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March 16, 2022

What is Ethereum 2.0 - Proof of Stake?

A blockchain's transaction must be validated from multiple sources before being confirmed. This is traditionally done using either proof of work or proof of stake methods. Bitcoin and Ethereum are currently Proof of work blockchains which means that miners are able to provide their processing power through a complicated procedure with the blockchain to validate transactions, and in return, they receive pieces of the coin as a reward. Proof of work blockchains have some major drawbacks, specifically tied to energy costs, and it leaves many people wondering what the better way is to validate transactions. One possibility might be Ethereum 2.0.

Proof of Work Drawbacks

With the proof of work method that the major blockchains utilize, it can be profitable for groups of people to garner large collections of “ASIC” Miners and create a mining farm. These farms are outputting large amounts of processing power and being provided huge rewards in return for their work. As profits continued to rise over the course of the last couple of years, more and more investments were being placed into mining farms. Although profitable, these farms have come under major scrutiny as things ramped up. The energy cost to mine a bitcoin is actually now higher than that of a small country. As these findings surfaced, there has been an environmental concern to the mining of bitcoin and Ethereum and people are calling for changes. Outside of environmental concerns, there can also be security concerns with Proof of work chains.

How Secure is the Blockchain?

As noted, blockchain transactions are validated through a designated consensus model, either PofW or PofS. Transactions require multiple validations from different sources to be confirmed on the chain. There is however one shortcoming to the proof of work method. If one user or group controls over 50% of the power in a proof of work algorithm, then they could conspire to validate false transactions. Though this is very difficult and quite unlikely, it is possible. Through the Proof of stake consensus method, this becomes much harder to accomplish. One user would need to control over 50% of the circulating staked Ethereum, a much harder task.

What is Proof of stake?

One possible positive change is the transition from proof of work to proof of stake. In the proof of stake system, users will just “stake” their coins to become a validator for the system. Validation is now the same for both systems, however, it is done in an entirely more energy-efficient way. In Ethereum 2.0, validators would now be rewarded for staking their Ethereum and gain more overtime as a reward. This can be thought of similarly to a traditional interest savings account but with typically much higher yields.

A positive Change

As cryptocurrency popularity begins to rise, the blockchain difficulty for proof of work algorithms begin to rise. As a result, this raises energy costs for diminishing returns on electricity usage. In an effort to stop the massive toll cryptocurrency mining is putting on the environment and energy grid overall, Ethereum is making a much-needed transition to proof of stake. The timeline for this change is unknown. In fact, Ethereum 2.0 has been postponed multiple times dating all the way back to 2019. For now, users anticipate the release of Ethereum 2.0 and the proof of stake algorithm, while mining farms need to prepare their new coin of choice for these operations.

Crypto Taxes

With all that being said, If you do decide to jump into this world of crypto and even pick yourself up some tokens, you need to make sure that you have the proper tools on hand to help you manage your financial accounting needs. One of the best solutions for you will be Ledgible.

With Ledgible, you can report and keep track of your crypto transactions with the supported integrations as you dive into the crypto space with this new information. If you want to learn more about Ledgible and get started for free, click here.

Disclaimer: The author and Ledgible do not provide investment advice and nothing in this article is meant to be taken as such. This website is presented solely for informational and entertainment purposes and is not to be construed as a recommendation, solicitation, or an offer to buy or sell / long or short any securities, commodities, cryptocurrencies, or any related financial instruments.

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