The energy efficiency of cryptocurrencies has been a hot topic of late, with Proof-of-Work blockchains like Bitcoin criticized for their high energy consumption compared to greener alternatives.
The latest debate kicked off when Tesla CEO Elon Musk confirmed Tesla’s suspension of vehicle purchases using bitcoin. Musk expressed concern regarding the “increasing use of fossil fuels for Bitcoin mining and transactions,” going on to state: “we intend to use it for transactions as soon as mining transitions to more sustainable energy. We are also looking at other cryptocurrencies that use <1% of Bitcoin’s energy/transaction.”
A week later, a top government official from China announced that Beijing would start to crack down on bitcoin mining citing concerns over energy consumption and perceived financial risks, in what would become a more intensified ban on the industry. An estimated 90% of China’s bitcoin mining capacity is now shut down, at least for the short-term pending migration overseas.
These events, alongside broader energy consumption criticism of the industry, sparked a discussion on pursuing greener alternatives to the Proof-of-Work (PoW) model. Proof-of-Stake (PoS), frequently cited as a viable alternative, now outnumbers the adoption rate of PoW chains, particularly as the second-largest cryptocurrency seeks to transition to PoS as Ethereum 2.0.
Is Proof-of-Stake the Solution?
To win the right to add a new block of transactions on a chain, miners on PoW networks compete to solve complex mathematical puzzles. Miners are encouraged to expend increasing computational energy to be the fastest to solve the problem and earn the block reward. Unlike such Proof-of-Work based consensus systems such as Bitcoin or Ethereum, Proof-of-Stake blockchains do not depend on energy consumption – thought to be as high as the annual consumption of countries like Austria in the case of Bitcoin – to secure their networks.
Instead, PoS uses economic incentives based on staking or locking up tokens on the network in return for a share of the block rewards, and slashing or seizure of those tokens if stakers misbehave. This usually means running a computer node on the network known as a validator, akin to miners in PoW, or by delegating staked tokens to such validators. To put it another way, rather than using computational power expended to determine the next block producer, PoS block producers are determined by ownership of the token supply, pseudo-randomly electing nodes proportionally based on stake and time staked.
As a result, Proof-of-Stake has no lower bound on the amount of energy it needs and as technology advances, the cost to power nodes on a PoS network can reduce, with proponents seeing it as a more efficient and environmentally friendly system. According to the Ethereum Foundation, for example, Ethereum’s transition to PoS will result in 99.95% less energy being used.
That’s not the full picture, however, as PoW chains can use cleaner energy sources such as hydroelectric power, wind, and solar. Also, the often high-specification, high-cost specialized hardware used in PoS, though consuming less energy in operation, still requires resources to produce in the first place that are not necessarily renewable. It should also be noted that both systems require a fraction of the energy consumption of the traditional banking system.
Newer Energy-Efficient Mechanisms
PoS does not present the only solution, with algorithms like Proof-of-Trust providing a much greener alternative without compromising on speed, scalability, or security, according to Dr. Nir Haloani, CTO at COTI Group.
The Proof-of-Trust (PoT) consensus algorithm, used by COTI’s enterprise-grade fintech platform, removes blocks and the mining process altogether, assigning each network user a “Trust Score” and utilizing direct acyclic graphs (DAGs) to solve scalability.
Using PoT DAGs, each transaction is represented by the user’s Trust Score. To be added to the ledger, transactions need to be attached to two previous transactions with a similar Trust Score threshold, connecting transactions simultaneously and asynchronically rather than linearly to form a Trustchain.
Trust Scores are allocated to nodes on the network too, so suitable nodes can be selected quickly to broadcast and confirm transactions without wasting time or energy.
The Trustchain uses Trust Scores to calculate the PoT required to confirm a transaction, incentivizing higher Trust Scores with near real-time, low-cost confirmations, reducing energy consumption as a greener block-less and miner-less network.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.