How does Ethereum Proof of Stake work?

Many of you know that I’m a crypto nut. And as the new uptrend of cryptocurrencies restart following Bitcoin’s recent halving in May, let’s take a look at the current Number 2 in the market. Ethereum itself is going through a major change, switching almost the entire infrastructure in its operations into what is known as Ethereum 2.0, moving from a proof-of-work to a proof-of-stake model. In this article, we’ll look at how proof of stake works, vs its current proof of work model.

What is Ethereum?

For those of you new to crypto and hence unfamiliar with Ethereum (ETH), it is the number 2 cryptocurrency by market cap after Bitcoin. Its current circulation is valued at USD$44.6B.

Like Bitcoin, it is an open source blockchain technology platform that allows for decentralised applications (dApp) to run on top of its platform, allowing for smart contracts to be created and executed between 2 people or organisations, without any 3rd party mitigation.

Unlike Bitcoin, Ether is meant to be a currency fueling the transactions on the blockchain, and not originally meant as a peer to peer payment unit.

Even if you’re unfamiliar with Ethereum, you’ll most likely have heard of this phenomenon known as Cryptokitties raging in 2018. Cryptokitties run on the Ethereum blockchain.

Here are my kitties.

I know! I spent actual money on these! What a pioneer. I wonder what a Gen 9 kitty can fetch on the market these days.

Funny aside: I wanted to showcase my own kitties (normal as they are) on this post, rather than googling for other people’s kitties. But metamask logged me out, and asked for my seed phrase instead of password to log in. I panicked, but after hours (okay, minutes) of searching, I found it! Note to self – keep, keep, keep your seed phrase safe!

What is Proof of Stake (POS)?

Ethereum, like Bitcoin, currently runs on a proof of work model to validate transactions. This requires a huge amount of computing power to execute, and you will have read about articles saying running the bitcoin blockchain consumes more energy than Switzerland does.

This has dual implications. One, mining is reduced to large organisations that has the processing power and resources to handle it. Two, the high energy consumption makes it much less efficient to scale.

Proof of stake solves this by vastly reducing the resources needed to validate transactions, thereby allowing for more participants into the network, making it more secure.

This also means anyone holding a certain amount of ETH can join in the network and help mine new ETH and validate transactions to the block.

How much Ethereum do you need to participate in the network?

To participate in ethereum 2.0’s proof of stake network as a validator, you will need to own and stake a minimum of 32 ETH.

At today’s rate, 32 ETH would cost you about USD12,689 (SGD17,385). As ETH 2.0 gets closer to reality, and more and more people want to get into the network, ETH price will likely rise. So, if you want to start staking your ETH and earning some passive income, you’d better start stacking ETH today!

Is staking crypto the future of dividend stocks?

I was chatting with fellow crypto enthusiast Kevin, and he suggested something I really liked, that POS cryptocurrencies are the (very near) future of dividend stocks.

Essentially, by holding onto a certain amount of cryptocurrencies, and staking them on the network, you are contributing to validating new transactions, and in the process, earning a portion of new crypto that is being mined. Cool huh.

Ethereum 2.0 Phases

Switching from POW to POS is an intense undertaking, and with ethereum’s enormous market cap at this point, any change has to be done cautiously to ensure things are working as usual while the transition occurs.

Phase 0 – Beacon Chain

The phase 0 testnet was launched on 5 August 2020, and involves the launch of Beacon Chain. It stores and manages the registry of validators, and will implement the Proof of Stake (PoS) consensus mechanism for Ethereum 2.0. The original Ethereum PoW chain will continue to run alongside the new Ethereum PoS chain, ensuring there is no break in data continuity.

Phase 1 – Sharding

Sharding refers to the implementation of scalability, where the main blockchain is split into 64 parallel chains. This provides 64X (and higher) more speed and transactions that can be validated in the same timeframe.

The Beacon Chain will be managing and combining these shards back onto the main chain. Phase 1 is likely to roll out in 2021.

Phase 2 – State Execution

Phase 2 will start to bring everything together, and execute POS, building execution environments for applications to be built on top of ETH 2.0. When this is done, Ethereum proof of work will be turned off.

This will likely happen late 2021 or 2022.

My thoughts on Ethereum as a whole

Ethereum has been around since 2015, and there are many applications running on top of its platform. From an enterprise and institutional perspective, companies like Microsoft, JP Morgan Chase, IBM, Deloitte and Credit Suisse are some of the interest parties testing out the blockchain.

It has grown from strength to strength, and with the pivot to ETH 2.0, it looks like scalability and efficiency will be much higher, resulting in even more usage in its technlogy.

If you ask me, I will look to have at least a staking portion of ETH to hold in my crypto portfolio, and partake in some passive income on that front.

Where can I find out more about ETH 2.0?

Reddit is a wonderful resource for anything, and specific to ETH2.0, you can check out ethstaker.