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#86: Proof of stake: how to cut global energy usage by 0.2%

September 19, 2022 | 3 Minute Read

A few weeks ago Ethereum blockchain moved from proof-of-work to a proof-of-stake algorithm. This step alone reduced global energy consumption by 0.2%. It’s as much as an energy usage of Austria. At this point, Ethereum, the second largest blockchain after Bitcoin, is using barely as much electricity as a few hundred households. How is that possible? How does the proof-of-stake algorithm work, avoiding catastrophic energy waste?

First of all, let’s recap how the proof-of-work algorithm works. In general, hundreds of thousands of energy-hungry computers are trying to find a solution to a math problem. To be honest, it’s more like making millions of uneducated guesses per second. If any computer finds a solution - a very long number - it wins. Winning means it can append new transactions to the blockchain and get some small rewards. Everyone must move on to the next math problem.

This approach, in some sense, is very democratic. In theory, even the tiniest computer can win this competition. It also means that there is no central authority. Finding the solution is hard, but verifying that the solution is right, is quite easy. So every other participant can verify that this particular lucky computer was the one. There is no need for a central bank or database. That’s why blockchains are decentralized.

All this seems ingenius until you realize, what’s the scale. At any given time, literally, millions of computers are competing with each other, consuming tons of electricity. Only one wins. The amount of energy consumed by proof-of-work is staggering. It’s comparable to some mid-size European countries. Millions of computers and graphic cards do nothing more than just guess numbers, 24/7.

Proof-of-stake algorithm recently replaced proof-of-work in the Ethereum network. This was a big engineering achievement. With proof-of-stake, computers no longer perform useless work all the time. Instead, any node participating in the blockchain network can stake its own money to validate new transactions. The more money you stake, by depositing it in some special wallet, the bigger the influence you have. Still, many computers are competing to validate new transactions. But it’s not pure computing power that wins. It’s the amount of money you put at stake.

As Marius Smith greatly explained it, quote:

Hey, I have so much faith in the legitimacy of this transaction that I’m willing to back it up with my own money.

End quote. In other words, your chances of mining the next block are proportional to the amount of money you staked. And your returns are proportional as well. However, if you staked some money and verified fraudulent or broken transactions, some of your money is lost. This penalization process is known as slashing.

Some critics argue that proof-of-stake favours rich cryptocurrency owners. Yes. But proof-of-work also favours the rich ones. Those, who can afford to spend thousands of dollars on hardware and electricity. With proof-of-stake, you can still achieve consensus in a zero-trust, decentralized network. And the algorithm itself also seems fairer, compared to pure coincidence and the GPU arms race.

That doesn’t mean that cryptocurrencies like Ethereum or Cardano are no longer extremely risky assets. It also doesn’t mean that NFTs or DeFi will no longer be full of scammers. But I’m happy for the environment. It is said to be the biggest decarbonization event in history.

That’s it, thanks for listening, bye!

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Tags: cryptocurrencies, ethereum, proof-of-stake, proof-of-work

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