Solving Blockchain’s Energy Crisis
Elon’s Outrage…
This morning, I woke up to this.
Within hours, BTC and ETH have dropped nearly 15%.
In this space, the question of the carbon footprint and environmental sustainability is always brought up.
With damming headlines over the energy consumption used in mining BTC, large companies and institutions are hesitant to explore crypto as a medium of exchange for their goods and services.
For blockchain technology to cross the chasm, this is a question that needs to be answered.
Proof of Work Vs. Proof of Stake
The carbon footprint of the Bitcoin blockchain is due to its reliance on the ‘Proof of Work’ consensus algorithm. It is the process by which new transactions on the blockchain consolidated into new blocks.
For every additional transaction, network participants compete to solve a complex cryptographic puzzle. The participant that solves it obtains the right to add the next block to the blockchain, and thus gains a reward in the form of Bitcoin.
With Proof of Work the network participants are known as Miners.
Proof of Work is an incredibly sound method to maintain a secure and maintain a decentralised ledger.
However, it is incredibly energy consuming, and a great deal of work is done for no tangible reward. Many miners attempt to solve each cryptographic problem which contributes to a high computational usage and energy expense.
One solution to the energy expenditure problem is by shifting consensus from ‘Proof of Work’ to ‘Proof of Stake’.
With Proof of Stake, the right to add the next block is assigned with a weighted probability to participants with the most coins held on the network. The process of holding coins on the network is known as staking, and chosen participants, are known as validators. For their efforts, they are rewarded with transaction fees.
With each transaction, only one validator is chosen to add an additional block to the blockchain. As such there is a low computational requirement, and the result is a far lower energy expenditure relative to Proof of Work.
Part of the reason for Ethereum’s record highs over the past few weeks it’s ongoing migration from Proof of Work to Proof of Stake.
As this continues to be rolled out, network participants are incentivised to stake their ETH coins, driving down circulating supply and therefore increasing the price per coin.
The transition to Proof of Stake is a signal the that the Ethereum ecosystem is morphing into a new, and far more scalable version of itself.
These factors as well as the continued retail and institutional inflows into the Crypto space as a whole, is contributing to the bullish upswing in the the price of ETH.
If Proof of Stake wins out as the consensus mechanism for Blockchains of the future, we could have solution to the energy consumption problem in the space today.
The other, more upstream solution is to simply source the energy for blockchain consensus (whether it be PofW or PofS) from renewable sources, as opposed to Fossil Fuels.
A combination of these two factors, shifting to Proof of Stake to achieve blockchain consensus, and the ongoing proliferation of Renewable energy sources will likely bring an end to all the questions surrounding energy sustainability for the blockchains of the future.
The question for me, is that if the Ethereum network can prove the superiority of Proof of Stake over Proof of Work, will the Bitcoin network follow suit?
Only time will tell…
