If you’re worried about the environmental concerns surrounding crypto, rest assured help is on the way. And it’s called Proof of Stake.
While retail investors sent the price of Bitcoin plunging on news that Tesla CEO Elon Musk would no longer accept the coin for its electric cars, savvy crypto traders hung on. Why? One reason could be that they knew the latest iteration in mining digital coins called Proof of Stake (PoS) uses less energy and was about to take hold.
But before you can understand Proof of Stake, take a look at the current model of Bitcoin mining, called Proof of Work (PoW) and its impact on the environment.
Proof of Work, according to Investopedia, is “a decentralized consensus mechanism that requires members of a network to expend effort solving an arbitrary mathematical puzzle to prevent anybody from gaming the systems.”
What that means in the crypto world is simply, computers (run by “miners”) rush to complete a complex equation that results in a 64-digit number known as a “hash.” The hash is recorded in a public ledger and is used to verify that a new transaction has taken place on the blockchain.
It’s the amount of energy that’s used to create the hash that is cause for concern.
“The Digiconomist’s Bitcoin Energy Consumption Index estimated that one Bitcoin transaction takes 1,544 kWh to complete, or the equivalent of approximately 53 days of power for the average US household,” CNet said.
It’s this staggering use of energy that prompted Musk to reverse his position in accepting Bitcoin as payment for a Tesla.
“Tesla has suspended vehicle purchases using Bitcoin. We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel,” Musk tweeted in May, sending BTC plummeting 14%. “Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at a great cost to the environment.”
The world’s first digital currency continued to sink shortly thereafter. The knee jerk, which was primarily felt by retail traders who recently entered the market, sent the price of Bitcoin down to its lowest level more than three months.
Why were seasoned traders hanging on? Probably for many reasons. But among them may be knowing that a new method of mining digital coins was being quickly adopted. It’s called “Proof of Stake” or PoS.
The Proof of Stake model for mining coins relies on a miner having a stake in the game, namely, owning coins for a specific currency.
“The proof of stake (PoS) seeks to address this issue by attributing mining power to the proportion of coins held by a miner,” Investopedia explains. “This way, instead of utilizing energy to answer PoW puzzles, a PoS miner is limited to mining a percentage of transactions that is reflective of their ownership stake. For instance, a miner who owns 3% of the coins available can theoretically mine only 3% of the blocks.”
So instead of thousands of mining computers sucking up energy in the mad dash to be the first to solve the computational problem and create a hash, the number of miners working to solve the problem is reduced. Makes sense, doesn’t it?
“Because the basis of proof of stake doesn’t require any extra energy to prove trustworthiness, it is much more energy efficient,” NBC News recently reported. “Unlike in proof of work, where specialized computing equipment like high-end graphics cards are needed, the proof of stake protocol can be run off of a laptop. The nodes are virtual spaces, not physical equipment.”
In addition to using less energy, the PoS model is thought to be more secure, as there are fewer computers on the network working to create the coin. That makes it less likely for hackers to find an entry point.
While Bitcoin continues to use the Proof of Work model, Ethereum, the number two crypto coin, is working to make the switch to PoS.
“I’m definitely very happy that one of the biggest problems of blockchain will go away when proof of stake is complete,” said Vitalik Buterin, the inventor of Ethereum, in an interview with Fortune. The transition is expected to be complete by next year.
Other coins currently using the PoS model include Cardano (ADA), Polkadot (DOT), NEO (NEO), Algorand (ALGO), Cosmos (ATOM) and ThorChain (RUNE), according to Investorplace.com. Will Bitcoin eventually follow suit?
As more traders become aware of the PoS model, confidence in the crypto world is bound to go up as fears about harming the environment go down.
As Danny Ryan, a researcher at the Ethereum Foundation put it: “When humans find new tools they use them. So this decentralized thing, this crypto thing, it’s not going anywhere, but there’s also a much better way to do it.”
Originally published at https://www.stex.com on June 19, 2021.