BLOCKCHAIN - PoW, PoS AND THE ENVIRONMENT SAGA

- Adetti Thakur

When Elon Musk announced his company would no longer be accepting the cryptocurrency as payment due to its ties to fossil fuels in a tweet, it perplexed us. Why would he change his mind within 4 months? did he not know about this before announcing that he would accept them as a payment mode? Well, the answers to these questions were seemingly more significant than questioning the fact about the process of mining of the said cryptocurrency actually harming our environment.

Blockchain, one aspect of it is the distributed ledger, that stores records of all transaction. The reason its called a distributed ledger is because the information is not stored in one centrally accessible location but across a network of computers also called as “nodes” in different parts of the world.

Blockchain uses a consensus mechanism that verifies that any information added to the ledger is valid, which means the entire network is in agreement hence also eliminating the possibility of double-spending coins. The goal of this consensus algorithm in the blockchain is to achieve a unified agreement.

Since blockchain technology uses a highly decentralized network, the system is self-regulated, which means that anyone can join the network as a node. This consensus mechanism ensures blockchain technology gives equal opportunity to everyone at validating a block in the ledger.

CONSENSUS ALGORITHMS

The two most commonly put to use consensus algorithms are Proof-of-Work (PoW) & Proof-of-Stake (PoS).

Bitcoin blockchain was the first major implementation of PoW consensus algorithm, now you might wonder what does this mean? Or how is a consensus algorithm posing a threat to the environment? The answer lies in the working of this algorithm.

You might have heard about ‘mining a bitcoin’ now this mining refers to go through the solving of a cryptographic puzzle to validate a transaction on the network of nodes and ledger. Miners compete against each other to solve this puzzle. What do they get? This whole hustle is to get to the ‘hash’ which is the answer to the puzzle which earns these miners a reward i.e fraction of the native cryptocurrency. For instance, if a miner successfully validates a transaction on a bitcoin network, the reward would be a fraction of bitcoin. The first miner to solve the puzzle is rewarded with coins.

This algorithm requires powerful and expensive hardware devices to solve the highly complex cryptographic puzzle. This system is energy intensive and it increases the expenses and these devices require more and more energy.

On the other hand Proof-of-Stake uses a different process to verify & validate transactions and reach a consensus. This still uses a cryptographic puzzle, but the overall objective and aim of this mechanism is quite different compared to PoW.

While PoW requires miners to compete and the miner to solve the puzzle first is rewarded the complex equation, in PoS, it selects the person that creates the next block depending on how many coins they put at ‘stake’.

For example, if one person stakes 5 coins and another stakes 20 coins, the person with a stake of 20 is more likely to validate the next block of transaction.

There is no competition whatsoever in PoS, which reduces the energy load of many miners competing to get to the hash. It also helps eliminating the need for expensive hardware devices which consume a lot of energy. All you need is a standard PC and a stable internet connection.

Niklas Nikolajsen, the founder of Swiss crypto broker Bitcoin Suisse, predicted on 14th of April 2020 that Bitcoin (BTC) will move to PoS once Ethereum (ETH) proves the success of this algorithm. Looking at the benefits of PoS we’d expect Bitcoin to move to PoS leaving PoW as the consensus algorithm.