Carbon Footprint: Proof-of-Work vs. Proof-of-Stake

KEY TAKEAWAYS

• Proof-of-Work and Proof-of-Stake are the two major consensus mechanisms utilised by most blockchain networks.

• The first proof-of-work mechanism ever invented is Hashcash. Hashcash was invented in 2002 by Adam Back.

• Proof-of-work addresses the Byzantine Generals problem. The Byzantine Generals problem occurs when the control of a decentralised network is concentrated in a central authority.

• The high energy consumption rate of Bitcoin and other PoW blockchains is their biggest strength despite the environmental concerns.

  
  

Proof-of-work (PoW) and proof-of-stake (PoS) have become the two foremost consensus mechanisms that most blockchains adopt to ensure consensus and preserve the state of their networks. While proof-of-work precedes proof-of-stake, both consensus algorithms require energy (electricity) to perform their basic functions. However, to what degree is their energy consumption, and how does it affect the environment in terms of carbon footprints?

The first proof-of-work mechanism ever invented is Hashcash— proposed by Adam Back in 2002. PoW has evolved from the Hashcash mechanism to a more complex one utilised by Bitcoin and other older generation blockchains such as Litecoin and Ethereum.

The Proof-of-work mechanism helps the Bitcoin blockchain achieve consensus across its network through distributed nodes controlled by miners. By distributing the nodes on the network among miners (scattered in different locations), the Bitcoin blockchain prevents a common problem known as the Byzantine Generals from achieving decentralisation as proposed by Satoshi Nakamoto in 2009.

What is the Byzantine Generals Problem?

The Byzantine Generals problem is synonymous with decentralised systems like Bitcoin. On the Bitcoin network, there are several users, including miners. Miners on the network often have to arrive at a consensus on an objective or a suitable software version for the blockchain.

The Byzantine Generals problem occurs when a few persons or central authority controls the bulk of a network. Owing to this, decentralisation is affected. The Bitcoin blockchain uses the proof-of-work consensus to address this issue.

How Proof-of-Work Consensus Operates

Proof-of-Work or PoW, just as the name implies, requires the participants of a network to perform certain tasks to secure it. The Bitcoin blockchain has miners participating on the network. These miners compete to solve cryptographic puzzles whose solution must be agreed to by all the nodes to arrive at a consensus, which is then used to validate transactions, add blocks and produce new bitcoins. Miners earn incentives for solving these puzzles and successfully adding new blocks.

Mining on a proof-of-work blockchain requires a lot of computational power and energy. The mining process is done with energy-intensive special computers known as Application-Specific Integrated Circuit (ASIC) or mining rigs. As more miners join the network, its security improves, making it impossible for bad actors to execute spam, 51% or even denial-of-service (DoS) attacks.

In the face of the arrival of more blockchain networks, a transition from the energy-intensive PoW to the more scalable proof-of-stake consensus, which consumes less energy occurred. Currently, there are several other consensus algorithms such as Proof-of-Concept, Proof-of-Authority, Delegated Proof-of-stake, amongst others.

Proof-of-Stake Consensus Mechanism

The PoS consensus adopts a different mining model. In this model, miners are referred to as stakers or validators and are not required to perform any cryptographic task. The proof-of-stake model replaces computational power with staking, such that the amount of tokens held by a user determines his mining power. For instance, if a user holds 3% of a token's supply, he can only mine 3% of a network's blocks. Mining is done by staking tokens in a smart contract rather than mining blocks with the help of ASIC machines and a large chunk of computing power.

Due to many factors, the PoS consensus was invented as an alternative to the PoW. The first set of cryptocurrencies to adopt the proof-of-stake consensus include Nxt (NXT) and Peercoin (PPC), which combine the PoW and PoS algorithms. The PoS has become the most preferred consensus algorithm, adopted by several new generation blockchains such as Algorand, Solana, Tezos, and most recently, Ethereum 2.0 (ETH 2.0).

Proof-of-Work Vs. Proof-of-Stake

Both consensus algorithms boast of peculiarities that have endeared them to their thousands of users. However, blockchain users have failed to agree on one point— how much energy each consensus algorithm consumes and its effect on the environment.

According to the Bitcoin Energy Consumption Index estimates, a single Bitcoin transaction consumes the same amount of energy as an average US household for 57.25 days, which is about 132.5 terawatt-hours per year. This contrasts sharply with the 2015 estimates revealed that a single Bitcoin transaction could power a US household for 1.57 days at the rate of 119.87 terawatt-hours annually.

According to TQ Tezos, Bitcoin's energy consumption is capable of powering mid-sized countries like Argentina or Ukraine. While the Bitcoin blockchain relies on such an amount of energy to produce transaction blocks and new tokens, the environmental impact of this energy consumption has been a subject of concern among blockchain enthusiasts. As such, the proof-of-work consensus is criticised for its excess carbon footprint, which has been likened to driving a gas-powered Sedan for a thousand kilometres. Following this, calls have been made for a shift to a renewable energy source or, more preferably, the PoS algorithm.

How Much Energy Does the PoS Consume?

There are no specific estimates on the amount of energy consumed by proof-of-stake networks. Notwithstanding, Danny Ryan— a researcher at the Ethereum Foundation stated that the energy consumption of proof-of-stake networks is 99.99% lower than proof-of-work. Ryan made this estimate in relation to Ethereum 2.0— a PoS version of the Ethereum blockchain— that is scheduled for release in Q2, 2022.

PoS has been touted as a better consensus algorithm due to its energy efficiency. PoS leaves fewer carbon footprints than PoW because its energy consumption is lower compared to the latter. However, the high energy consumption rate of the Bitcoin blockchain and other proof-of-work networks is considered their biggest strength. This is because the larger the network becomes, the stronger its security (a major reason the Bitcoin blockchain is yet to suffer an exploit). In addition, as the price of Bitcoin increases, it becomes increasingly difficult to mine new blocks, thereby requiring more energy.

Despite the negligible energy consumption rate for the PoS, it is not devoid of challenges, some of which include governance issues and its vulnerability to attack if a party holds 51% of a token's supply, enabling him to exercise total control over the network, which represents a compromise on the network's security. With such power, he can prevent other users from mining blocks. Thus, the essence of decentralisation is defeated.