Why Proof-of-Stake is the Future of Blockchain Technology

Cryptocurrencies are under wide public scrutiny for placing an undue burden on the environment. Concerns that cryptocurrency — the primary application of blockchain technology — will have broad implications for environmental sustainability are undoubtedly warranted. Bitcoin, for example, is responsible for the estimated annual energy consumption of over 41 terawatt hours, a figure on par with the total energy use of New Zealand. The sustainability problems associated with Bitcoin are predicated upon the Proof-of-Work protocol it employs in order to verify transactions on the network.

Proof-of-Work, the methodology used to ensure the validity of the ledger’s transactions, demands that complex cryptographic puzzles be solved in order to mint a new block of transactions recorded on the digital ledger. A new block on the chain is minted once a cryptographic puzzle is successfully solved by a miner. This block incorporates the transactions that have been made and propagates them through the network. The miner responsible for minting each block is awarded with a predefined number of coins, as well as the fees associated with the transactions in the block. In a race to mint the next block and reap mining incentives, miners expend a great deal of energy in order to stay competitive. Successful mining justifies the costs associated with mining operations because miners are able to exchange their coins for fiat currency.

In countries like China and Mongolia, where electricity costs are amongst the lowest in the world, full-scale mining operations are powered primarily by coal. The use of cheap energy sources is a driving contributor to climate change and environmental degradation. Furthermore, the fact that Bitcoin miners rely on power from the grid is troublesome because power sources are ultimately at the hands of governmental bodies and regulatory agencies that can decide to restrict energy supplies or impose tariffs on mining operations. A crackdown on energy consumption in China, for example, could prove to be a major hit for the price of Bitcoin. China has already taken staunch action in the face of cryptocurrencies by banning initial coin offerings and shutting down online exchanges. In the coming weeks and months, Chinese officials plan to take actions to shut down domestic mining operations.

Even without government interference, mining for Bitcoin on its existing Proof-of-Work platform may eventually be unprofitable. Every four years, the token incentives for miners are halved. Between 2021 and 2024, miners are expected to receive just over six Bitcoins per block. After 2024, that figure will again be cut in half. With fewer mining incentives, fewer miners on the network will potentially mean increased vulnerabilities in network security and profound ramifications for the price of Bitcoin.

As blockchain technology continues to evolve, achieving decentralized distributed consensus in an immutable way will remain a primary goal of new projects. These projects seek to effectively establish a record that is agreed upon by everyone. Third generation blockchain networks like DFINITY are employing Proof-of-Stake, an environmentally-conscious alternative to the Proof-of-Work methodology, both as a means of reducing the computing power required to effectively mine a block and as an answer to the security problems posed by Proof-of-Work. A Proof-of-Stake consensus algorithm provides for mining opportunities in proportion to the amount of tokens held by a user on the network. This means that an individual who has a 10% stake in the network (ownership of 10% of the coins) is able to validate transactions in proportion to his or her stake. This miner can theoretically mine one tenth of the total number of blocks. Stakeholders, also known as validators, participate in a voting round in order to validate the next block of transactions. The weight of his or her “vote” is a function of the proportion of tokens he or she owns. Proof-of-Stake ensures the security of the network because it is in the interest of the miners to maintain the integrity of the digital ledger. Furthermore, Proof-of-Stake imposes penalties against those who want to rig the system. If someone does not live up to his or her role of validating the next block, the penalties include network confiscation of the validator’s staking wallet. This is because a coin cannot be used for transactions and held in stake simultaneously.

While these types of networks have not yet been widely tested, the Proof-of-Stake model is attractive and promising. It is substantially less computationally expensive than its Proof-of-Work counterpart, and addresses the economic and ecological costs of mining. When DFINITY and other third generation blockchains relying on Proof-of-Stake are deployed, the early advantages will include enhanced network security and improved energy efficiency. Improvements in the speed of blockchain consensus algorithms will also have broad implications for the varieties of applications that can be run on top of the network.