One of the key decisions that any cryptocurrency must make is how to validate transactions and prevent double-spending. The most common approach is Proof-of-Work, which relies on miners to confirm transactions and add blocks to the blockchain. In return for their efforts, miners are rewarded with a portion of the currency. However, Proof-of-Stake is an alternative that has become popular in recent years. Under this system, everyone who holds currency can participate in validation. The more currency you hold, the more likely you are to be chosen as a validator. This leads to the upcoming Ethereum transition.
Its likely you have heard about the coming merge that transitions Ethereum from a Proof-of-Work model to a Proof-of-Stake model. Proof-of-Work is a tried and trusted model that was introduced by Satoshi Nokamoto, the author of the white paper, that described the Bitcoin blockchain. The algorithm identified in that white paper assures the blockchain can’t be altered unless an adversary can get 51% of all mining or more. The Proof-of-Stake algorithm is much more efficient but it’s also much harder to calculate the risks associated with the Proof-of-Stake algorithm. Some suggest that Proof-of-Stake design began in earnest in 2017. Ethereum is targeting September 17th for the cutover but, as indicated below, the stakes are insanely high (bold is mine):
“ETH Merge: CoinGecko co-founder shares strategy for forked tokens. Many believe that after Ethereum transitions to proof-of-stake (PoS), a faction of Ether (ETH) miners will be creating a proof-of-work (PoW) fork of the network so that they can still keep mining. An executive believes that there are ways for ETH holders to take advantage of this upcoming event. Different people are expecting to trade the Merge very differently to take advantage. Our experts highlight some of their plans. Let us know how you will be doing things in the comments sections.
Ethereum gone wrong? Here are 3 signs to keep an eye on during the Merge. The assumption that Ethereum will just transition to a fully functional proof-of-stake (PoS) network after the Merge somewhat ignores the risk and effort necessary to move an asset that has a $193 billion market capitalization and 400 decentralized applications (DApps). That is precisely why monitoring vital network conditions is essential for anyone willing to trade the event. Our very own Marcel Pechman lays down 3 things to keep an eye on during the merge.”
Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group.