Ethereum’s Proof of Stake: Hummer vs Cybertruck

Ethereum’s shift to Proof of Stake (PoS) is akin to trading in a 2009 Hummer for a sleek 2023 Tesla Cybertruck.

The Hummer, much like the Proof of Work (PoW) system, has its roots in brute strength and raw power. It’s the embodiment of the early days of blockchain, where computational muscle was king, and the race was won by those who could solve complex puzzles the fastest. But, as with any gas-guzzler, there’s a cost – and for PoW, it’s the enormous energy consumption and environmental impact. It’s like driving the Hummer on a busy highway; you’re going places, but at what cost?

Enter the Cybertruck – or, in the blockchain world, Ethereum’s PoS. This isn’t just an upgrade; it’s a reimagining of what a consensus mechanism can be. In this new world, validators, much like the electric motors of the Cybertruck, provide the necessary power, but they do so by staking their ETH. It’s a cleaner, more efficient system, where the power to validate transactions and create new blocks isn’t about computational might but about economic commitment and stability.

But just as the Cybertruck isn’t without its critics and challenges – from questions about its design to its durability – Ethereum’s PoS also faces scepticism. The complexity of the system, potential centralization of power, and the need for a significant amount of ETH to become a validator are points of contention. It’s like figuring out all the new features of the Cybertruck – exciting, but also a bit daunting.

As we look to the future, Ethereum’s shift to PoS is more than just a new model rolling off the production line; it’s a sign of a changing landscape. In this new world, where a crypto payment gateway for businesses is not an exotic animal anymore, efficiency, sustainability, and inclusivity are key. The transition signifies a shift in how we think about blockchain technology and its role in our world – much like how the Cybertruck challenges our perceptions of what a truck can be.

Defining Ethereum PoS

Let’s start with the basics. Ethereum’s Proof of Stake (PoS) mechanism is a radical departure from the traditional Proof of Work (PoW) system that came before it (the one that Bitcoin still uses, by the way). In PoS, the security and integrity of the blockchain are maintained not through computational work but through economic stakes. Validators, instead of miners, are the key players in this system. They stake a certain amount of Ethereum’s native cryptocurrency, Ether (ETH), as a form of collateral in a dedicated smart contract on the Ethereum blockchain.

The staked ETH serves as a security deposit. If validators act honestly and follow the protocol, they are rewarded. However, if they act maliciously—for instance, by proposing multiple conflicting blocks or sending conflicting attestations—they risk losing a portion or all of their staked ETH. This punitive measure is a crucial deterrent against dishonest behaviour and is known as slashing. Slashing ensures that validators have a substantial economic incentive to maintain the network’s integrity. On the topic of deterrents, the system also employs a ‘correlation penalty’ to discourage coordinated attacks, making such attempts economically unfeasible.

Key Components of Ethereum PoS

Naturally, validators are at the heart of Ethereum’s PoS mechanism. However, to become a validator, an individual must stake 32 ETH. This high entry threshold ensures that validators have a significant financial investment in the network, aligning their interests with its overall health and security. Indeed, running a validator in Ethereum PoS is a commitment that involves maintaining hardware and network connectivity.
Validators are required to run three distinct software components:

1. The Execution Client processes transactions and maintains the Ethereum state;
2. The Consensus Client is responsible for the PoS-related activities, including the creation of new blocks and communication with other validators;
3. The Validator Client acts as the interface for the validator, managing the staking, proposing, and attesting of blocks.

There’s also an activation queue at play – a mechanism designed to control the rate at which new validators join the network. This ensures a steady and manageable growth of the network, preventing sudden surges that could destabilise the system.

Understanding Ethereum’s PoS Timing Mechanism

Importantly, Ethereum’s PoS introduces a structured timing mechanism, dividing time into slots and epochs. There are a number of benefits to this system, but the most notable regards the enhancement of network efficiency and security.

Slots are fixed 12-second intervals during which a validator is chosen to propose a new block. The selection process is pseudo-random, based on the amount of ETH staked and other factors, ensuring a fair and decentralised selection process.

An epoch consists of 32 slots and lasts approximately 6.4 minutes. At the start of each epoch, a group of randomly-selected validators is chosen to form a committee, whose purpose is to check the work of the block proposer and vote on the block’s validity.

Of course, by dividing the validator set into committees, Ethereum’s PoS reduces the workload on individual validators and ensures that every validator has the opportunity to participate in the consensus process regularly, but not necessarily in every slot. This efficient distribution of responsibilities enhances network scalability and performance.

Transaction Execution in Ethereum PoS

For the chronologists among us, the following section will be of great use. Indeed, a transaction in Ethereum PoS undergoes several steps, starting from its creation and signing by the user, through validation by an execution client, to its addition into the blockchain by a block proposer. The process is secured by Ethereum’s JSON-RPC API and involves various network layers for validation and attestation. Let’s delve deeper into each step:

1. Creation and Signing of the Transaction: The process begins with the user creating a transaction. This typically involves specifying the recipient, the amount of Ether (ETH) to be transferred, and any data relevant to smart contract interactions. The user then signs the transaction using their private key. This signature is a critical security feature, as it verifies that the transaction was indeed initiated by the rightful owner of the funds.
2. Submitting the Transaction: The signed transaction is submitted to the Ethereum network. This can be done using a variety of interfaces, such as a cryptocurrency wallet or a web interface that interacts with Ethereum nodes. At this stage, the user can specify the gas price they are willing to pay. The gas price is a fee paid to validators for processing the transaction. Higher gas prices can incentivize quicker validation by validators.
3. Validation by an Execution Client: Upon receiving the transaction, an Ethereum execution client (formerly known as the Ethereum Virtual Machine or EVM) verifies its validity. This includes checking whether the transaction is correctly formed, the signature is valid, and the sender has sufficient balance to cover the transaction and the gas fees. If the transaction is valid, the execution client adds it to its local mempool, a pool of pending transactions.
4. Broadcasting the Transaction: The transaction is then broadcast to other nodes in the Ethereum network. Each node that receives the transaction will also validate it and, if valid, add it to their local mempool.
5. Selection by a Block Proposer: In each 12-second slot of the PoS mechanism, a validator is chosen at random to be the block proposer. This validator is responsible for creating a new block. The block proposer selects transactions from its mempool, including them in the new block. Transactions with higher gas fees are often chosen first, as they are more profitable for the validator.
6. Execution and Validation of Transactions in the New Block: Once the block is proposed, it is distributed to other nodes. These nodes execute all the transactions in the block to verify their correctness and update their local copy of the blockchain state accordingly. Other validators in the network then attest to the validity of the new block. Their attestations are crucial for the block to be accepted into the blockchain.
7. Finalisation of the Transaction: A transaction is considered finalised when it becomes part of a block that is deeply embedded in the blockchain and has received a sufficient number of attestations.

The way ‘finality’ is structured in Ethereum’s PoS makes this an incredibly expensive attack vector for bad actors. Indeed, finality is achieved when a transaction becomes part of a block within a ‘supermajority link’ between two checkpoints. Checkpoints, occurring at the start of each epoch, are crucial for confirming the network’s consensus. An attack on this system would be costly, as it would require sacrificing a significant portion of staked ETH.

On the topic of security, Ethereum PoS uses the LMD-GHOST algorithm for fork choice, determining the chain’s head based on the weight of attestations. This approach enhances the network’s security across the board.

Ethereum PoW vs. Ethereum PoS

What a budding blockchain enthusiast might find interesting, aside from the shiny new network design, is the reasoning behind Ethereum’s monumental shift. As such, let’s take a look at a number of factors that drove the move in an effort to uncover some of the benefits that this new network design brings.

Energy Consumption and Environmental Impact was likely one of the most widely discussed issues with PoW. Ethereum’s PoW, like Bitcoin’s, required vast amounts of computational power for mining activities, leading to high electricity usage and associated environmental concerns. Indeed, PoS dramatically reduces this energy expenditure as it does not require energy-intensive mining operations. Validators in PoS only need to run a node, which requires significantly less power, thereby reducing the blockchain’s carbon footprint.

The Centralization of Mining Power was also an ongoing issue within Ethereum’s PoW system. This was due to economies of scale, where larger mining operations with more resources could achieve greater efficiencies, leading to a concentration of mining power in the hands of a few. PoS addresses this by eliminating the advantage of specialised mining hardware. Since block validation in PoS is based on staked ETH rather than computational power, it opens up the validation process to a broader base of participants, reducing the risk of centralization.

Security Vulnerabilities were also apparent in the old system. Notably, PoW systems are susceptible to a 51% attack, where an entity with more than 50% of the mining power could potentially take control of the network and manipulate it for their gain. While expensive and difficult, the risk remains a concern, especially for smaller PoW blockchains. In PoS, executing a 51% attack is not only more challenging but also more costly, as it would require control of a significant portion of the staked ETH. Moreover, the potential penalties and slashing in PoS create additional financial disincentives for such attacks.

Barriers to Entry, including the high cost of mining equipment and the technical know-how required for PoW mining, were known for limiting participation in the mining process to a relatively small group of individuals and organisations. As one can imagine from the aforementioned, PoS lowers these barriers by allowing more individuals to participate in the consensus process as validators, requiring a lower capital investment and technical threshold.

Delays in Transaction Processing should also be mentioned. In PoW, the time to create a new block can be variable and sometimes lengthy, leading to delays in transaction processing during times of high network congestion. With Ethereum’s PoS, the block time is more predictable and consistent, leading to more efficient transaction processing and an overall smoother experience for users.

What Could Go Wrong?

Having talked about the positives, it’s difficult to imagine that Ethereum’s PoS can do anything wrong. However, it is inherently more complex than its PoW counterpart. The added elements such as epochs, slots, validators, and various software clients contribute to this complexity. This increased complexity can make the system more challenging to understand and maintain, potentially leading to a higher risk of bugs or vulnerabilities.

Moreover, while PoS reduces the risk of mining centralization seen in PoW, there is still a concern about the centralization of staking power. Wealthier participants who can afford to stake more ETH have a higher chance of being chosen as validators, potentially leading to a concentration of power among the wealthy.

As the third con, we should cite the possibility that validators could form cartels to control decision-making processes or manipulate certain network outcomes. Although the design of Ethereum’s PoS includes mechanisms to prevent such scenarios, the risk cannot be entirely eliminated.Nevertheless, it’s certain that the benefits outweigh the downsides – or else why would HRH. Buterin would have given the green light?

Summing up: The Future Landscape of Blockchain Consensus

Of course, this evolution of Ethereum is significant. This transition highlights a growing trend towards more sustainable, efficient, and scalable consensus mechanisms within the blockchain ecosystem. While future-talk is underway, here are my predictions for the future of the industry.

Firstly, ethereum’s move to PoS is clearly a response to the increasing demand for environmentally sustainable practices in technology. This trend is likely to continue, with more blockchain networks seeking eco-friendly alternatives to the energy-intensive Proof of Work (PoW) models.

Next, despite some challenges, PoS offers a framework for potentially more secure and decentralised networks. Future developments in blockchain technology will likely focus on refining these systems to address current limitations, such as the risk of validator cartels and the concentration of staking power.