Although the proof of work consensus mechanism has proven to be a secure and effective method of validating transactions on many blockchain networks, its negative impact on the environment and contribution to climate change has led many to question whether proof of work has a place in the future of blockchain technology. At the same time, the proof of stake consensus mechanism has emerged as a viable alternative, both in terms of effectiveness and security. However, what is the impact of proof of work vs. proof of stake energy consumption?
In this article, we will outline the basic differences between the proof of work and proof of stake consensus mechanisms and discuss the impact that each validation method has on the environment in terms of energy consumption. We will also detail the following five ways that proof of stake is better for the environment than the proof of work alternative:
- Scalability and Throughput
- Fewer Complex Computations
- More Decentralized Networks
- Enhanced Security
- Low Barrier to Entry
Proof of Stake vs. Proof of Work
Proof of work and proof of stake are both consensus mechanisms that “...help blockchains synchronize data and remain secure. These algorithms determine which node (computer) in the network can add the next block of transactions to the chain. Both mechanisms have proven to be successful at maintaining blockchains, though they each have trade-offs.” Before diving into the pros and cons of each consensus mechanism, let’s analyze their background and functionality.
Proof of Work
The proof of work consensus mechanism was created by Satoshi Nakamoto in 2008, and it remains one of the most commonly used mechanisms for blockchain networks. Without realizing it, casual blockchain users benefit from the proof of work mechanism when making many different types of transactions on the blockchain, including the purchase and sale of Bitcoin.
In order for the proof of work mechanism to function properly, the network relies on the contribution of “miners.” Miners are people or businesses that use their computers to validate transactions on the blockchain by adding blocks of data one at a time. Because miners perform work that contributes to the functionality of the blockchain as a whole, they are rewarded for their efforts with payment, generally in the form of native cryptocurrency.
On a technical level, the proof of work mechanism uses computer power to validate blockchain transactions. “Proof-of-work is a system where computers compete against each other to be the first to solve complex puzzles. This process is commonly referred to as mining because the energy and resources required to complete the puzzle are often considered the digital equivalent to the real-world process of mining precious metals from the earth.”
In order for a proof of work transaction to be validated, a complex cryptographic puzzle must be solved. These puzzles “...are solvable using guess and check. The computers attempting to solve the puzzle have to check trillions of wrong answers before finding the correct one. Even if we have thousands of computers working on the same problem, it will still take about ten minutes for one of them to find a correct answer.” Once a computer solves the puzzle, the transaction is validated, a block is added to the blockchain, and the winning miner collects their reward.
While crypto mining was originally envisioned as a way for individual people to contribute to the blockchain network and make some extra money, it has morphed in recent years into a large-scale enterprise for crypto mining businesses. As a result, “...massive warehouses have popped up worldwide, and there are hundreds of specially designed computers known as ASICs that are all mining Bitcoin simultaneously. These companies are winning a lot of the mining rewards.”
Proof of Stake
Like proof of work, proof of stake is also a consensus mechanism used by blockchain networks for transaction verification. However, instead of using computer power to verify transactions, the proof of stake method uses staking, a process similar to bidding or escrow.
The proof of stake concept was first introduced by Sunny Kind and Scott Nadal in 2012. “In a proof of stake system, a network of “validators” contribute or “stake” their own cryptocurrency in exchange for the chance to validate the new transaction, update the blockchain and earn a reward. The network uses an algorithm to select a winner based on the amount of cryptocurrency each validator has in the pool and how long it has been there. Once the “winner” has validated the block of transactions, other validators can attest to the accuracy of the block. When a threshold number of attestations have been made, the network updates the blockchain. All participating validators then receive a reward in the native cryptocurrency, depending on their original stake.”
Like crypto miners in the proof of work system, crypto validators can generate significant income from their blockchain activities. However, they also risk forfeiting large amounts of crypto if they do not quickly and accurately validate the transactions. The potential for loss of collateral is motivating because a significant amount of crypto is at stake. “In Ethereum’s case, you need to stake 32 ETH tokens to get started as a validator.” Recently, each Etherium token has been worth about $1,200 USD.
The proof of stake mechanism is different from the proof of work mechanism in that significantly less computing power is needed to validate a proof of stake transaction. In fact, proof of stake transactions can be validated with a computer that has as little as 8 GB of RAM. This results in a drastic reduction in energy consumption per transaction and for proof of stake blockchain networks as a whole.
Proof Of Work vs Proof Of Stake Energy Consumption
The difference in energy consumption between the proof of work and the proof of stake consensus mechanism is profound. For example, it is estimated that a proof of work network like Bitcoin consumes over 99% more energy than proof of stake networks like Tezos, Polkadot, or Solana.
The “merge” recently carried out by Etherium has provided some of the most reliable energy consumption statistics comparing the proof of work mechanism to the proof of stake mechanism. As some of you may know, the Ethereum network recently switched from using proof of work to using proof of stake. Because Etherium switched mechanisms primarily for environmental reasons, it has a significant interest in measuring the total energy consumption of their network pre and post-merge. In total, “the Ethereum Proof-of-Work network is estimated to use 2,000 times more energy than the Ethereum Proof-of-Stake test network that has been running in parallel. When the switch to Proof-of-Stake is made, the Ethereum network will go from using roughly the same amount of energy as a medium-sized country to the same
amount of energy as around 2,100 American homes.”
The proof of stake mechanism was designed to be an energy-efficient alternative to the proof of work mechanism. And it has proven to be environmentally friendly in more ways than one. We will discuss five of the more important energy efficiency improvements below.
5 Advantages Proof of Stake Has Over Proof of Work
As discussed above, the proof of stake method rewards validators based on the amount of coin they put up as collateral rather than the amount of computing power they devote to crypto mining. While this change may seem small at first glance, it has a profound effect on the power consumption of blockchain activities. The proof of stake mechanism is more energy efficient in the following ways:
Proof Of Stake Has Superior Scalability And Throughput
When employing the proof of stake mechanism, networks choose validators based on the amount of native coin they hold. The staking process allows proof of stake networks to validate transactions much faster as compared to proof of work networks which rely on a computational competition between miners. “The time it takes for the proof-of-stake algorithm to choose a validator is significantly quicker than the proof-of-work competition, allowing for increased transaction speeds.”
By doing away with the competition to solve extremely complex equations, the proof of stake mechanism increases both throughput and scalability. The greater transaction throughput can be seen when comparing a proof of work network like Bitcoin to proof of stake networks like Ethereum or Tezos. “The Bitcoin network can only conduct roughly five transactions per second, for an energy cost per transaction of 830kWh. Ethereum can conduct around 15 transactions per second, for an energy cost per transaction of 50kWh. Tezos can conduct about 52 transactions per second for an energy cost per transaction of 30mWh. The difference between Bitcoin and Tezos here is a factor of 25 million; the difference between Ethereum and Tezos is a factor of 1.5 million.”
In addition to throughput benefits, the proof of stake mechanism also offers increased scalability. One of the deficiencies with the proof of work mechanism is that as the network grows, more and more computers are required to solve equations and execute transactions properly. At some point, it will not be possible to build enough computers to keep up with the transactional demands. And the energy required to produce and power all of the mining equipment would be nothing short of staggering. On the other hand, the proof of stake network does not rely on computer power and, therefore, can scale faster and more efficiently. A very large number of transactions can be verified by proof of stake validators using basic computing equipment. “There is no need for huge mining farms or sourcing large energy supplies.”
Proof Of Stake Requires Less Complex Computations
As discussed above, the proof of work mechanism relies on complex computations to validate transactions. And energy consumption continues to increase as the network grows. For example, “the Bitcoin network’s Proof-of-Work algorithm also adjusts the difficulty of the
mathematical problem that validators must solve based on the total power
allocated to the network to ensure that each block always takes approximately 10
minutes to generate. The lucrative rewards offered by the Bitcoin network for
mining a block caused many entities to enter the Bitcoin mining business, which
in turn increased the computation power required to mine a block and drove up
energy usage because of the aforementioned adjustment mechanism. The more
miners there are competing with one another, the higher the computational
power necessary to mine Bitcoin.”
Alternatively, the proof of stake method does not have a computational competition, preferring instead to rely on an algorithmic selection process based on the amount of native coin a validator holds. By avoiding the computational puzzle, the proof of stake mechanism reduces energy consumption significantly and speeds up the transaction verification process. Importantly, validators do not need to operate high-powered computer equipment to collect rewards. For example, “the hardware requirements of many proof-of-stake systems are equivalent to average laptops on today’s market. Validator software is also not very demanding across most proof-of-stake systems.”
Proof Of Stake Makes Networks More Decentralized
Proof of work mining has been a booming market over the past decade, with large-scale mining farms popping up all over the world. While these crypto miners have contributed positively to the proof of work networks, they have consolidated mining activities to the point where large mining companies control most of the market. According to a National Bureau of Economic Research (NBER) study, “‘the top 10% of miners control 90% of the Bitcoin mining capacity, and just 0.1% (about 50 miners) control 50% of mining capacity.’” NBER concludes that “‘...the Bitcoin ecosystem is still dominated by large and concentrated players, be it large miners, Bitcoin holders or exchanges.’”
Such a high degree of crypto mining consolidation negatively affects both network security (more on this later) and the industry’s carbon footprint. As mentioned previously, the proof of work computational requirements become more complex as more miners enter the market. As investment dollars flood the crypto mining industry and firms add computer capacity, the algorithmic puzzle becomes more difficult to solve. The increased difficulty requires firms to purchase more sophisticated computer equipment and consume more energy. This spiraled out of control in recent years, with some of the largest mining companies regularly spending over $1 million a month on energy bills and submerging their computer equipment in cooling liquid just to control the heat they produce. Currently, Bitcoin mining consumes more energy on an annual basis than the country of Kazakhstan and slightly less than the Netherlands.
Because the proof of stake mechanism does not encourage validators to hoard sophisticated computer equipment like the proof of work mechanism does, individuals and small operators have a better chance of competing for staking rewards. Simply put, proof of stake validators do not need to have immense resources to get started staking in the same way that crypto miners do. Crypto miners must rent a facility, purchase a large number of sophisticated computers, pay large energy bills, and try to avoid lawsuits from neighbors and evictions from local, state, or federal government. Meanwhile, proof of stake validators can set up shop by purchasing a standard laptop and a predetermined amount of native coin (about $40,000 - $50,000 at current prices in the case of Ethereum). Additionally, individuals who can’t afford the minimum amount of native coin to start staking on their own can pool resources with others by entering a staking pool. All of this contributes to increased decentralization and “...a much higher chance for an individual to forge a block under PoS successfully.”
Proof Of Stake Has Enhanced Security
In the previous section, we discussed the prevalence of crypto mining firms and the power they have consolidated on proof of work networks. Although these firms help the networks function properly, there is also the possibility that they could attempt to control them in the future. Currently, “Proof-of-work makes it impossible to counterfeit bitcoin unless a nefarious miner controls more than 50% of the entire network — this means they must control at least 51% of both the cumulative computing power of miners, known as the hashrate, and the nodes in the network. If they did control more than half of the network, the bad actor could broadcast a bad block to the network and have their nodes accept the block to the chain.” Some suggest that this type of attack is not possible given how large the proof of work networks have become; however, an attack becomes more likely as large firms consolidate and the price of crypto drops. Both of these events have happened recently. In fact, smaller proof of work networks are frequently the target of 51% attacks.
While 51% percent attacks are possible on proof of stake networks as well, they are much less likely because one entity would need to control at least 51% of all native coin rather than the 51% of computing power needed to attack proof of work networks. Because proof of stake networks are less susceptible to attack, they are also less susceptible to fraudulent transactions. In fact, “Staking can be seen as a financial motivator for the validator not to process fraudulent transactions. In case the network finds a fraudulent transaction, the validator will lose a part of their stake and the rights to take part in the future. As long as the stake is higher than the reward, the validator could lose more coins than it would be able to gain via fraud.”
Indirectly, the security framework of proof of stake networks is also better for the environment. If, for example, a crypto mining entity was intent on attacking a proof of work network, it would have to assemble and employ 51% of all mining computing resources on the network. While not many miners get involved in blockchain activity with the goal of attacking the network, this is just another example of how the proof of work mechanism encourages high energy consumption. Both well-intentioned miners and nefarious actors are working tirelessly to employ computing resources and are increasing the proof of work’s carbon footprint in the process.
Proof of Stake Has A Low Barrier To Entry
The proof of work mechanism creates a high barrier to entry for those that want to get involved in crypto mining. These days, miners must have access to a significant amount of capital to get started. Miners must purchase highly sophisticated computer systems and have the tech know-how to operate them effectively. Alternatively, proof of stake validators have a much lower barrier of entry. As stated earlier, validators can operate effectively using a standard laptop computer and $40,000 to $50,000 of native coin. New validators can get started with even less native coin by joining a staking pool. There is no need for high-powered computers or specialized tech knowledge.
Proof of stake’s low barrier to entry has positive effects on the environment. Not only does the proof of stake mechanism require less energy to validate transactions, but it also does not incentivize the relentless creation of electronic waste in the same way that the proof of work mechanism does. Proof of work miners dispose of tons of used electronic equipment every year in a constant effort to update obsolete technology. Proof of stake validators, on the other hand, can operate for years using very basic computer systems.
Bitwave Is Your Go-To Partner For Proof Of Stake Accounting And Taxes
Proof of stake networks have shown that they are better for the environment than the proof of work alternatives. As a result, proof of stake networks will likely lead the way in the future development of blockchain technology. Thankfully, Bitwave has everything you need for proof of stake taxes and accounting no matter what type of staking business you run. Setup a demo to learn more about how Bitwave can get your business organized and ready for the crypto market of the future.
Disclaimer: The information provided in this blog post is for general informational purposes only and should not be construed as tax, accounting, or financial advice. The content is not intended to address the specific needs of any individual or organization, and readers are encouraged to consult with a qualified tax, accounting, or financial professional before making any decisions based on the information provided. The author and the publisher of this blog post disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use or application of any of the contents herein.
