Over the last few years, cryptocurrencies have gained momentum and become a favourite among investors, despite their volatile nature. A defining characteristic of cryptocurrencies is that they are decentralised, which means there is no centralised exchange (like Visa or PayPal) monitoring the transaction.
The lack of a central authority responsible for verifying transactions presents a challenge. Cryptocurrencies overcome this by using a “consensus mechanism” to regulate the process in which transactions are verified and added to the blockchain.
The most widely used consensus mechanism is “proof of work”, used by the two largest cryptocurrencies – Bitcoin and Ethereum 1.0. At the core of this mechanism are cryptocurrency miners – virtual miners who are required to solve a complex mathematical problem. The first miner to solve the problem updates the blockchain with the latest verified transactions and receives a predetermined amount of cryptocurrency in return.
This process requires an enormous amount of computing power and, thus, electricity, and some estimate that a single Ethereum 1.0 transaction can consume as much energy as an average US household uses in a week. There is also a major issue with electronic waste generated from the specialised hardware and computer servers used for mining, which tend to have a limited obsolescence period.
As such, the environmental impact of cryptocurrency mining (using the proof of work consensus mechanism) is obvious. Consequently, Ethereum is switching to a consensus mechanism known as “proof of stake” in an ongoing process that is expected to conclude by the end of 2022.
In a proof of stake system, a network of “validators” contribute or “stake” their own cryptocurrency in exchange for the chance to validate the new transaction, update the blockchain and earn a reward. The network uses an algorithmto select a winner based on the amount of cryptocurrency each validator has in the pool and how long it has been there. Once the “winner” has validated the block of transactions, other validators can attest to the accuracy of theblock. When a threshold number of attestations have been made, the network updates the blockchain. All participating validators then receive a reward in the native cryptocurrency, depending on their original stake.
The energy consumption between the two consensus mechanisms is notable. It has been reported that using the proof of stake consensus mechanism uses 99% less energy than the proof of work mechanism. Additionally, the hardware required is less specialised and more equivalent to an average laptop, which allows the network to scale and should reduce the amount of electronic waste that is generated.
As energy costs and environmental concerns grow, we can expect the more energy efficient and cost-effective cryptocurrencies utilising the proof of stake mechanism to grow in popularity. Once Ethereum finalises the switch to proof of stake, it promises to be a much greener future for cryptocurrencies.
Ralph Giles, Associate Solicitor in theCommercial IP & IT team at Bristows
Hannah Jones, technology litigationparalegal at Bristows
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This article is also published in the Spring 2022 issue of Computers & Law which has been guest edited by the SCL Sustainability and ESG Group.
FAQs
The Proof of Stake consensus mechanism has emerged recently as a more secure and environmentally-friendly alternative to the proof of work validation mechanism described above.
What is the problem with proof-of-stake? ›
The most popular argument against proof-of-stake systems is that coins are concentrated among only a few validators. Proof-of-stake encourages users to accumulate bitcoin in order to maximize their chances of winning a block and obtaining a reward.
How effective is proof-of-stake? ›
Proof-of-stake (POS) is seen as less risky regarding the potential for an attack on the network, as it structures compensation in a way that makes an attack less advantageous. The next block writer on the blockchain is selected at random, with higher odds being assigned to nodes with larger stake positions.
Is Ethereum still bad for the environment? ›
Ethereum, Solana, and many others use a system that requires very little energy—their environmental impact adds little to the impact already created by the global networking infrastructure and its daily use.
What is the main disadvantage of proof-of-stake? ›
Proof of Stake Drawbacks
Susceptibility to attacks decreases the overall security of the blockchain. Validators who hold large amounts of a blockchain's token or cryptocurrency may have an outsized amount of influence on a proof of stake system.
Is proof-of-stake a monopoly problem? ›
How Proof of Stake Addresses Monopoly Problems. Monopoly is still possible under proof-of-stake. However, proof-of-stake would be more secure against malicious attacks for two reasons. Firstly, proof-of-stake makes establishing a verification monopoly more difficult.
What is better than proof-of-stake? ›
Security. So far, proof-of-work has been the most proven way to maintain consensus and security within a distributed public network. This is because proof-of-work requires the initial cost of hardware and the ongoing expenditure of resources, rather than a single upfront expense to participate like proof-of-stake.
What is a major drawback of the proof of work consensus? ›
Problems with proof-of-work
Because proof-of-work mining requires so much computing power, it tends to consolidate miners down to the few people who can afford the equipment. It also tends to pull computing resources into locations where electricity is cheap.
Is proof-of-stake the future? ›
While the transition from PoW to PoS may pose technical challenges, the potential benefits make it an avenue worth exploring for the future of Bitcoin. As a cryptocurrency researcher, I have witnessed the remarkable advantages that Proof of Stake (PoS) can bring to the Bitcoin network.
How does proof of stake make money? ›
In a proof of stake system, staking serves a similar function to proof of work's mining, in that it's the process by which a network participant gets selected to add the latest batch of transactions to the blockchain and earn some crypto in exchange.
PoS requires less energy than PoW.
The use of the proof-of-stake consensus protocol translates to less carbon footprint for the entire network and the applications and systems implemented on top of the blockchain. The difference between how much electric energy POS needs and what POW consumes is vast.
Is proof of stake vulnerable? ›
Proof of Stake Drawbacks
Certain implementations of proof of stake could leave blockchains more vulnerable to different kinds of attacks than proof of work, such as low-cost bribe attacks. Susceptibility to attacks decreases the overall security of the blockchain.
Which crypto is bad for the environment? ›
Global Bitcoin mining is highly dependent on fossil fuels, with worrying impacts on water and land in addition to a significant carbon footprint.
Why is blockchain bad for the environment? ›
Blockchain technology has a significant carbon footprint due to its energy-intensive process of verifying transactions and creating new blocks on the blockchain. The energy consumption of blockchain technology results in significant greenhouse gas emissions, which contribute to climate change.
What is the carbon footprint of Ethereum? ›
Synthesising all our previous findings, we estimate GHG emissions attributable to Ethereum mining at 27.5 MtCO2e since the network's inception until its transition to PoS. It should be noted that nearly 60% of the total emissions during that time occurred in 2021 and 2022, as illustrated in Figure 4(a).
How much energy does proof-of-stake consume? ›
PoS requires less energy than PoW.
The use of the proof-of-stake consensus protocol translates to less carbon footprint for the entire network and the applications and systems implemented on top of the blockchain. The difference between how much electric energy POS needs and what POW consumes is vast.
Is crypto bad for the environment? ›
UN Study Reveals the Hidden Environmental Impacts of Bitcoin: Carbon is Not the Only Harmful By-product. Global Bitcoin mining is highly dependent on fossil fuels, with worrying impacts on water and land in addition to a significant carbon footprint.
Is proof of work bad? ›
Problems with proof-of-work
Unfortunately, that methodical pacing results in a waste of resources and a very high level of energy consumption. Because proof-of-work mining requires so much computing power, it tends to consolidate miners down to the few people who can afford the equipment.
Is proof-of-stake considered mining? ›
Proof of Stake is a consensus algorithm whereby new blocks are secured by validators before being added to the blockchain. In the proof of stake mining algorithm, a person (node) can participate in the mining process by “staking” a given amount of their coins to be allowed to validate a new transaction.
