Ethereum’s transition from a PoW (proof of work) algorithm to a PoS (proof of stake) algorithm, has been in the works for quite a while. It seems that the switch is finally here. The beacon chain will allow PoW Ethereum 1.0 to grow into PoS Ethereum 2.0. But how does the beacon chain work and how can this affect your interaction with Ethereum? Find out in our beginner’s guide to Ethereum’s Beacon Chain.
To understand the change, how the new chain will work and how this can affect you, it is necessary to delve a little deeper into what PoW and PoS are. Since a blockchain is a decentralized and distributed database that is also immutable (or should be), actors within the system must come to a consensus over proposed changes. This is done through a consensus algorithm, which for Ethereum has been a PoW algorithm until now.
At this point you might be asking yourself why consensus is needed at all. The answer is simple: Without it, any given actor could add a block to the blockchain, time stamp transactions and claim rewards, making a huge mess of what should be an organized open ledger. No consensus would mean that no one knows which blocks are legitimate and which are not. Up until now, the most successful and widely used blockchains have a PoW algorithm to achieve consensus, which Ethereum is looking to change.
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PoW vs PoS
A PoW algorithm works through a lottery of sorts. In this lottery, actors invest computing power in figuring out the value of the winning ticket – basically, what the number of the winning ticket is. Once one of these actors finds the value of the winning ticket, they broadcast it to the network. The nodes then validate that value by checking that it conforms with the specified target value. These actors who invest computing power to find lottery ticket values are called miners, and their incentive to invest their mining power comes from the rewards that they derive from discovering the block – namely ownership over newly minted coins. These come into the money supply via new blocks and transaction fees for time stamping transactions on that block.
PoW leads to an arms race of sorts between people who seek to add more computing power to claim more lottery wins. It also centralizes the process of block creation to an extent, which is anathema to the ethos of a decentralized system. In comes PoS, which replaces the computing power that miners invest in finding the winning ticket value, with a voting system – consensus through a ballot system. Instead of investing computing power, actors in a PoS system must deposit a certain amount of money or prove they have it, in order to have a right to cast a ballot.
The Beacon Chain
This is basically how the beacon chain works. Validators add blocks and time stamp transactions within those blocks based on a voting system. Each validator must deposit 32 ETH in a smart contract to be eligible to cast a ballot. When a block is rejected by voting, all the transactions that should have been included in it are passed onto the next block. A new block is added to Ethereum’s beacon chain every 16 seconds, making the voting process quick.
To avoid attacks or coordinated voting, validators are chosen at random for the validation of the next block in the chain. These validators could also lose the money they have deposited if they behave in an inconsistent manner or maliciously towards the blockchain that they are supposed to protect.
Ethereum’s beacon chain has been running this PoS algorithm for about a year. Its consensus is not entirely based on the validation of blocks via voting. Beacon has relied on a reference to the PoW Ethereum chain that it will eventually replace. This change is expected to be implemented during the first quarter of 2020.
How Does Ethereum’s Beacon Chain Switch Affect You?
If you use Ethereum to transact, the only thing you should be concerned with is the smooth transition to Ethereum 2.0 through the beacon chain. Your addresses should still work once the transition is complete and you should be able to transact without noting any changes on your side. Nevertheless, since this is a major change in the network and things could go wrong, you should make sure that you move all your funds into a non-custodial wallet that is safe, like a hardware wallet for example.
While Ethereum is going through this change, funds left on a platform such as an exchange, could be vulnerable. Exchanges will have to update their trading platforms and accommodate other technical upgrades during the transition to the beacon chain. During these upgrades, funds can be lost due to a number of reasons.
Beacon Chain: Market Implications
The implementation of Ethereum’s beacon chain might also have an effect on the price of Ether. It all depends how the switch rolls out and how the exchanges adopt it. Beacon has been running in parallel to the PoW Ethereum chain for a while now, so the Ethereum Foundation has been able to reduce the risk of a switch, substantially.
No Beginner’s guide to Ethereum’s beacon chain would be complete without a recommendation to make sure that you balance risk on your side. This will allow you to enjoy the benefit of having a stake in what is expected to be the first large-scale, successful, PoS blockchain. Not only will you be able to reap the reward if the market validates the change, you might also be able to muster the 32 ETH necessary to become a validator and get rewards for helping maintain the validity of the blockchain when you stake your funds.