Mind Matters Natural and Artificial Intelligence News and Analysis

# Ethereum Moves From Mining to Staking This Month

As there came to be more and more “eth” in the world, the puzzles computers had to solve got very much harder, consuming vast energy resources

In this first part of “Staking and Liquidity on Web3”, the fifth episode of the podcast series between computer engineering prof Robert J. Marks and engineers Austin Egbert and Adam Goad, look at upcoming changes in mining — how cryptocurrency is produced. In Episode 4, the discussion centered on what a decentralized crypto financial system would look like and on challenging new concepts like flash loans and smart contracts. Dr. Marks is the director of the Walter Bradley Center.

A partial transcript, notes, and Additional Resources follow.

Robert J. Marks: Like gold, cryptocurrency like Bitcoin and Ethereum is mined, at least so far. Mining becomes harder and harder as more gold is mined… finding fresh gold deposits becomes more and more difficult the more gold you discover.

In the same way as the supply of a cryptocurrency increases, computers have to solve harder and harder problems to be rewarded cryptocurrency. Investment banker, JP Morgan, estimates that the production cost to mine one Bitcoin today is between $13,000 and$24,000. At this recording, one Bitcoin goes for about $20,000. But famously, the price of cryptocurrency like Bitcoin is very volatile. You know where it is today, but you have no idea where it’s going to be tomorrow. Robert J. Marks: There is a new approach that replaces mining and reduces costs, especially the use of electricity. The new approach is called staking, something that I’ve just learned about thanks to our guests today, Adam Goad and Austin Egbert. Adam, what does it mean to stake your money today? ## How staking is replacing mining for Ethereum Adam Goad: The one everyone is talking about in the news right now [is] Ethereum. Ethereum is moving from proof of work, which is the mining you mentioned, to proof of stake some time in the middle of September 2022. Instead of having all these fancy computers constantly trying to solve cryptographic problems — to have the right to set the next block onto the chain and get the rewards for doing so — what’s going to happen is, people are going to have to stake some Ethereum, I believe the going rate for becoming your own staking validator node is 32 Ethereum. Robert J. Marks: How much is that in US dollars, 32 Ethereum? Adam Goad: Well, today one Ethereum is worth about$1,500.

Robert J. Marks: Okay. So we’re talking about $40,000 or so, is that right? Adam Goad: Yes, but if you don’t have about$40,000 burning a hole in your pocket, you could get together and make a pool of people. You all contribute a little bit to make one of these validators and you have a validator pool then.

Now, instead of everyone racing to solve this problem and using GPUs and dedicated mining machines to the maximum power, now the chain will select one validator for every block. This validator gets to propose the new block to be added to the chain. Then once they have proposed this block, there will be a randomly selected committee that confirms this and makes sure it’s all good and everything. And then once that is done, it is added to the chain. Then everyone else on the chain gets to also confirm the validation in a more passive way. As long as most people agree, 51%, then it won’t be kicked off the chain. And the person who did the validating will get a reward. And I believe also the people on that committee would get a reward as well.

Robert J. Marks: Now let’s talk about validation. You get a validator and they go to the crypto and there’s kind of a committee. This committee has replaced the entire universe, which is trying to mine for something like Bitcoin. So you have a much smaller group, and then you choose the person who takes the place of what the old miner was, right?

Robert J. Marks: And they interact with a blockchain, and the blockchain comes back and… don’t they give them a problem to solve?

Adam Goad: Yes, they do have to solve the cryptography of making sure all the transactions being added are valid, and then added into the rest of the chain.

Robert J. Marks: And then once the problem is solved, all of a sudden, some more crypto is created, right? Just like if you mine something — you solve the Bitcoin problem — you get more crypto, right? The validation gives you more crypto on the blockchain. Is that right?

Adam Goad: Yes. Currently, when you mine a new Ethereum block, you get two Ethereum plus a percentage of the transaction fees for all the transactions in that block.

## How are validators chosen?

Robert J. Marks: I see.A number of stakers that go into one of these pools and then, in some way, a validator is chosen. What’s the advantage of being a validator and how are they chosen from all of these people that have been participating in these pools of stakers? How is the validator chosen?

Austin Egbert: The question of how the validators are chosen is one that I’ve had a bit of a struggle tracking down on the internet. I’ve been looking into it recently because it’s really been bugging me. Everyone will just say, “Oh, we pick a committee of validators at random to work on the next block in the chain.” And I go, “Yeah, but who’s doing the picking? The picking is happening somewhere. Somebody says okay, you get to be the one who validates this next transaction.” And I’ve eventually tracked it down.

It comes back to the DAOs that Adam had been talking about in previous episodes, those decentralized autonomous organizations. There’s essentially a process by which several different people can contribute randomness towards a final, random answer, and then they all agree on how everyone’s input and contributions will be used to create the final solution. So, as one example, you could have everyone who wants to be a validator, in each round, submit a number. Then they all agree on how they’ll take everyone’s numbers to pick the final batch of validators that should be chosen to work on the network.

Robert J. Marks: Now to be a validator, you have to have some computer skills, as I understand it. Not every Tom, Dick and Harry can be a validator. And so the question is, number one, why would I want to be a validator? And number two, do I have to have these technical capabilities, these coding capabilities, in order to be a validator?

Austin Egbert: I would say you don’t necessarily need to have coding capabilities, but it wouldn’t hurt. Essentially, by being a validator and working on the network and putting up that stake, you’re basically saying, “Hey, I am committing to be a reliable operator of the network.” Where some of that expertise comes in is that you are expected to provide a certain amount of uptime or availability so that if you get chosen to be a validator, you’re actually there to answer the call, essentially.

Austin Egbert: It’s almost, at that point, kind of like jury duty. If you don’t show up for jury duty, the government’s going to come and punish you in some way. In the same way, the network — if you don’t show up to validate — is going to actually diminish some of that stake that you have placed. So while you get rewarded for validating successfully, if you, for some reason, don’t work — for as simple a reason as, oh, maybe your Internet’s out and you can’t be reached — then you’re actually punished for failing to perform the duties you said you would be willing to do. The reason why you might want to go ahead and do this is because you do get those payments when you complete the job successfully.

Here’s the second part of Episode 5: What happens if you want to lend or borrow in crypto? In the world of Web 3.0, the borrower is anonymous, so collateral is a must. Adam Goad tells Robert J. Marks that a number of banks and investment companies are getting into crypto, where their expertise makes them “alpha callers.”

Here are the two parts of the fourth episode:

What would a financial system based on blockchain look like? Adam Goad talks about key differences between banks and blockchains in what creates trust and privacy. Hackers don’t steal cryptocurrency by breaking the encryption but by getting by getting users to reveal information that makes them vulnerable.

and

The futurist finance world of flash loans and hypernodes. In the cryptocurrency world, you could float a loan for ten seconds and make good money — but you and your computer must be very fast indeed. Adam Goad explains to computer science prof Robert J. Marks how decentralized finance works in a world where milliseconds make or break you.

Note: If you want to read or listen to the first three episodes, you will find links to all parts at the bottom of this page.