Proof-of-Stake versus Proof-of-Work Blockchains

A solution to the environmental concerns around blockchain mining?


Photo by israel palacio on Unsplash


One of the most common concerns expressed by those who doubt the merits of blockchain technology is the energy it uses. It’s a topic that fascinates me and one that I’ve read and written about in a bid to increase my understanding and add balance to my perspective.

Estimates vary but a study by the University of Cambridge estimates the annualised consumption of energy by Bitcoin (for example) to be in the region of 133.65TWh — approximately 0.6% of global energy usage.

Responses to such figures vary — those within the Bitcoin community point out that the justification for such energy depends on a value judgment — whether the technology serves a useful purpose or not. As a potential alternative to the conventional financial establishment and the world’s FIAT currencies, the energy consumed by Bitcoin could be seen as minimal — Ark Investment Management estimates that this is less than 10% of the combined energy used by the conventional banking system, for example.

Regardless of the justifications provided by blockchain enthusiasts and whether or not these satisfy the critics, most agree that excessive energy usage is not a good thing. We’re all concerned for the long-term future of the planet and the threats presented by climate change are significant — any measures that can reduce energy usage would seem to be a good thing.

One such measure is the idea of a Proof-of-Stake blockchain — a technology that will feature within The Docking phase of the upgrade of Ethereum to Ethereum 2.0, scheduled for 2022.

Within this article, I’ll explain in the simplest terms possible how Proof-of-Stake works to illustrate why it could offer advantages in making blockchain computing less energy-hungry. There are other effects of it to consider too.

Consensus Mechanisms in Blockchain

Proof-of-Work (hereafter known as POW) and Proof-of-Stake (POS) are forms of consensus mechanism — a concept that is integral to allowing blockchain computing to function. Blockchain is based on the notion of decentralised nodes that each contribute to the collective power of the network. Each node incorporates a record of the full blockchain, each maintaining a validated record of each transaction across the network. Holding a complete ledger at each node underpins the security of the blockchain, ensuring that each node is identical and each transaction can be proven and validated with certainty against other nodes.

Transactions cannot be rolled-back which means that before they’re written to the blockchain, consensus needs to be reached across nodes. Consensus mechanisms are the algorithms that enforce this integrity across the blockchain and which reward those who maintain the network.

Proof-of-Work Consensus Algorithms

In a POW blockchain (like Bitcoin, and Ethereum currently), the algorithm rewards the node that solves cryptographic puzzles the quickest, giving them the right to validate transactions and create new blocks in the blockchain (a process known as mining). The miner that solves the puzzle quickest is rewarded financially — in the Bitcoin network, one miner is awarded new Bitcoin approximately every ten minutes.

The reward represents the creation of value on the network and reflects financial compensation for the electricity used to power the computers that solve the algorithms and maintain the ledger.

As is hopefully evident, there’s an incentive for miners to ‘win’ the new coins by resolving the puzzle the quickest. This in turn is an incentive to have the greatest computing power available to solve the puzzle, which in turn creates a demand for the electricity that the mining equipment consumes.

This explains why Proof-of-Work blockchains are typically quite energy-hungry.

Proof-of-Stake Consensus Algorithms

In a Proof-of-Stake blockchain, there is no direct incentive to harness more computing power to receive a block reward for processing algorithms. Instead, holders of the relevant cryptocurrency can become recognised validators. The validator needs to possess a certain value of the cryptocurrency and be willing to have this held in deposit on the network (this is their stake).

POS algorithms then randomly reward one of the validators with the right to create the next block in the blockchain at a set time interval (in the POW example, 10 minutes).

The only way that a POS validator can increase their chances of receiving the block award is to place more of the cryptocurrency on deposit — increasing their stake. There is no direct incentive for them to invest in additional computing power, and hence no driver to increase their demand for electricity.

Image by WorldSpectrum from Pixabay


Benefits of POS over POW

It should now be clear why consensus algorithms are an integral part of blockchain and fundamental to the cryptocurrencies built upon them. The decentralised, ownerless architecture relies upon the multiple nodes which each contain the same validated information. Each node plays a part in validating the next and ensures the integrity of the network as a whole.

From the perspective of cryptocurrencies that sit upon the blockchain like Bitcoin and Ether (on the Ethereum blockchain), fundamental to their utility is that the ledger on each node reflects the movements of each unit of currency. This prevents fraud and theft, and avoids the risk of a single coin being spent twice.

It’s this process of each transaction being written to multiple ledgers that causes a cryptocurrency transaction to take a few seconds or minutes to be irrefutably completed.


When I send some Bitcoin from my crypto exchange account to my crypto wallet, that movement has to be validated and written into the ledger on multiple nodes before it is forever sealed into the blockchain. This takes time, but is secure and irreversible.

Environmental benefits

In POS the incentive for miners is to increase their influence over the integrity of the network by increasing stake — the potential for reward (being awarded new blocks) is increased by holding a greater stake in the underlying cryptocurrency.

POS doesn’t incentivise increasing computing power and the associated consumption of energy alone. Instead, increasing their stake by 10x will give the miner a 10x chance of receiving the next block from the algorithm.

Reduced risks of centralization

In a POW blockchain there is a theoretical chance that individual miners could gain disproportionate power and influence, by investing in more computing power.

A hypothetical POW miner could invest in cutting edge technology that regularly wins them the block reward. They invest in more technology and it increases their advantage even further, winning block rewards more frequently. In time and with this pattern repeating the miner could become ever more dominant, simply by investing in ever greater computing power.

It’s Moore’s Law in action — the effects of increased computing power increasing geometrically over time as new power is added into the mining process, rather than proportionately as with POS.

When a miner increases their stake, their relative power increases proportionately to the stake they put up — if they 5x their stake, their power increases by 5x too.

Currency benefits

Since a POS miner has their stake locked up and held within the network, those coins are effectively taken out of circulation — limiting those remaining in circulation. Considering that the staking requirements are likely to be high, this enforces a degree of scarcity among the remaining currency. This could mean that through the market-effects of supply and demand the price of the currency as a whole would increase, benefitting all holders of it.

Security benefits

Security is inherent to the design of blockchains. While crypto exchanges have been hacked and scams are rife within the cryptocurrency space, blockchains themselves have proved to be largely impregnable.

The main way that the blockchains themselves could theoretically be compromised is by rogue actors taking control of the majority of the nodes such that the blockchain itself became corrupted — a theoretical 51% attack.

POS enables an antidote to such threats — for a node to have influence they must have placed a stake within the network, and to gain sufficient influence to corrupt the integrity they would need to have placed a sufficiently large stake to warrant that degree of influence. In the mutually-governing, decentralised world of blockchain this stake hands the network a means of collective-control. They can limit the threat presented by a rogue actor who could have their stake destroyed or confiscated in the event that they sought to corrupt the network.

Avoidance of the Tragedy of Commons

In a POW network such as Bitcoin, there exists a long-term threat known as the ‘Tragedy of Commons’. New Bitcoins will be awarded via the POS mining process based on a schedule built into the protocol until the full 21 million coins have been minted around the year 2140. While miners' rewards are currently constituted of both new Bitcoins that are minted as well as transaction fees, there’s a theory that when there are no new coins to be minted there will be little incentive for miners to operate.

This could leave the network open to takeover by a rogue actor who sought to take control of it as miners lost interest. This is the Tragedy of Commons.

If a POS model were in place, miners would remain incentivised by their stake which is held within the network and which holds its innate value by virtue of the continued existence of the network. POS thus helps to mitigate the threat of the Tragedy of Commons coming to fruition.

Final thought

There are many technical measures that could reduce the energy used by blockchain. Simultaneously, means are being explored to utilise cleaner and greener energy to power it. Those who believe in blockchain aren’t ignoring the environmental concerns but are instead trying to find innovative ways of addressing them.

Ethereum is moving to Proof-of-Stake as part of the upgrade to Ethereum 2.0. Bitcoin could (theoretically at least) move to POS too.

Blockchain is also about more than the cryptocurrencies that sit on top of it.

There has been a recent spike in interest around Non Fungible Tokens (NFTs) and these represent another use-case for blockchain which might be adopted more widely if the energy usage issue can be addressed. NBA Top Shots — NFTs associated with video clips of NBA basketball moments, are built upon the FLOW blockchain which uses Proof-of-Stake algorithms today.

POS won’t solve the environmental issue alone, any more than renewable energy will. But it’s one part of a wider approach and one that has the potential to make an enormous difference.

 

Note: This article is for informational purposes only. It should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.

The definitions provided are my own interpretations of the referenced sources — any inaccuracies or confusion introduced by the piece are unintentional and of my own making.


If you’ve enjoyed this article, please feel free to join Toby's email list.


This article was originally published here on Medium. Toby Hazlewood can also be found on Twitter or at tobyhazlewood.com/.