How can Ethereum smoothly transition to PoS? Miners’ nightmare “difficulty bomb” may be the only solution

The founder of Ethereum divided the development of Ethereum into 4 milestone stages: Frontier, Homestead, Metropolis and Serenity. Ethereum is currently in the third stage: Metropolis-Byzantium. Since the Frontier stage, the "difficulty bomb" (a protocol that increases the difficulty of ETH mining) has been incorporated into the Ethereum blockchain.

Why did the “difficulty bomb” come into being?

Ethereum’s last milestone (Serenity) will bring a major change: Ethereum’s blockchain consensus algorithm will change from Proof of Work (PoW) to Proof of Stake (PoS). That is, before the Ethereum network can switch from PoW to PoS, miners must switch from the PoW blockchain to the PoS blockchain.

Imagine that miners spend a lot of money to buy equipment for mining, but with the advent of PoS, these equipment will become worthless. If miners cannot be prevented from staying on PoW and continuing to mine, three Ethereum cryptocurrencies may be created: ETC, ETH-PoW, and ETH-PoS, which is absolutely a nightmare for Ethereum. The reason is simple. This will not only reduce the credibility and economic value of Ethereum, but also dilute the hash rate ratio of the entire system, making it more vulnerable to hacker attacks.

Therefore, in order to ensure that Ethereum miners can join the new blockchain, the development team introduced the "difficulty bomb" mechanism.

On August 4, 2015, former Ethereum Chief Business Officer Stephan Tual first mentioned the “difficulty bomb” in a blog post.

“A lot of people have been wondering how we will implement the switch from PoW to PoS during the Serenity phase. This will be handled by a newly introduced difficulty adjustment schedule that will smoothly schedule the hard fork over the next 16 months… It will work like this: starting at block height 200,000 (around late August 2015), mining difficulty will begin to experience an exponential increase, and after about a year, the difficulty will increase noticeably. At that time (around the time of the Serenity milestone), the large increase in mining difficulty will cause block times to increase.”

Ethereum's difficulty adjustment algorithm in the home stage keeps its block time stable at 15 seconds. The "difficulty bomb" will increase the difficulty coefficient exponentially, and the block time will also increase significantly, until it is almost impossible to mine blocks. At that time, miners will have no choice but to switch to the new PoS protocol.

Ethereum Ice Age

On September 7, 2016, a protocol to increase the difficulty of mining was introduced to the Ethereum network. According to Tual’s estimates, by December 2016, verifying blocks will become so slow that activity on the Ethereum network will seem to be frozen. This is why the “difficulty bomb” is also called the “Ice Age”.

However, by December 2016, block times had not increased significantly. In March 2017, Ethereum co-founder Vitalik Buterin posted on Reddit about the “difficulty bomb”:

“It turns out that with the change in the difficulty adjustment algorithm brought about by the last hard fork (Homestead), the ice age will come very slowly. Starting from the block height of 3.5 million, the average block time for the next 100,000 blocks (about 1 month) is 25 seconds.”

“For the next 100,000 blocks (about 1.4 months), the block time is 35 seconds; for the next 2.2 months, the block time is about 55 seconds; for the next 3.8 months, the block time is 95 seconds… and for the next 26 months, the block time will be 655 seconds… The final freeze will not happen until 2021 (although it will become very annoying in the second half of 2017).”

The "difficulty bomb" was originally scheduled to be detonated at the end of 2017. However, in October 2017, the "Ice Age" was postponed again. On October 16, the Ethereum network upgraded to the Metropolis phase. This hard fork delayed the "difficulty bomb" by 42 million seconds (1.33 years). Therefore, the block time may increase to 30 seconds around the end of 2018.

With the arrival of Metropolis, the development team will make a smooth transition to PoS through two other measures: first, deploy the Casper algorithm, and one out of every 100 blocks will be mined using the PoS protocol; second, the reward for each block will be reduced from 5 ETH to 3. These measures are intended to ensure that all nodes can deploy the PoS protocol and eliminate the problems encountered before the arrival of Ethereum's final stage, Serenity.

(Figure) Changes in block speed under the influence of the "difficulty bomb"

PoW vs PoS

In the PoW mechanism, computers compete in an algorithm. The computer that first solves the answer and broadcasts the new block to the network is rewarded with new cryptocurrency and transaction fees in the block. Since the computer that solves the answer first will be rewarded, miners are motivated to use as much computing power as possible in order to get the block reward. However, in order to get more hash power, miners need to spend more resources and pay more electricity costs to run mining equipment, which means that the system needs to consume a lot of computing power and electricity.

(Figure) Proof of Work and Proof of Stake

PoS: In this mechanism, it is the validators rather than the miners who play a role. Its principle is: as a verification node, you must first have a certain amount of ETH. According to the amount of ETH and time, the stake used to bet on and verify the block will be generated. Only nodes with stakes can effectively verify blocks. When the blocks you verify are packaged into the blockchain, you will receive block rewards proportional to the stake you have. If you verify malicious or wrong blocks, the stake you bet will be deducted. Since supporting invalid blocks will be severely punished, individuals have a stronger motivation to behave honestly than in the PoW mechanism.

Blockchain architect David Duccini noted that “the mining process exerts constant downward pressure on the underlying price of cryptocurrencies because miners must convert cryptocurrencies into fiat currency to pay for electricity and upgrade mining hardware. They mainly sell cryptocurrencies to speculators. In a PoS-based blockchain, cryptocurrency holders are directly rewarded, and the rewards are proportional to the amount they hold.”

Energy costs

The energy cost of the PoS mechanism is much lower than that of the PoW mechanism; validators stake their funds on blocks rather than solving algorithms through hardware. Michael Gord, founder of MLG Blockchain, said:

“PoS networks are always more efficient than PoW networks. The security of PoS networks is guaranteed by users holding tokens on the network, rather than users providing computing power to ensure the security of PoW networks.”

In PoS, you don’t gain any advantage by using expensive, more powerful mining equipment. This means that there is no need to spend high electricity costs to test and support the network.

David Duccini also said that PoS is better than PoW because it is more efficient.

“The advantage of PoS is that it has low energy consumption, for two reasons: first, it consumes not electricity, but the amount of coins held and the time; second, in a pure sense, because you are a stakeholder, you care about the long-term viability of the blockchain, which is completely different from participants who just want to get quick returns.”

At the same time, the PoS mechanism also makes it more difficult and expensive to conduct a 51% attack. In the PoS mechanism, you need to buy 51% of the ETH market cap - not many people have such strong funds to accomplish this feat, and the network attack may also lead to your own losses, which is obviously not cost-effective. In the PoW mechanism, to conduct a 51% attack, you must control 51% of the mining power - this has happened before: in July 2014, on the Bitcoin network, a Bitcoin mining pool called Ghash had 51% of the mining power for 12 hours.

In extreme cases, mining has been “weaponized” — turning rational actors into “economic terrorists” and underpowered blockchains are vulnerable to attack. Since Ghash controls 51% of mining power, they theoretically have the ability to control transactions on the network and duplicate payments.

Is the PoS consensus algorithm fair?

So, how does the PoS mechanism differ from the PoW mechanism in terms of economic structure?

In the PoS mechanism, the rich get richer. On the blockchain, individuals with more wealth have a greater chance of creating blocks and receiving transaction fees than individuals with less wealth. If you hold 20% of the Ethereum market share, you have a 20% chance of creating a block and receiving the transaction fees included in the block; if you hold 0.005%, the corresponding probability is 0.005%.

In the PoW mechanism, people with more computing power can mine more resources compared to those who cannot afford to buy high-computing computers.

Therefore, whether it is PoS or PoW, the rich will accumulate more wealth. Moreover, with each new block created, the wealth gap will widen.

Ethereum’s final milestone

The PoS mechanism will be fully implemented when Ethereum upgrades to the Serenity phase (the last milestone in the roadmap). At this stage, Ethereum will become a blockchain for business with a built-in Turing-complete programming language. Its programming language can be used by other developers, companies, and entities to create contracts, applications, and systems.

At a 2017 launch event, Ethereum developer Hudson Jameson discussed Ethereum’s roadmap. While Hudson did not mention when Serenity would be released, he did say that when it reaches the final milestone, “that’s when you’ll know what the real breakthrough is.”

Compared to other blockchain networks and blockchain-related companies that offer digital asset zones, Ethereum is one of the more business-like blockchain networks. Ethereum’s 4-phase roadmap and white paper clearly describe what the company plans to achieve. The Ethereum white paper states:

“What Ethereum will provide is a blockchain with a mature built-in Turing-complete programming language that can be used to create ‘contracts’ that encode arbitrary transactional functions, allowing users to create any of the above systems, as well as other systems that have not yet been imagined. The way to create a system is as simple as writing the logic in a few lines of code.”

In other words, Ethereum's goal is to provide a service that allows other blockchain-related companies to create any type of application, product or system they want through programming. On January 13, 2018, when the execution progress of the Ethereum roadmap was less than 75%, the value of ETH was as high as $1,430.81. Although the current price of ETH is only around $400, this is still a crazy phenomenon.

The implementation of the PoS mechanism will attract more distributed nodes to join, laying a physical foundation for the operation of various distributed applications. Ethereum will hopefully become an app store in the decentralized field, and a new era of the Internet will also come. From this perspective, Hudson’s comments on the quiet stage sound reasonable.