Proof of Work vs Proof of Stake
With a recent pushback due to environmental concerns and energy consumption, Bitcoin, and more broadly, cryptocurrencies, have faced harsh critiques by people such as Elon Musk and Bill Gates. However, in order to understand where the criticism regarding energy consumption is stemming from, one must first look at the differences between Proof of Work (PoW) and Proof of Stake (PoS), in order to understand how cryptocurrencies like Bitcoin and Ethereum are rewarded.
Proof of Work
Proof of Work is the general mechanism used by Bitcoin to secure the Bitcoin blockchain. The Proof of Work algorithm has all miners competing to solve a cryptographic puzzle, when the miner successfully solves the puzzle, he or she is rewarded with Bitcoins. Due to the competition amongst miners, those with larger mining farms and better equipment, i.e. money, have a greater hash rate and are more likely to solve the puzzle first and be rewarded. These mining farms use an incredible amount of electricity, 0.55% of global electricity production thus raising eyebrows at the environmental impact of cryptocurrencies as a whole. Furthermore, miners may join forces to create a mining-pool, further increasing the likelihood of being rewarded. Mining pools pose a greater threat to PoW than the energy consumption itself as it encourages a centralization of the blockchain. However, there is a solution to both the centralization and energy consumption that Proof of Work leads to: Proof of Stake.
Proof of Stake
Proof of Stake works by randomly choosing a node to become a validator and verify the next block. In order to become a validator, a node has to deposit a set amount of coins into the network as his or her stake. The larger the stake the validator has deposited in the network, the greater likelihood of them being chosen to mint the next block. Once selected, the validator verifies all the transactions within the block and adds it to the blockchain. By doing so, the validator is rewarded with the fees of the transactions within the block. Additionally, to maintain the integrity of the blockchain, if the validator verifies a fraudulent transaction, he or she loses a part of their initial stake, thus incentivizing them to only verify legitimate transactions. Once the network has verified the legitimacy of the block verified by the validator, the validator is free to withdraw his or her stake and validation fees.
What is the Solution?
By removing the mining aspect of Proof of Work, Proof of Stake not only uses substantially less energy, but it also does not encourage the centralization of the blockchain. Furthermore, Proof of Stake is less plutocratic than Proof of Work as there is a degree of randomness to selecting the validator, whereas Proof of Work favors those who have the means to build mining farms. Bitcoin, and other cryptocurrencies using Proof of Work, would strongly benefit by transitioning to Proof of Stake as this would eliminate the environmental concern of energy consumption. Furthermore, by making this transition, Bitcoin would gain greater appeal as part of what makes cryptos so attractive in the first place is their being decentralized.
