The so-called Proof of Stake (PoS) is a consensus algorithm that aims to be faster and cheaper than Proof-of-Work (PoW).
The first cryptocurrency ever created in the world, Bitcoin, was created using PoW as a consensus algorithm, and still uses it today. Indeed, all first-generation blockchains, such as Litecoin, use it, and even for Ethereum in 2015, when it was created, PoW was chosen because it provides high levels of security.
However, while PoW offers a high level of security, it has a couple of major limitations: the number of transactions it is able to validate, and the energy costs.
The first limitation, for example, means that only about 3,000 transactions can be validated on the Bitcoin blockchain every 10 minutes, a small fraction of the number validated by Visa, for example.
This limitation affects all blockchains that use PoW, making them unscalable except by using second-tier solutions, such as Lightning Network, that do not validate on-chain transactions.
The other problem is related to the energy consumption of the work required by the machines used to validate transactions. However, this is a problem that only affects miners economically, while the environmental impact affects everyone.
Proof-of-Stake does not have these limitations.
How does Proof of Stake work
Or rather, as far as the volume of validatable transactions is concerned, this is enormously higher than that of PoW. There are now several second and third-generation blockchains that use PoS, and they do not seem to suffer from scalability problems.
As far as energy consumption is concerned, however, the advantage is enormous, since Proof-of-Stake requires minimal consumption of electricity.
In fact, instead of using the work of computing machines, to validate transactions it uses nodes that have significant amounts of tokens in storage. Since those tokens are only valuable if everything works properly, their holders have every interest in validating transactions correctly. So far, there are no known major problems with PoS in this respect.
The Ethereum project was born with PoW, and to date has maintained this consensus algorithm. However, the two limitations mentioned above mean that the commission costs that need to be paid to miners in order to have a transaction validated are now high, but with the move to Proof-of-Stake we expect a clear reduction in the cost of PoW, and a big step towards greater scalability.
In fact, Ethereum’s PoS-based parallel blockchain, Beacon Chain, is already active, but still only in the testing phase. It is not known when it will be integrated into the mainnet, but it is possible that by the end of 2021 these tests will end, and release dates can be scheduled.
When Ethereum 2.0, based on Proof-of-Stake, is finally launched, it will be a kind of quantum leap for the project, allowing it to support a much higher number of transactions than at present, and probably comparable to networks such as Visa, while at the same time greatly reducing commission costs. It will be a real fundamental revolution, the effects of which could greatly benefit the process of mass adoption of Ethereum.
The important thing will be that nothing goes wrong and that everything works as it does now. In theory, this is entirely possible, but it is not surprising that the developers are taking their time to get it right. Ethereum is now worth hundreds of billions of dollars, and it wouldn’t make sense to risk blowing it all up.