Ethereum, a much-touted blockchain platform, recently underwent a significant transformation referred to as the Ethereum Merge. The main feature of this transition was the shift from a ‘proof-of-work’ to a ‘proof-of-stake’ consensus mechanism.
Oversight of Transactions in the Old vs. New System
As a decentralized platform, Ethereum has never relied on traditional institutions like banks to approve its network’s transactions. This duty was initially undertaken by miners using the Proof of Work (PoW) consensus mechanism. In this old method, miners competed to solve complex mathematical puzzles using advanced computer hardware, and the quickest to find the solution became the validator. However, this mechanism was substantially dependent on crypto farms, large facilities housing computer systems dedicated to solving these puzzles.
Energy Consumption Concerns in the Proof of Work System
A significant concern with crypto farms was their massive energy consumption; some used more electricity than entire countries and posed substantial environmental sustainability questions. The cryptocurrency’s total annual power usage was comparable to Finland, and its carbon footprint was on par with Switzerland. Given these concerns, many European countries contemplated banning crypto mining, and China enforced a countrywide crackdown on crypto miners.
Adopting the Proof of Stake Method
The Ethereum Merge brought in the Proof of Stake (PoS) mechanism, rendering the need for crypto miners and huge mining farms obsolete. Instead of miners, the PoS model randomly appoints validators to approve transactions and earn a small reward. These validators are individuals who offer their computers to maintain the blockchain’s integrity by computing the linkage between blocks continuously.
Benefits of the New System
This shift would completely eliminate any need for miners on the Ethereum network and is expected to reduce Ethereum’s energy consumption by almost 99.95%. Moreover, it will make transactions on the Ethereum network highly secure.
Understanding the Use of Ethereum
Developers extensively use Ethereum as a platform to create decentralized applications (dApps), smart contracts, and even cryptocurrency tokens. Its currency, Ether, is second only to Bitcoin concerning market capitalization. Some common uses of cryptocurrencies such as non-fungible tokens (NFTs) and decentralized finance (DeFi) are based on the Ethereum network.
Cryptocurrency Explained
Cryptocurrency or crypto refers to any digital or virtual form of currency that uses cryptography for secured transactions. Unlike traditional money, cryptocurrencies do not have a central issuing or regulating authority but use a decentralized system to record transactions and issue new units. Cryptocurrencies rely on a decentralized peer-to-peer network known as blockchain.
Introduction to Blockchain Technology
Blockchain technology ensures that all transactions in cryptocurrencies are recorded in a public financial transaction database. Bitcoin, Ethereum, and Ripple are some well-known examples of cryptocurrencies. Information is stored as ‘blocks’ in digital databases or ledgers, which are linked together to form ‘chains’, hence the name Blockchain. The technology offers real-time transaction transparency, auditability, and permanent and tamper-evident record-keeping. An exact copy of the blockchain is available to each computer or user connected in a network. New information or alterations made via a new block must be vetted and approved by over half of the total users.