TECHNOLOGY
When Bitcoin launched in 2009 its ‘consensus mechanism’, how its blockchain processes and verifies new transactions, was based on what is called ‘proof of work’. Since its inception many other blockchains have arisen and some went with a different approach to find consensus called ‘proof of stake’.
Bitcoin is still the top dog as the world’s biggest cryptocurrency but the number two and most widely used, Ethereum, has finally ditched proof of work. After much delay, and a significant amount of testing, the Ethereum blockchain implemented “The Merge” and is now using proof of stake. So, what is the difference between the two consensus mechanisms? Is one better than the other?
The benefit of blockchain technology, both for proof of work and proof of stake, is that it uses a communal and immutable ledger which is verified by numerous computer nodes making it decentralized. This creates enhanced security, greater transparency, and instant traceability according to its advocates.
In a proof of work blockchain, the computer nodes compete with each other to be first past the post in solving complex mathematical puzzles to add a new block to the chain, and with it all the rewards.
In the case of Bitcoin ‘miners’, those running powerful computers to solve the puzzles, 6.25 Bitcoin for each block they successfully mine. This amount will halve sometime in 2024 and will continue to do so until the maximum supply of 21 million has been exhausted, roughly in 2140. After that miners will receive fees from the transactions to maintain the network.
However, this competition between the nodes means that proof of work requires vast amounts of energy to run those number crunching computers. In the case of Bitcoin, its consumption was slightly less than that of Argentina. This has been just one strike against blockchain technology and crypto assets creating opposition to wider adaptation of the technology.
.@Galois_Capital Co-Founder Kevin Zhou on the $ETH merge: "Very standard, very smooth overall success. From a markets perspective and from a price perspective, on the other hand, not quite a success… This was definitely much more of a 'sell the news' event than otherwise." pic.twitter.com/2BNvt8DRVS
One of the selling points for the adaptation of proof of stake through ‘The Merge’ is that the switch will reduce its energy consumption by 99.95 percent. According to Digiconomist, a website that tracks crypto’s energy consumption, Ethereum uses far less energy than before ‘The Merge’ but a single transaction still has a carbon footprint equivalent to 10,794 VISA transactions or watching Youtube for 812 hours.
Proof of stake does away with the need for the massive computations to add new blocks to the chain. Instead, those with a stake in the network get to participate in the validation mechanism. Validators place a minimum stake of 32 Ether, the digital coin of the Ethereum blockchain, but the larger the stake, the better chance of being selected to check that new blocks propagated over the network are valid and thus the monetary reward that comes with it. But this won’t necessarily block small participants as investors can commit holdings to a stake pool operated by exchanges.
The Biden White House has just released its first-ever framework on what crypto regulation in the U.S. should look like. https://t.co/tUoXgaSACu
If your only concern is saving energy, proof of stake is clearly head and shoulders above, however each one has its own uses and neither solves the problems that have plagued cryptocurrencies and assets. Crypto has also come into the crosshairs of government regulators due to its use for nefarious ends, scams and hacks that have resulted in people losing over $1 billion since the start of 2021, as well as their highly volatile nature.
Proof of work is much slower than proof of stake. For example, Ethereum expecting to perform up to 100,000 transactions per second after the transition in addition to the launch of its shard chains. That’s up from only 30 transactions per second on its proof-of-work blockchain. However, proof of work is considered more secure and able to maintain a decentralized network.
Ethereum counters that proof of stake should make its blockchain more secure by increasing the cost for a potential perpetrator of a 51-percent attack. That’s when miners with majority network control can interrupt the recording of new blocks. Likewise, the community can recover the honest chain collectively should an attack overcome the crypto-economic defenses.
Still there is the worry that Ethereum’s switch could reduce its decentralized nature and funnel more power to large firms. That in turn raises the specter that it would be easier for governments to apply pressure that a staking service comply with an order to censor certain transactions. Brian Armstrong, the CEO Coinbase, the largest US exchange accounting for 14 percent of all staked Ether, has said that he would rather shutter the company’s staking service than comply with any such hypothetical order.
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