ETHEREUM SHIFTS TO ALTERNATIVE “PROOF OF STAKE” SECURITY METHOD

After years of preparation, Ethereum—the world’s second most popular digital currency after Bitcoin—has completed its transition from the standard Proof of Work (PoW) method of validating transactions and adding new coins to the alternative called “Proof of Stake” (PoS).

In PoW, new coins are created by participants solving complex mathematical problems using massive computer power. The solutions are by trial and error and the first to solve a problem has created a new coin.

PoW systems have been criticized for the vast amounts of energy consumed by networks of computers churning away to create and validate new coins.

The method uses 0.6 percent of the world’s electricity, more than the entire nation of Norway, and threatens Europe’s ability to meet its emissions commitments under the Paris accords, the Cambridge Bitcoin Electricity Consumption Index has calculated.

In PoS, a player who wants to create a new coin pledges a “stake” of digital currency. The creation is validated by other players chosen at random, based on their own stakes and the amount of experience they have validating transactions.

One drawback to PoS is the large investment required to put up a stake of digital currency; another is that the player must freeze the stake for a period of time in order to earn a return.

Switching to proof of stake will cut Ethereum’s energy demand by 99.5 percent, according to the Ethereum Foundation.

Also, the switch might qualify Ethereum as a security under U.S. law, Gary Gensler, chair of the Securities and Exchange Commission, said on 15 September.

A financial instrument qualifies as a security if it passes something known as the Howey test, which assesses whether investors expect to earn a return based on the effort of third parties.

Securities must abide by extensive regulations in the U.S.