Bitcoin and the rest of the cryptocurrencies are having a really bad time: after reaching all-time highs at the end of last year, the situation is now dire and the accumulated losses compared to those highs are huge. The economic situation, now more linked than ever to these virtual currencies, does not help, but there is hope for at least some of these cryptocurrencies. That hope is called Proof of Stake.
What is Proof of Stake. As we explained in a recent article, until now Bitcoin and Ethereum were based on a mechanism called Proof of Work (PoW). That system required a large energy consumption to solve complex mathematical problems with specialized hardware, but Ethereum has been planning the use of a very different mechanism called Proof of Stake (PoS) almost since its creation.
In this system, users validate transactions according to the number of cryptocurrencies they have in the system, based on their ‘participation’ (stake). This would have a direct consequence on the environmental impact of the Proof of Work system: from the 84,000 Wh consumed per transaction, it would go down to about 35 Wh.
Ethereum is ready. Everything is ready so that the Ethereum network and its ETH token can make a complete migration to this system. The first successful test has already been completed with a test network called Beacon Chain that will allow the so-called “Ethereum vision” that seeks “more scalability, security and sustainability” to be fulfilled.
The Merge. That is the name of that great transition from PoW to PoS mechanism. The good progress of the tests in Beacon Chain —with some other setbacks— means that, according to those responsible for Ethereum, this great transition will take place between the third and fourth quarters of 2022. Vitalik Buterin indicated a few weeks ago that it could take place in August if all goes well.
deflationary ethereum. Another consequence of this transition to the PoS mechanism will be the so-called “Triple Halvening” in direct reference to the “Halvings” of Bitcoin. After the transition to PoS, the emission of ETH will be reduced by approximately 90% due to the reduced amount of cryptocurrencies with which users will stake.
That event will be linked to a cryptocurrency “burning mechanism” called EIP-1559 with which supply and demand are controlled. These two events will probably make ETH directly deflationary, which as indicated on Twitter Julio Alonso —co-founder of Xataka and Weblogs SL— “implicitly increases its value in the same way as the repurchases of company shares”.
Breaking away from bitcoin? Another potential consequence of this transition to PoS is to turn Ethereum into a platform that is much less linked to Bitcoin: when one goes up or down in value, the other does so in parallel, but it is not clear whether both cryptocurrencies will continue to have such paths. similar after this process. For Alonso, “either Ethereum decorrelates from the rest of the sector, or its behavior determines, at least in part, the behavior of the entire sector”, making this platform more important than ever. More even than bitcoin, some claim.