Why Is Proof of Stake Better for the Environment?
Since Bitcoin in 2009, the blockchain and cryptocurrency industries have seen robust growth. First emerging as a cypherpunk dream, decentralization has since gone mainstream, disrupting business models across many industries.
Public blockchain market caps account for over 217 billion dollars in value. According to data from Grand View Research, revenue from the global blockchain industry will be $5.76 billion by 2025. However, this surge of value creation and capture comes with growing criticism of the industry’s environmental impact. With many public blockchains relying on the efforts of energy-hungry miners, new solutions are crucial. But what’s the right answer?
In this post, we’ll explore the factors driving environmental concerns while taking a look at the most common blockchain consensus mechanisms and their unique functionality.
To kick things off, let’s break down the concept of consensus.
What is Blockchain Consensus?
Merriam-Webster defines consensus as “first, general agreement, and second, group solidarity of belief or sentiment.”
So what exactly is a consensus mechanism? Because public blockchain networks lack a central authority, consensus mechanisms enable trust-less oversight. These autonomous rules are specific to the blockchain network on which they operate. For any transaction to occur on a decentralized network, all network participants (nodes) must reach consensus (agree).
Although novel in concept, reaching consensus can sometimes require the use of a lot of electricity. Further, because blockchains rely on a vast network of decentralized computers, they naturally draw more energy than centralized solutions.
In combination, these factors drive an eco-conscious narrative that questions the sustainability of specific consensus mechanisms — namely, Proof of Work (PoW).
What is Proof of Work (PoW)?
The two most popular blockchain networks have been built using the Proof of Work (PoW) consensus mechanism — Bitcoin and Ethereum.
On these PoW blockchains, miners compete to solve complex mathematical problems based on cryptographic hashing algorithms. By solving these puzzles, successful miners show the network that substantial time has been spent validating a block of transactions — resulting in a consensus.
More specifically, pending batches of network transactions are verified and added to the blockchain. Although block rewards differ on each blockchain, Bitcoin miners currently receive 12.5 BTC (Bitcoin) each time they validate a block of transactions.
This reward will decline as miners continue to generate blocks and the reserved supply of new bitcoin runs out (there is a fixed supply of 21 million BTC).
The Environmental Impact of PoW
As a result of the intensive processing power necessary on PoW networks, excessive electricity use has been the most common criticism of this consensus mechanism. According to Digiconomist, annual Bitcoin electricity consumption currently sits at 73.12 TWh. That’s more electricity than the country of Switzerland uses in a year.
When we look at the combined energy consumption of the top 6 PoW blockchain networks, this number is set to reach 110 TWh by the end of 2018.
In addition to being slow and unscalable, this intensive electricity use is why many continue to denounce the PoW consensus mechanism.
Source: 2nd Global Cryptoasset Benchmarking Study
What is Proof of Stake (PoS)?
On a Proof of Stake (PoS) blockchain, those validating transaction blocks have to put something at stake so others can trust them. If these validators have something at stake, they have something to lose. This collateral is enough of an incentive for them to tell the truth and maintain the integrity and security of the network.
If they are found to be ineffective in keeping accurate records or purposely manipulate transactions, they could lose what they have at stake! Many popular PoS networks use a model called Delegated Proof of Stake (DPoS) to establish economic incentives for the whole community.
As a holder of a staking token, I can choose to delegate my tokens to a validator instead of running my own high-availability servers or just holding them in a wallet. In exchange for this delegation, the token holder can earn rewards and fees.
Validators
In public blockchain systems, becoming a validator is a permissionless act. Anyone with technical proficiency and the desire is able to set up a validator. That being said, in some PoS systems, there are limits to the number of validators. In these systems, there is often a minimum amount that a validator needs to have at stake in order to operate and become elected.
If a Validator fails to participate in producing blocks or fails to secure the network, members of the community can redelegate their stake. Electing validators is an ongoing process that ensures network optimization and efficiency.
The Environmental Impact of Proof of Stake (PoS)
Although PoS blockchains still utilize cryptography, their energy consumption is dramatically lower than PoW-driven alternatives. Because miners do not need to solve extremely complex puzzles to prove their work on PoS blockchains, the required processing power is much lower. As such, many in the industry have begun exploring PoS and other energy-efficient alternatives in response to growing environmental awareness.
The Future of Consensus
Although the PoW mechanism remains popular, its intensive electricity use has become problematic for many observers. In the face of mounting criticism, some incumbents have begun considering a switch to PoS infrastructure to lower energy use while improving network speed and scalability. Most notably, Ethereum’s transition from PoW to PoS (Eth 2.0) is underway.
For others, PoW remains attractive, given its history of secure operation and ease of implementation. For these industry players, powering PoW with renewable energy is seen as a viable solution. Regardless of the path chosen, it’s clear that eco-friendly solutions are in demand. The blockchain community would be wise to consider the long-term impact of this growing narrative.
