Ethereum Merge: Proof of Work vs. Proof of Stake
Happy Monday!
Ethereum is preparing to move from proof of work to proof of stake. They’re calling it “the Merge”. I did a little deep diving to understand what exactly this means because I was a bit confused and found this great video that does a good job breaking it down.
In short, a blockchain that uses proof of work (POW) relies on ‘miners’ with large computational power to mine new coins and validate transactions. This creates high energy needs and gives an advantage to miners who can create economies of scale with mining equipment/energy costs.
Instead, proof of stake (POS) relies on randomly selected ‘validators’ to validate transactions. To become a validator you have to put a sort of security deposit, ie. put up coins in the form of a stake. (If you validate fraudulent transactions, some of your stake will get taken away.) This allows more people to have the chance to validate transactions, creating more decentralization, and vastly decreasing energy usage. (Ethereum is predicting this will reduce energy use by 99.5%.)
Anyone else out there have a better way to explain this that I can share? Does this explanation make sense?
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Disclaimer: All opinions are my own. The content on this site and on the podcast does not constitute financial, legal, accounting, tax, or investment advice.
