Mining cryptocurrency such as Bitcoin is an energy-intensive business. But it doesn’t have to be.
Bitcoin, and other cryptocurrencies such as Dogecoin and Litecoin, secure their networks using the proof-of-work (PoW) consensus mechanism.
An alternative consensus mechanism used by cryptocurrencies such as Ethereum is called proof-of-stake (PoS), which radically reduces the blockchain’s carbon footprint.
In this article we’ll explore what consensus mechanisms are, and how proof-of-stake differs from proof-of-work.
What is a consensus mechanism?
Public blockchains, at their most basic level, are just databases.
Most databases set permissions for who can access and edit them. This centralized control is convenient, but makes them vulnerable to hacks. By contrast, blockchains make everyone running the software—from exchanges to traders in their basement—responsible for updating them.
That‘s a potentially messy process, which is why blockchains use “consensus mechanisms” or “consensus algorithms.” Consensus mechanisms keep the network humming, making sure that only legitimate transactions get added to blocks. It’s all the nodes—or computers running the blockchain software—checking amongst themselves to conclude, “Yes, this is true.”
In doing so, they guard against "51 attacks," which is when someone accumulates more than half of the computing power in a distributed network and can then control it.
What is proof-of-work?
To prevent attacks, which make it possible to spend funds twice, Bitcoin uses the proof-of-work consensus algorithm. That system asks people to use hardware (and electricity) to help the network process transactions. In proof-of-work, miners (or, their computers, to be precise) try to solve fiendishly difficult puzzles in order to be the first to complete a block of transactions. Their work helps to verify that the transactions are legitimate. As compensation, they’re rewarded with cryptocurrency such as Bitcoin.
Proof of work was built into the design of Bitcoin, and replicated by other cryptocurrencies, including Ethereum. However, one of the by-products of this system is it requires a lot of machines using a lot of electricity to solve complex problems, the vast majority of it rendered moot except for the energy expended by the winning miner.
What is proof-of-stake?
Proof-of-stake aims to achieve the same outcome as proof of work: to securely verify transactions on the blockchain.
Whereas PoW miners dedicate hardware resources (large, expensive computers) to secure the network, PoS “validators” dedicate their cryptocurrency. With PoS, to get a chance to verify transactions in a block—and to get the associated fees—validators must lock up, or stake, cryptocurrency that they can’t spend. The blockchain uses that locked-up crypto to secure the network.
According to the Ethereum Foundation, proof of stake has several advantages over proof of work.
