Comprehensive interpretation of ETH upgrade: the technological revolution from PoW to PoS

This article comprehensively interprets the major upgrade of Ethereum from the Proof of Work (PoW) mechanism to the Proof of Stake (PoS) mechanism. Due to the limitations of the PoW mechanism such as high energy consumption and low efficiency, and cannot meet the industry's growing demand for blockchain scalability, speed and efficiency, Ethereum has launched this upgrade. The article compares the principles and advantages and disadvantages of the two mechanisms PoW and PoS, elaborates on the key upgrade processes such as "The Merge", Dencun upgrade and future sharding, and analyzes the impact of this upgrade on economic model, ecosystem, developers, users and miners, and finally discusses the technical, community and supervision challenges faced during the upgrade process.

Upgrade background

• Limitations of PoW1
  • Energy consumption problem: Under the PoW mechanism, miners need to compete for accounting rights by calculating difficult mathematical problems, which consumes extremely high energy, which is contrary to the current trend of sustainability and environmental protection.
  • Performance bottleneck: Ethereum PoW can only handle about 15 transactions per second, and faces the explosive growth of decentralized applications, transaction congestion, and soaring gas fees.
• Industry development needs: The blockchain industry is constantly developing, and large-scale commercialization puts higher requirements on the scalability, transaction speed and energy efficiency of blockchain. Ethereum needs to be upgraded to maintain its leading position.

Comparison between PoW and PoS mechanism 1

• The principle is different
  • PoW: Rely on miners to invest their computing power to solve mathematical problems to compete for accounting rights and obtain block rewards. Whoever has strong computing power and fast problem solving speed will have a greater chance of obtaining accounting rights and rewards.
  • PoS: The accounting rights are allocated based on the number of ether coins held by the participants and the holding time. The more coins they hold and the longer they take, the higher the probability of obtaining the accounting rights.
• Pros and cons are different
  • PoW: The advantage is that it has been tested for a long time, is highly secure, can effectively resist 51% attacks, and has a high degree of decentralization. The disadvantage is that energy waste is serious, transaction processing speed is slow, and it is difficult to meet the needs of large-scale commercial applications.
  • PoS: The advantage is that it consumes extremely low energy, has strong scalability, can support higher transaction throughput, and reduce the risk of mining centralization. The disadvantage is that there is a problem of concentrated equity, which may lead to a few large currency holders having too much voice, requiring participants to lock in a certain amount of currency, reducing capital liquidity.

Upgrade history

• The Merge: In September 2022, Ethereum completed the transition from PoW to PoS, which reduced Ethereum's energy consumption by 99%, laying the foundation for subsequent upgrades.
• Dencun Upgrade: Launched in 2023, in which EIP - 4844 has greatly reduced the transaction costs of the Layer 2 network by introducing a "blob" data storage mechanism, paving the way for sharding technology.
• Future sharding: Shaving is one of the ultimate goals of Ethereum 2.0. It divides the Ethereum network into multiple "shafts" and processes transactions in parallel, thereby greatly improving network throughput.

Enhancement Impact

Economic Model 1
• Inflation is deflation: Before the merger, the number of ETH issuance per day was about 13,000, and after the merger, it dropped to 1,600, and the number of burns exceeded the number of additional issuances, and ETH entered the deflation stage.
  • Derivative changes: Before the merger, derivatives such as stETH and rETH were discounted due to the inability to redeem instantly. The redemption was opened after six months of merger, and the price was expected to return to 1:1.
Ecosystem 1
• Developers: Provide a more efficient and low-cost development environment, attract more people to build applications on Ethereum, and promote the development of decentralized finance, digital identity verification, meta-universe and other fields.
  • Users: Increase transaction speed and reduce transaction costs, improve user experience, and attract more ordinary users to participate in the Ethereum ecosystem.
• Miners: PoW miners lost their mining income and had to transfer their computing power to other blockchains. Some may choose projects such as Ethereum Classic ETC.

Upgrade Challenge 1

• Technical Level: The upgrade process is complex, involving multiple updates and coordination in the consensus layer, execution layer, etc. Any technical failure or vulnerability may affect the upgrade process and network security.
• Community level: There may be differences in the community regarding upgrade plans, such as the interests of PoW miners' groups being damaged, which may promote hard forks and affect the consistency and stability of the Ethereum network.
• Regulatory level: As Ethereum's influence increases, transformation may arouse the attention of regulators and face stricter regulatory requirements, bringing uncertainty to the upgrade.

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