- Ethereum (ETH-USD) is forecast to complete the Kiln Testnet Merge (a fork event) on Jun. 28, which is 76 days from now.
- This is when the new Proof of Stake (PoS) system for transaction validations starts.
- All Ethereum mining will cease and the Ethereum blockchain will reduce its electricity drag by 99.9% by cutting out mining.
The Ethereum (ETH-USD) blockchain is on a countdown. You can see this at the website wenmerg.com where a “difficulty bomb” is set to explode when the countdown reaches zero. This will make mining on the Ethereum platform extremely difficult.
Presently, miners use proof of work (PoW) to validate transactions by solving complex mathematical puzzles. The new proof of stake (PoS) model has users who validate transactions using ETH tokens they own. In effect, the mainnet Ethereum platform will merge with the Ethereum 2.0 blockchain platform. It is already using this PoS validation.
The summer date is an estimate, but is based on an interview that CNBC had with Tim Beiko, the coordinator for Ethereum’s protocol developers in Dec. 2021.
What Will Happen With Ethereum Proof of Stake
The new PoS mechanism will allow the processing of over 100,000 transactions per second (TPS). This is much faster than its existing 13 TPS now, according to CNBC.
The actual process of validation and “attestation” is difficult to understand. This article from CNBC describes the details of how a blockchain is broken up into 32 blocks called an “epoch” and then into 32 “shards.” Then, a committee of 128 validators is chosen randomly. The 32 committees then process validations. When two such epochs clear validation, they become an attestation. No one can tamper with or modify that particular block or epoch.
To become a validator, you have to have 32 ETH tokens that you put up as collateral on the Ethereum blockchain. At today’s Ethereum price of $3,100, that amounts to $99,200. You then submit an application to set up a node on the blockchain. Moreover, you need large amounts of computing power (900GB expanding at 1Byte per day).
Many mining companies will become validators. Others can also now join pools. These pools combine Ethereum tokens to become part of a pooled validation company that splits up rewards. This is based on how much Ethereum one stakes.
The issue of whether this can be profitable is not for discussion here, as it can become quite complicated. Suffice it to say that one must completely study any particular ETH staking pool. Keep in mind there are risks, including having your Ethereum tokens as collateral.
The Bottom Line on Ethereum’s Transition to Proof of Stake
Last May, Vitalik Buterin, Ethereum’s Candian-Russian co-founder, told Fortune magazine that Proof-of-Stake could solve the environmental woes tied to cryptocurrency. He says that Ethereum will reduce the amount of electricity needed by a factor of 100 and possibly 10,000. There Ethereum blog says it will reduce electricity by 99.95%.
So far, for example, Bitcoin (BTC-USD) has no plans to move away from proof-of-work, which is mining. This could give Ethereum a huge environmental-friendly advantage over Bitcoin for many institutional investors.
One additional factor about the transition to PoS is that the number of rewards to validators will drop dramatically. Instead of the current 5.4 million new ETH tokens granted per year, it will drop to just 0.54 million a year, according to Lark Davis who runs a popular YouTube channel.
Here is why that is important. Right now, according to Coinmarketcap.com, there are about 120.4 million ETH tokens in the circulating supply. So, every year, there is an inflation increase of almost 4.5% in the total supply through rewards granted to miners. This will drop to less than one-half of one percent per year. That dramatically increases the value of the currency by reducing its dilution.
In other words, expect to see a huge gain in the price of Ethereum over time simply due to the elimination of an inflationary supply. Indeed, with the recent EIP 1559 proposal, which I discussed in previous articles, it is possible that the supply of Ethereum tokens may fall. That will make it a deflationary supply, just like Bitcoin, and enhance its price movement upward.
The bottom line here is that Ethereum could spike in 76 days when Ethereum switches to proof-of-stake validating.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.