InvestorPlace – Stock market news, stock advice and trading tips
- Moving to the proof-of-stake model raises questions about Ethereum (ETH-USD) future.
- Investors need to understand the fundamental reasons and the advantages and disadvantages of the change.
- The Beacon chain represents the same risks inherent in the proof-of-work model.
Source: Filippo Ronca Cavalcanti / Shutterstock.com
Like Ethereum (ETH-USD) continues its transition to a full proof-of-stake (PoS) network, questions have started to arise. The choice had previously been hailed for its environmental benefits. But now broader questions about centralization have begun to arise. However, the risks inherent in Ethereum are not much different from what they were under the outgoing evidence model.
Why is ETH changing?
Ethereum includes a network of nodes that validate transactions. One thing to understand about these so-called nodes is that they are not fixed in number. According to Etherscan, in the past month there have been between 1,000 and 3,000 nodes, usually around 2,500. The nodes themselves are groups of people trying to validate a block. Validate a block and get rewarded with valuable ETH. This is one of the reasons nodes exist. Block validation work is vitally important.
It is also extremely important to understand how this work is done. Ethereum began operating under a proof-of-work (PoW) model. In this model, nodes pool massive computing power in order to solve complex mathematical calculations. Those who do are rewarded with ETH.
But this computing power requires huge amounts of electricity. It harms the environment. The media seized on this beginning of last year. At that time, many articles were published claiming that Ethereum could quickly and easily switch to a PoS model to reduce its environmental footprint.
How proof-of-stake works
In a PoS model, validators must contribute at least 32 ETH to the network to have a chance of proving blocking. Then, a validator is randomly chosen from these nodes. Prove the stake, 32 ETH, and have a chance to prove the next block added to the blockchain.
Currently, Ethereum is running both models with plans to fully transition to PoS this year. This chain is called Beacon chain. This change was once universally welcomed mainly on the basis of environmental arguments. But this transition is beginning to raise other valid questions.
Mainly, PoS raises the question of the centralization of power on the blockchain. This is pretty much antithetical to the premise of blockchain and Ethereum.
But as long as a validator can prove they have a pool of 32 ETH to stake, they can validate a block. One of the arguments here is that a group with enough capital can simply invest some money and create a set of valid nodes. He could then just throw so much money at it that he would be more likely to validate blocks and gain influence.
Anyway, that’s the assertion. I wonder to some extent. On the one hand, Ethereum claims to have mechanisms in place to prevent this from happening. Second, how does this significantly differ from the threat posed by mining groups under the PoW model? Miners aggregate large amounts of capital to create supercomputing clusters to then mine ETH.
In theory, the same concentrated power risk exists under POW and POS. This power can be wielded in dangerous ways in either model. So I don’t really believe the threat is greater with a point-of-sale model.
Bet big on Ethereum
There are massive bets on the success of the POS model. There is more than $35 billion at stake in the move to the Beacon chain. $10 billion of that is being staked in ETH staked lido (STETH-USD).
Experts fear Lido poses a threat as it currently controls much of the Beacon chain’s cash. Lido allows users to contribute any amount of ETH to a pool which, once it reaches 32 ETH, is directed to a service that Lido chooses to set up a validator. The reason so much capital is booked through Lido is that it is liquid. The other $25 billion invested in ETH is on hold until the Beacon Chain goes live, apparently this year.
Lido currently controls around 90% of the $10 billion liquid market for staked ETH. Most experts believe that once the change is made, ETH should rise rapidly.
The anxiety is exaggerated. Most of the risks posed by Lido and the Beacon chain are the same as before.
At the date of publication, Alex Sirois did not hold (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.
The post Fear Around Ethereum Switching to Proof-of-Stake Is Overblown appeared first on InvestorPlace.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.