Bye-Bye, Miners! How Ethereum’s Big Change Will Work

(Bloomberg) -- Ethereum is making big changes. Perhaps the most important is the jettisoning of the “miners” who track and validate transactions on the world’s most-used blockchain network. Miners are the heart of a system known as proof of work that was pioneered by Bitcoin and adopted by Ethereum, the platform that supports Ether, the runner-up to Bitcoin as the world’s most valuable cryptocurrency. Proof of work has come under increasing criticism for its environmental impact: Bitcoin miners now use as much electricity as Chile. Proof of stake, which Ethereum plans to phase in during 2022, will be greener and faster. Proponents say the switch will illustrate another difference between Ethereum and Bitcoin -- a willingness to change. 

1. What are the ‘proof of’ systems for?

Cryptocurrencies wouldn’t work without blockchain, a new technology that performs the old-fashioned function of maintaining a ledger of time-ordered transactions. What’s different from pen and paper records is that the ledger is shared on computers all around the world. Blockchain has to take on another task not needed in a world of physical money -- making sure that no one is able to spend a cryptocurrency token more than once by manipulating the digital ledger. Blockchains operate without a central guardian, such as a bank, in charge of the ledger: Both proof of work and proof of stake systems rely on group action to create, validate and safeguard a blockchain’s sequential record.

2. How does that happen?

In Bitcoin and Ethereum’s main network today, transactions are grouped into “blocks” that are published to a public “chain,” but only after “proof of work” verification is performed. With Bitcoin’s software, that happens when the system compresses the data in the block into a puzzle that can only be solved through potentially millions of trial-and-error computations. This work is done by miners who compete to be the first to come up with a solution and are rewarded with free cryptocurrency if other miners agree it works.

3. What are proof of work’s drawbacks?

When Bitcoin was worth pennies, mining was also cheap. But as the currency’s value rose, an arms race of a sort set in, as miners poured in resources in the quest to win new coins. Bitcoin’s software responds to increased competition by revving up the computational difficulty. The resulting sky-high electricity usage led to calls from the environmentally conscious to shun Bitcoin. It’s also led to a growing dominance by huge, centralized mining farms, a development that’s created a new vulnerability for a system designed to be decentralized. In theory, a blockchain could be rewritten by a party that controlled a majority of mining power.

4. What is proof of stake?

The idea behind the proof of stake system being adopted by Ethereum is that its blockchain can be secured more simply if you give a group of people a set of carrot-and-stick incentives to collaborate. People who put up, or stake, 32 Ether (1 Ether traded at almost $4,300 in late November) will be able to become “validators,” while those with less Ether can become validators jointly. Validators are chosen to order transactions into a new block on the Ethereum blockchain. If a block is accepted by a committee whose members are called attestors, its validator is awarded Ether. But someone who tried to game the system could lose the coins that were staked. Ethereum’s proof of stake system is already being tested on a blockchain, called the Beacon Chain, that’s separate from the proof of work system; so far $38 billion worth of Ether has been staked there. The two blockchains are expected to merge in 2022.

5. What are the system’s advantages?

It’s thought that switching to proof of stake would cut Ethereum’s energy use, estimated at 45,000 gigawatt-hours per year, or a bit more than New Zealand’s, by 99.9%. In terms of its carbon footprint, it would essentially be like any other internet operation whose energy use involves nothing more than running a network of computers, rather than a venture resembling a collection of gigantic digital factories. The switch to proof of stake is also expected to increase the network’s speed. That’s important for Ethereum, which is already a platform for a vast range of financial and commercial transactions.

6. What are its vulnerabilities?

Proof of stake is less battle-tested than proof of work, whose security has been scrutinized for more than a decade. So new vulnerabilities could be found. Its proponents think the risk is worth what would be gained in terms of environmental benefits and transaction speed, as well as from bringing a broader group of users into the process. 

The Reference Shelf

• A Bloomberg Businessweek story about “proof of stake.”
• A Bloomberg story about Ethereum founder Vitalik Buterin on the London hard fork and EIP 1559
• Bloomberg QuickTakes on Bitcoin vs. Ethereum, Bitcoin and blockchain, crypto jargon and decentralized finance.
• Matthew Leising’s book “Out of the Ether: The Amazing Story of Ethereum and the $55 Million Heist that Almost Destroyed It All.”
• The original white papers on Bitcoin, by the pseudonymous Satoshi Nakamoto, and on Ethereum, by Vitalik Buterin.

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