At any given moment, thousands of computers around the world are buzzing, solving complex math problems that create and maintain bitcoin.
This network gives bitcoin its appeal: decentralized, always active and easily tradable. But it also means the network is constantly using energy – a sticking point for many cryptocurrency skeptics and critics. And it’s not just a bitcoin problem. Other cryptocurrencies and blockchains, including Ethereum, have similar challenges.
Debate over the environmental impact of bitcoin intensified earlier this month when Tesla CEO Elon Musk, once one of the most notable bitcoin boosters, said his company would no longer accept it. for the purchase of vehicles. He cited the use of fossil fuels for mining bitcoin as the reason.
It’s a problem some blockchain evangelists believe they can solve – and potentially open the door to more widespread adoption of the technology.
“This is a fundamental breakthrough for humanity, we can now do things that we could not do otherwise,” said Danny Ryan, a researcher at the Ethereum Foundation, on decentralized computer systems and blockchain technology. “When humans find new tools, they use them. So this decentralized thing, this crypto thing, it’s not going anywhere, but there’s also a much better way to do it.”
The best way is called proof of stake. And for some cryptocurrencies, it’s already in use.
Proof of work
To understand the implications of proof of stake, it’s important to start by detailing how bitcoin works today: a system called proof of work.
The idea of bitcoin is generally recognized to have emerged from a white paper published in 2008 by an anonymous author who used the pseudonym Satoshi Nakamoto. He presented the idea of a proof of work, in which separate parties are responsible for verifying the records and transactions stored in a blockchain.
The system is fully decentralized, which means that many computers around the world are involved in the blockchain verification process. The underlying bitcoin system code governs the process, rather than any central authority.
To participate, bitcoin miners must use specially built computers and have access to a lot of power. Currently, these computers are rare but in great demand. At the base are specialized computer chips and semiconductors, both facing a global shortage that has already affected the manufacturing of automobiles, laptops and smartphones.
The decentralized network of specialized computers, called “rigs” or “mining rigs”, work hard to solve very complex mathematical equations. By solving the equation, they verify that the blockchain is correct. People who take part in this verification process are called miners and are rewarded for their efforts in the form of cryptocurrency, in this case, bitcoin.
The process is energy intensive. In order to verify that the registration is correct, the so-called bitcoin miners spend a significant amount of computing power. Miners who verify the records are then rewarded for their bitcoin spending.
System security is built into the enormous amount of computing power required to run it. In order to hijack records, an entity would have to contribute more than half of the total computing power. In the case of bitcoin, this would be prohibitively expensive and, due to the scarcity of hardware, is not feasible.
And so, any cryptocurrency built on a proof-of-work protocol is going to be plagued, as Musk put it, with “crazy” energy demands as it scales. The Cambridge Center for Alternative Finance, which is part of the Cambridge Judge Business School, discovered that bitcoin uses around 110 terawatt hours per year, which is similar to what Malaysia and Sweden use.
Proof of participation
Proof of stake takes a different approach to security by providing confidence in an older currency: silver.
To participate in the proof of stake blockchain verification process, users create a node, this node can be managed by one person or by a group of people working together. You can think of a node as a computer. The node is required to prove its reliability by locking a certain amount of crypto coins, of the same type generated by the blockchain they are verifying. Imagine putting a deposit in escrow or locking it in a bond. This locking process is called staking.
For each block of transactions to be verified, a node is selected by an algorithm that takes into account many factors to both reward those with more coins in play and prevent a node from having too much control over the process. This node is responsible for checking and publishing or adding the block to the chain.
Then all the other nodes have time to make sure everything looks good. If there is an error or fraud, the node that published the problematic block is punished by having all or part of its staked parts destroyed. But if all looks good, this knot is rewarded with more coins. It is both the security mechanism of the blockchain and the motivator for participation.
“Instead of buying a bunch of hardware and burning a bunch of energy, I can instead take that asset and kind of lock it in like a bond,” said Ryan, a researcher at the Ethereum Foundation.
Because the proof of stake basis does not require any additional energy to prove reliability, it is much more energy efficient. Unlike Proof of Work, where specialized computer equipment like high end graphics cards are required, Proof of Stake protocol can be run from a laptop computer. Nodes are virtual spaces, not physical equipment.
As a result, participation in the “mining” process has a much lower barrier to entry, which means more people can participate in the process. And since a fundamental tenet of cryptocurrency is decentralization, having more people involved in securing the blockchain helps secure the entire system.
The whole process uses slightly more power than a computer would if it were just turned on. Researchers like Ryan believe the result is that the power consumption for proof of stake is 99.99% lower than for proof of work.
The proof of stake is already working. Cardano uses proof of stake and has the fourth largest market cap – $ 50 billion – of any cryptocurrency in mid-May. It is currently the largest evidence of cryptocurrency stake on the market.
Cardano surged after Musk tweeted about the end of the program to allow people to buy Teslas with bitcoin due to energy efficiency issues, which have brought down nearly all other cryptocurrencies. He has since followed suit and collapsed.
Other already working cryptocurrencies that use proof of stake include Polygon, Tezos, Polkadot, and EOS.
But perhaps the biggest potential impact of Proof of Stake is a project called Ethereum 2.0.
Ethereum is the second largest cryptocurrency and has grown in popularity over the past year as investors have sought to diversify their portfolios away from bitcoin. And at its core, Ethereum is designed to be a versatile platform for an emerging concept called decentralized finance, or the use of smart contracts to automate many financial transactions that today require intermediaries.
Launched in 2015, Ethereum is also managed by proof of work, but since its inception, founder Vitalik Buterin has considered a transition to proof of stake. When Ethereum launched, the community agreed to set aside 430,000 Ether Coins to fund the Ethereum Foundation, a non-profit organization registered in Switzerland. This now equates to about $ 1 billion. The foundation has supported the community through grants in an effort to move towards a more energy efficient Ethereum 2.0, but in the spirit of decentralization, it is not showing the way.
“There are hundreds of people working on this project,” said Ryan, who is one of the few researchers employed by the foundation. “The EF certainly plays some sort of coordinating role and has tried to help facilitate and move things forward. But I would say it’s certainly not centralized.”
It’s complicated to pass Ethereum into proof of stake. Engineers working on the project need to build and test the proof of work engine and run it alongside the existing system, which continues to run on proof of work. This part has already started to slowly come online.
Once the proof of stake engine is fully live, it will run for a while while the bugs are resolved. Then, when the issues are resolved, the community will ideally reach consensus and set a time for the exchange. Platform users and people holding Aether will not be affected; all changes will happen on the backend. At that point, the platform’s power consumption is expected to drop by 99.99%, according to the Ethereum Foundation.
Ryan says the goal is to do so in 2021, but warns that 2022 is also quite likely. And there have been delays before.
“This is no joke. The Ethereum network is in the hundreds of billions of dollars, with tens of thousands of people using this platform all the time, and more and more,” he said. “And so doing it fast is important, but doing it safely is even more so.”