There may be no more difficult space for people to understand than the “crypto” space. Blockchain technology is well beyond most people; even technology types I deal with are uncomfortable with the details. Cryptocurrency has been hailed as the savior of modern finance and at the same time the biggest bubble of all time. Now, with one of the kingpins of crypto undergoing a major technical/business transformation, it’s no wonder that people are worried, excited, or both.
Ethereum’s “Merge” is perhaps the most significant shift in all of crypto, but it’s surely not the easiest thing to understand. Forget the murky term “merge” and dig down and you find another layer of murk, that we’re talking about a shift from “proof of work” to “proof of stake”. Most of the stories are long on promises and short on details, so let’s look at things and see what we might expect from “the Merge”.
A blockchain is a series of contract/transactional steps recorded in a chain of “blocks” and encrypted. Since these chains are electronic records, they have to be able to address the challenge of authenticity. A chain has to be validated, but to validate it you have to be able to decrypt it, and if you can do that you could in theory falsify a copy, claim it’s real, and steal a boatload of money (cryptocurrency) or falsify a contract. The traditional approach to assuring authenticity is “proof of work”.
Proof of work enlists a host of good guys, “nodes” that will all authenticate blockchains. Over half of all nodes have to agree a chain is valid, which means that for a bad guy to falsify a chain they’d have to control over half the nodes. The problem is that for every new blockchain you have what’s essentially a vote on validity, and since this all involves massive encrypt/decrypt, it’s very time-consuming, resource-intensive, costly, and hard on the environment. It’s called “proof of work” because it takes a lot of work to get to an authenticity proof.
The alternative that Ethereum is going to adopt, proof of stake, is different. Instead of a massive vote on authenticity, every “Validator” puts up a stake of ethers (ETH), the cryptocurrency used by Ethereum. The current value of the stake is roughly fifty thousand dollars US. If you forge a block or validate a forged block, your stake is reduced and eventually eliminated.
The practical benefit of this approach is that it scales. With an estimated reduction of 99% in power needs, the proof-of-stake approach could be used on the scale needed to support initiatives like Web3, which IMHO could simply not be supported using more compute-intensive proof-of-work technology. Proof of stake is also faster, which is important if some retail online applications of Web3 are to offer responses fast enough to satisfy users that their transactions are in fact working.
All this good stuff is important, but it’s not necessarily going to drive Web3 forward, or even help it shake off the increasingly skeptical publicity it’s been getting. There are even some valid concerns about the very technology advances that are cited as proof-of-stake benefits.
To be a node in a proof-of-work blockchain system, you need considerable compute power. The requirements for proof-of-stake blockchains are much less dramatic, and Ethereum even allows for “pools” of users to combine to raise the needed stake and create the processing needed. That’s much less than that needed for proof-of-work, too. All this has encouraged some to say that proof of stake is the vehicle for creating the distributed, decentralized, future that Web3 is usually associated with.
One potential issue here is the sheer populism that proof of stake could create. Imagine some number of pools of purported stake-sharers. How many such pools might be required to foist a false document? What if the total value of a proposed forgery is far greater than the stake? We regulate banks, companies. Who regulates stakeholders? They are the validators, but who validates them? Is there a process of strong identity validation, technical validation, associated with this?
The governance of the pools process is IMHO a weak point in the new Ethereum model. It’s easy to see how it could be used by cybercriminals to defraud people, simply by claiming to be setting up such a pool and taking “investments”. It’s also easy to see how criminals might invest in the pools, or even become validators, to launder money, if there aren’t steps taken to ensure that these sorts of things can be caught.
It’s also important to note that the stake is defined in ethers not in dollars, which means that the buy-in price and the amount at risk will depend on the current value of an ether. Suppose they devalue? Could the required stake fall to the equivalent of a hundred bucks or so? Or suppose that ethers appreciate wildly, and the stake is now worth a million dollars? Do we see people cashing out of their role to take advantage of the appreciation?
None of these fears of mine need derail the progress Ethereum is making, and I’d not want it to. I’ve said in the past that I believe that Ethereum is the strongest of the crypto concepts, and this Merge will only make it stronger. It’s not Ethereum that worries me as much as what could be done with and to it. We’re not going to find that out by digging into the differences between proof of work and proof of stake. We’ll have to experience the outcome by experiencing the applications.
The metaverse really isn’t a blockchain application, and the challenges associated with making it real at the scale that Meta (at the least) hopes have nothing to do with crypto, currency or otherwise. The real applications will be some flavor of Web3. Even the cryptocontract feature of Ethereum is really a Web3 concept. Validation by consensus, in the end.
Can we trust consensus, however we arrive at it or prove it, as the ultimate test of what’s real? I mentioned the ‘60s cultural icon Carlos Castaneda in connection with all this before. Did he prove that reality could as easily be the product of shared delusion as the product of truth? I’m not trying to get philosophical here, just get to the key point. That point is best related as a question; “Who are the masses?”
Any distributed system of validation is based that, on the average, what’s true for most is what’s real. We have an alternative approach today, the “centralized” framework where a few giants we all know are the guarantors of identity, validity. It sounds inherently autocratic, but we know who these people/companies are and we can sue them, regulate them, police them. Will we know all that, be able to do all that, in the decentralized Web3 world? I wonder. I worry.