means that investors can reduce their investment in heavy assets and invest more funds in PoS assets.

2. Improved network security

When the number of ether coins owned exceeds 51% of the entire network, the network can be attacked, which greatly increases the difficulty of attack and improves the security of the network. PoW and PoS have their own advantages and disadvantages, but when those mined coins are mined, they may have to switch to the proof of stake mode, so maybe one day all PoW will gradually convert to PoS.

The upgrade of Ethereum is not only related to the development of code and network design, but also closely related to a group of investors.

So for miners, what are the difficulties and opportunities when ETH2.0 transitions from PoW to PoS , and how can they participate?

Miners’ Dilemma and Opportunity

1. Dilemma: With the change in the reward algorithm, Ethereum may no longer need miners.

In the ETH1.0 version, the Ethereum network relies on computing power to create new blocks, and miners receive Ethereum rewards by contributing computing power.

Proof of Stake relies on validators (virtual miners) and deposited ether to build new blocks. That is to say, when PoW is fully transitioned to PoS, Ethereum no longer needs miners. So what should GPU miners do with their mining machines? Either sell them or mine other coins.

2. Opportunities: No need to compete in computing power, costs are reduced, and new opportunities are born

For validators (virtual miners) who are ready to enter the market, the reward algorithm of proof of stake means reduced investment costs. They no longer need to buy mining machines, so they can invest more money in PoS.

For validators, changes in the reward mechanism will change the way they invest;

For the entire network, the reduction in costs will encourage more nodes to participate in the maintenance of the blockchain, thereby strengthening the decentralization of the blockchain.

The increase in validators can speed up the transaction confirmation on the blockchain, improve the efficiency of transactions and verification, and thus increase the speed at which validators make money.
3. How do miners participate?

By staking 32 ETH, you can become a validator of Ethereum 2.0.

When the total network stake reaches 520,000 ETH, the annualized return can reach 21.6%. When the total network stake reaches 10 million ETH, the annualized return can be maintained at around 5%.

During this period, you can still enjoy the dividends of ETH price increase. Of course, validators also have to bear the risks of ETH being locked for 2 years and unable to withdraw coins, and changes in yield returns.

Although ETH2.0 has certain benefits in the early stage, for miners, due to the large investment in the early stage, this upgrade of ETH may still cause them certain losses. Embracing changes and changing investment thinking in time may be their top priority.