How does ETH1 view the PoW and PoS mechanisms?

Author: 7 O'Clock Capital

With the ETH2.0 merge approaching, which brings greater opportunities and uncertainties? Although Bitcoin has also experienced forks in the past, its consensus mechanism remains PoW. However, Ethereum is different; its fork involves a fundamental change in the consensus mechanism, splitting into PoW and PoS chains. If successful, it could lead to a price increase, allowing miners to recoup their investments or increase earnings. Conversely, if there are mistakes, it could bring more instability to the Ethereum ecosystem during a bear market and introduce uncertainties for miners' future development.

In fact, the development of Ethereum represents thousands of ecosystems. Currently, miners support the PoW chain, while developers run the PoS chain. How to choose? ETH1 provides such an option.

What is ETH1?

Ethereum One (ETH1) is a new public chain in the Ethereum ecosystem formed by a hard fork at a specific block height, inheriting the PoW functionality of Ethereum, allowing all mining machines to participate in mining. Miners on this chain will use a new proof-of-work algorithm to build new blocks and implement new features on this chain through algorithm improvements, enhancing user experience.

How ETH1 views the impact of the merge

Philosophical differences between PoW and PoS

• PoW is more open: PoW is dynamic and belongs to an open competitive system, while PoS is a static system. PoS can be likened to land ownership and rent; as the market develops, the open system will inevitably triumph over the static closed system.
• PoW has a more developed market: The PoS mechanism is akin to stock market stock dividends and splits, where the market value remains unchanged if there is no influx of funds. Without the splitting of funds, it is merely a numerical game. In contrast, the PoW mechanism resembles private placements and stock allocations, where only through investments close to the stock's par value (mining costs) can one own the stock. The funds that come in are thus solidified in that stock, so the development market for PoS will be hindered; without new funds, it will decline.
• PoW automatically screens out speculators: PoW requires a certain cost to be invested, while PoS allows more speculators to hold new coins, which cannot bring real value to the ecosystem. From a physics perspective, orderly energy input is negative entropy; without the exchange of energy and information, there is no value. Therefore, the value of ETH transitioning to PoS is not significant.

From the miner's perspective, the impact of ETH upgrading to PoS

• Miners have limited choices: Currently, there is no coin that can accommodate all ETH's hash power, and miners' existing choices are to sell mining machines at a loss or invest in a new project.
• Time left for miners is sufficient to expand their business: First, the upgrade to ETH2.0 is a lengthy process because the current Ethereum ecosystem carries a significant portion of market funds, users, and Dapps. Caution is required regarding security and future scalability. Second, each phase of 2.0 will take a long time for development, testing, updating, implementation, and improvement to ensure safety and stability. Finally, from multiple perspectives such as market conditions and development, the ETH merge merely accelerates miners' expansion of their business.

Impact on L2 after the upgrade

• L2 essentially supplements L1. After upgrading to PoS, L2 will lose competitiveness, and transitioning to L2 will involve more steps, leading users to choose to stay on L1.
• After the upgrade, users may question whether gas fees will decrease. Unfortunately, it may not happen as expected in the short term because reducing gas fees primarily depends on sharding technology, which is currently difficult and has been shelved. Additionally, achieving the merge will take a long time, and in the future, L2 will still need to share the pressure on the ETH mainnet.

Benefits of ETH1 for ETH miners

After the Ethereum merge, ETH holders will receive an airdrop of 1 ETH: 10K ETH1, with the reward amount distributed based on the price of Ethereum and the airdrop ratio, where the held ETH must be circulating coins.

Conclusion:

• The significance of ETH upgrading to PoS is minimal: The current value of PoW is essentially based on hash power - electricity - capital, ultimately falling on capital. Since PoW has not effectively addressed the issues of hash power decentralization and energy consumption, it has led to a high concentration of hash power and environmental impact, which is not fundamentally different from PoS. The transition from PoW to PoS is essentially the same, not affecting block security, but merely avoiding the issue of electricity waste.
• Currently, the difficulty of upgrading to PoS is high: The sharded transactions mentioned in the original ETH2.0 roadmap are very difficult to implement, and transactions within different shards are hard to operate independently, making verification unable to be fully processed in parallel. In the new roadmap, the scalability brought by data sharding is weak, indicating that the risks of upgrading to 2.0 are significant.
• If ETH successfully completes the merge, miners may recoup their investments early. However, if mistakes occur, ETH1 can safeguard users' hedging risks, allowing continued mining, which is the best choice for miners.