Ethereum 2.0 comprehensive analysis: The path to transformation from PoW to PoS

The transformation of Ethereum 2.0 from PoW to PoS is a major change in blockchain. The transformation stems from PoW's high energy consumption and poor transaction processing capabilities, which cannot meet the industry's development needs. The "merger" will be completed in September 2022, and there will be subsequent upgrade plans such as sharding. PoW and PoS have obvious differences in principle and advantages and disadvantages. Transformation affects economic models and ecosystems, and also faces challenges at technology, community, and regulatory levels, aiming to improve Ethereum's scalability, transaction speed and energy efficiency.

Transformation background

• Limitations of PoW: Under the PoW mechanism, miners need to compete for accounting rights by calculating difficult mathematical problems, and their energy consumption is extremely high 13. At the same time, Ethereum can only process 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.

Transformation process

• The Merge (merger): In September 2022, Ethereum completed the "merger" and officially transitioned from PoW to PoS1. This upgrade reduces Ethereum's energy consumption by 99%.
• Survey upgrade plan: For example, the EIP-4844 in the Dencun upgrade paves the way for sharding technology. Sharding is one of the ultimate goals of Ethereum 2.0, splitting the network into multiple "slicing" to process transactions in parallel, greatly improving network throughput.

Comparison of PoW and PoS mechanisms

• Working principle3
  • 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.
• Features and advantages
  • PoW: After long-term practical test, it is highly secure and can effectively resist 51% attacks; it has a high degree of decentralization. In theory, anyone can participate in mining by investing computing power.
  • PoS: The energy consumption is extremely low, in line with environmental protection concepts; it is scalable and can support higher transaction throughput; reduce the risk of mining centralization and reduce the possibility of monopoly computing power of large mining pools3.
• Insufficient disadvantages
  • PoW: Energy wasted severely, a large amount of computing power and electricity were consumed in mathematical calculations without practical significance; transaction processing speed was slow, making it difficult to meet the needs of large-scale commercial applications3.
  • PoS: There is a problem of concentrated equity, which may cause a few large-scale currency holders to have too much voice; participants need to lock in a certain amount of currency, reducing capital liquidity3.

Transformation Impact

• Economic Model
  • 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 issuance. ETH enters the deflation stage, which may support the price increase.
  • Derivatives 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
  • Developers: Provide developers with 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 lose their mining income and have to transfer their computing power to other blockchains. Some may choose projects such as Ethereum Classic ETC.

Transformation Challenge

• Technical Level: The upgrade process is complex, involving multiple aspects such as the consensus layer and the execution layer. 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 the PoW miner group 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 attract the attention of regulators and face stricter regulatory requirements, bringing uncertainty to the upgrade.

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