Ether (ETH) is one of the biggest bitcoin competitors when it comes to mining, and the 2nd biggest cryptocurrency by market capitalization. The Ethereum system uses the multifunctional GPUs for mining, which makes it more profitable. In the beginning, the Ethereum network utilized the proof-of-work (POW) algorithm for mining and security just like bitcoin. The community decided to switch to a proof-of-stake (POS) algorithm to enhance the safety of the system and reduce energy consumption.
A hard fork (similar to Bitcoin’s hard fork) takes place when either the blockchain protocol or the rules governing the functioning of the network and the consensus mechanism are changed by the majority vote of the community. During a hard fork, valid transactions turn invalid and the new version of the blockchain (or fork) is created. The fork helps to enhance the security of the peer-to-peer network.
Ethereum Improvement Proposal (EIP) is a set of Ethereum standards such as client APIs, core protocol specifications, and the contracts. Community members propose and submit EIPs on Ethereum’s GitHub profile for developers’ review and approval or rejection. In 2016, Matthew Light created “Reduce ETH issuance before proof-of-stake #186” also known as EIP #186 proposal, which suggested decreasing the Ethereum mining reward after the switch to POS.
How does it work?
When Ethereum used the POW mechanism for mining, it required immense computational resources and energy to solve mathematical puzzles. This method was borrowed from bitcoin. Its main weaknesses are the increasing difficulty, cost-inefficiency and overall unprofitability for individual miners without powerful hardware. Another drawback of the POW algorithm is susceptibility to attacks. The Ethereum blockchain creates a new block roughly every 15 seconds and gives the miner a 5 ETH reward per block for each crack of the puzzle. Proof-Of-Stake mining is a more viable alternative for Ethereum because it allows miners to reach decentralized consensus much faster. They don’t waste so much power. Their stake or the amount of owned ether allows them to participate in decentralized governance and decision-making.
POW to POS switch
99% of the Ethereum community supported the move by voting. The main purpose of the switch from POW to POS was to improve the mining efficiency and safety of the network against attacks. The fork, resulted by the switch, reduced the annual inflation rate and stabilized the price of ether. By analogy with bitcoin halving, the issuance of ether and the mining reward is dropping gradually. The mining difficulty is adjusted to more optimal energy requirements. While the switch was still in progress, the hybrid PoW/PoS mechanism was used until the transition to PoS was completed in 2018 by launching the Constantinople hard fork.