Recently, the Ethereum blockchain fully transitioned to a new way of processing transactions. This is an important day for crypto trackers as the Ethereum’s Merge event, as it is known, could change the nature of crypto and Web3 itself.
GS II: Science and Technology
Dimensions of the Article:
- What is Ethereum?
- Why is there a need for a new mechanism?
- Significance of the merge
- Which other cryptocurrencies are changing to proof-of-stake now?
What is Ethereum?
- Ethereum is one of the most used platforms by developers to build decentralised apps (dApps), smart contracts, and even crypto tokens.
- The platform’s currency, Ether is only second to Bitcoin (BTC) in terms of market capitalisation.
- The change in the way Ethereum builds the blockchain comes with not just environmental consequences, but also major cyber and financial security implications.
Ethereum’s former method, ‘proof-of-work’:
- Decentralised transactions are processed on blockchains using consensus mechanisms. Ethereum’s former method, ‘proof-of-work’, which is also used by Bitcoin, needs powerful mining hardware that consumes a lot of electricity and generates enormous amounts of heat.
- This energy is then used to process extremely difficult mathematical puzzles, the solution of which would let new transactions be added to the blockchain so as to reward the miners with crypto.
- Many environmentalists, policy makers, and regulators have strongly criticised the impact of Bitcoin mining on local communities.
- Common centres for mining included China (before a near total crypto ban), the U.S., Russia, and Kazakhstan — countries with cheap electricity rates and colder climates.
Why is there a need for a new mechanism?
- Ethereum’s website admitted that their crypto’s total annualised power consumption nearly matches that of Finland while its carbon footprint is comparable to Switzerland.
- For some time, European countries even mulled a crypto mining ban, while China actually carried out a nationwide crackdown on crypto miners, sending them fleeing overseas.
- Probably as a response to the backlash, Ethereum has decided to switch to a ‘proof-of-stake’ consensus mechanism, where Ether owners will stake their own coins in order to serve as collateral and help process new blockchain transactions, in return for rewards.
- Ethereum claims the proof-of-stake consensus mechanism offers better security.
Significance of the merge
- Developers say the transition to what is called a ‘proof-of-stake’ consensus mechanism will cut Ethereum’s energy consumption by 99.95%.
- Blockchains have a short history so far, but in that history, the Merge has become one of the most widely publicized and awaited events.
Which other cryptocurrencies are changing to proof-of-stake now?
- For now, no other top coin is planning an Ethereum-style Merge.
- After Bitcoin, Dogecoin [DOGE] is the largest proof-of-work based cryptocurrency. It was initially created as a joke by its founders. After that comes Ethereum Classic [ETC], formerly part of Ethereum before a community schism.
- Ethereum Classic has made it clear that it is loyal to the proof-of-work mechanism.
-Source: The Hindu