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Internet of Things July 2021 Viewpoints

Technology Analyst: David Strachan-Olson

Ethereum's Transition to Proof of Stake

The Ethereum Foundation plans to transition the Ethereum blockchain to a proof-of-stake consensus mechanism by the end of 2021, which will decrease the energy use of the network significantly. This change could help the Ethereum blockchain become more popular for smart contracts, decentralized apps, and IoT platforms, as well as encourage interest in distributed-ledger technologies more generally.

Description

Ether (ETH) is the second-most-popular cryptocurrency by value behind Bitcoin. The Ethereum blockchain underlies the ETH cryptocurrency, but the network also supports other applications through smart contracts, which execute various agreements or data transactions between users automatically. Currently, the Ethereum network relies on a proof-of-work (PoW) consensus mechanism to validate transactions, similar to the Bitcoin blockchain. The PoW mechanism requires computers to solve complex mathematical problems for a chance to add a new batch of transactions to the blockchain. The Ethereum Foundation, which oversees the development of the Ethereum blockchain, recently announced its intention to shift the Ethereum network to a proof-of-stake (PoS) consensus mechanism by the end of 2021. A PoS consensus mechanism relies on validators staking a certain number of their coins as collateral when creating and validating blocks. In Ethereum's case, each validator will need to stake 32 ETH (approximately $60,000). The network will choose Ethereum validators at random to create blocks, and unchosen validators will check and attest to the authenticity of blocks. If a validator misbehaves by going offline or authenticating inaccurate transactions, the validator risks losing their staked ETH.

The transition to PoS is part of a larger transition (Ethereum 2.0) to improve the capacity and efficiency of the Ethereum blockchain. Ethereum will adopt sharding—a technique for partitioning the blockchain into parallel sections that validators can work on simultaneously. Sharding should improve transaction speed. A so‑called beacon chain will coordinate the shard chains and manage stakes from validators. The beacon change is already active and will merge with the current Ethereum blockchain when the network transitions to PoS.

Implications

PoW mechanisms to process and validate transactions have proved a secure mechanism for blockchains, but they cause significant energy use. A switch to a PoS mechanism should allow the Ethereum blockchain to maintain a distributed verification network but with significantly lower energy use (up to 99.96% less energy use, according to the Ethereum Foundation). The transition could help make the Ethereum blockchain more useful for transactions but also for smart contracts, decentralized apps, and various automation technologies. If the Ethereum transition is successful, other blockchains may also transition to PoS mechanisms.

For IoT applications, fast, reliable, and energy-efficient blockchains may serve as a secure data-exchange layer for sensor-based automations, supply-chain-management systems, and cloud-based manufacturing platforms. Many companies are exploring distributed-ledger technologies for various applications, such as decentralized finance, energy trading, and health-care management. An energy-efficient Ethereum blockchain with fast transaction-processing speed could represent a key enabler for such applications.

Relevant Areas to Monitor

  • Distributed-Ledger Technologies

    Distributed ledgers, smart contracts, and similar technologies could one day become frameworks for new kinds of transaction and IT systems. Such technologies could also support a wide variety of decentralized applications that promote decentralization, user control, security, automation, and privacy.

  • Digital Transformation & Disruption

    Digital transformation is the use of technology to change fundamentally how a company operates; it is not simply the use of technology to improve a company's core business. Many legacy companies may struggle to embrace digital transformation, which creates opportunities for new players to disrupt incumbents.

Impact Scale

On a scale of low, medium, or high, the anticipated level of impact for this topic is: High.

Impact Timing

On a scale of now, 5, 10, or 15 years, the anticipated impact timing for this topic is: Now to 5 years.

Opportunities in the Following Industry Areas

  • AI/Automation/Software
  • Cybersecurity
  • Finance/Insurance
  • Information/Telecommunications
  • Internet of Things

Relevant to the Following Explorer Technology Areas