Blockchain transactions are completed with a mechanism known as proof of work (PoW). The transactions generate complex math problems that must be solved in order for them to be verified.

Individuals known as “miners,” who work in a blockchain network, tackle these math problems through computer processing. Upon completion, the network rewards whoever solves the problem first with a predetermined amount of cryptocurrency.

Mining is big business

Being a miner can be big business. Therefore, it’s in a miner’s interest to invest in massive amounts of equipment for faster processing. The more difficult the math problem, the more processing required.

To up the ante, some groups of miners form pools and cooperate to complete the PoW, in which case the reward is distributed evenly.

This is how Bitcoin mining works and how blockchain transactions are completed. While this consensus mechanism has been lauded for its secure and decentralized nature, it is also problematic.

The cost of mining

Here’s the rub. The amount of computer processing power is massive. Bitcoin farms that facilitate this mining process have been known to require vast warehouses of equipment. Just google mining farm and see for yourself.

To put the energy consumption into perspective, Forbes estimates that through PoW, the Bitcoin blockchain uses 707 kilowatt-hours of electricity per transaction. That is enough energy to light a five-room house with LED bulbs continuously for one year.

On a global scale, the annual amount of energy consumed by Bitcoin is a staggering 131.03 terawatt-hours, which is equivalent to Argentina’s electrical consumption.

While the Bitcoin blockchain has the biggest impact, Ethereum’s estimated energy consumption is about 72 terawatt-hours per year. That’s comparable with the power consumption of Colombia.

Ethereum’s merge to proof of stake for its verification method tackles this dilemma.

Introduction to proof of stake

To solve the challenges created by PoW, a new method for validating transactions is needed. Enter proof of stake (PoS)!

Proof of stake eliminates the entire mining process and the massive energy consumption of mining farms that comes along with it.

Instead of using miners, PoS uses validators known as “nodes.” These validators mint new transactions, or rather blocks, to the blockchain. Instead of relying on computing power to solve complex math problems generated by the PoW method, PoS randomly nominates one validator in the network to validate the block. This is not only more energy efficient, it is also far speedier in validating transactions.

How PoS works

Here’s how proof of stake works.

In order to become a validator, you must deposit a specified amount of cryptocurrency into the network. This is known as a “stake.” It serves as a security deposit. The size of the stake determines the chances of the validator being selected to mint the next block and receive the accompanying reward.

So, the greater your deposit, the more likely you are to be chosen.

Is PoS fair?

On its surface, it may seem skewed in favor of wealthier participants. But with PoW, those with more resources and materials on hand enjoy disproportional electrical rates, which would be comparable to receiving a discount for bulk purchasing. This is known as economy of scale.

As Decentralized tech explains in a video tutorial, “the price they pay for mining equipment and electricity doesn’t go up in a linear fashion. Instead, the more they buy (in kilowatt-hours), the better the prices they can get.”

In the PoS validation process, if a validator is selected, it will check whether the transaction within a block is valid. If valid, the validator approves the block and it is added to the blockchain. The validator then receives the fee associated with the transaction.

What is the purpose of stake?

The stake the validator pays serves as collateral against approving illegitimate transactions. As long as the stake is higher than the transaction fees for the work, in theory, the validator can be trusted to do their job correctly. After all, approving fraudulent transactions would result in a net loss.

“It’s a financial motivator and holds up as long as the stake is higher than the sum of all the transaction fees,” according to Decentralized tech. Furthermore, if a validator decides to stop verifying blocks, they will only receive their stake after a predetermined period has elapsed.

PoS arose as an alternative to PoW because of concerns about energy use, environmental impact, security, and scalability. Here are the positive takeaways for PoS.

Pros

1. Energy efficiency
2. Scalability and faster transaction processing
3. No specialized equipment or mining farms needed to participate
4. Some view individual stake as more secure than majority validation, as a validator would be less likely to attack their own network for personal gain

Cons

1. Not as proven, especially in terms of security
2. Validators with larger stakes have an increasingly greater influence on transaction verification
3. Some PoS cryptocurrencies hold stake deposits for extended periods
4. Some view PoS as less secure as it doesn’t require group consensus

Why did Ethereum shift to proof of stake?

Part of the reason for Ethereum’s merge to PoS has to do with more optimally facilitating smart contracts. PoS will have a massive impact on the processing speed, making it much quicker and more efficient.

Of course, the most obvious reason has to do with the tremendous amount of energy consumption the merge will save. Ethereum’s carbon footprint under the PoW mechanism was equivalent to that of Switzerland. That disappeared overnight making it perhaps the largest decarbonization step ever implemented.

Ethereum is not the first blockchain network to use PoS. Other networks including Cardano and Solana have implemented it, albeit at a smaller scale. But the merge has focused the spotlight squarely on Bitcoin’s network, which has faced heavy criticism.

Is proof of work on the way out?

In January 2022 a prominent EU regulator called for a ban on proof of work Bitcoin mining, proposing proof of stake as an alternative due to the strain on the energy grid. Some countries, like China, Egypt, Morocco, and Kosovo flat out banned cryptocurrency mining. Russia also proposed doing so at the beginning of the year.

Despite possible drawbacks of PoS, there does appear to be a sustainable future for cryptocurrency and blockchain technology. The merge from PoW is a step in the right direction.

What do you think of Ethereum proof of stake? Is Ethereum’s merge to proof of stake the best option? Are there better alternatives to PoW, like proof of authority or proof of weight? What’s the future of a more sustainable blockchain in the mobility industry?