Will Proof of Stake end mining?

If you are interested in cryptocurrencies, you have probably heard a term before, i.e., Proof of Work. You find it appealing, but you don't understand what it is for or don't know how to explain it? This article explains some basics of the Proof of Work process explicitly used in the Bitcoin blockchain. You will also learn about Proof of Work's counterpart, Proof of Stake. Don't worry; we will get to the differences between the two methods.

For twelve years now, the Bitcoin network has been based on the Proof of Work consensus mechanism. While Ethereum still relies on this algorithm method, the network is in a fundamental rebuilding phase. The goal of the transition to Ethereum 2.0 is to change from Proof of Work to Proof of Stake. By the way, if you already own Ethereum, there is nothing to worry about. Ethereum 2.0 is fully compatible with ETH; this change will only support the infrastructure of Ethereum.

This inevitably raises the question of which consensus mechanism is now better. The debate about the eternal battle between the two is not fading. Both sides have solid advocates and arguments in favor of the respective algorithm. That's why, in this article, we look at the pros and cons of the two consensus mechanisms.

Fundamental definitions: Proof of Work and Proof of State

Before we detail the algorithms, it is important to know when they play a role in the Blockchain. In short, the Blockchain consists of blocks that contain the transactions. To be included in the Blockchain, each block must be validated or verified.

When you make a transaction in traditional currency, the bank validates that you have enough money when you make a card purchase. Once the check is issued, the order is placed, and the transaction is completed. It is the same with blockchains. The only difference (and it's a big difference) is that this verification is done by the members of a crypto network (Bitcoin, Ethereum, etc.). For this reason, most cryptocurrencies are referred to as decentralized. That means they are not interfered with by a third-party organization.

The verification or validation is usually referred to as "mining." The people who work on this are called miners. "Mining" in a conventional sense means that miners use their computing resources to get rewards for each block they manage to complete, thereby securing the network. Miners ensure the integrity of the system. They also enable the Blockchain to function. Because without any newly mined and integrated block, the Blockchain is finished! That's right! This is critical.

The two algorithms function during the operational stage of the cryptocurrency. In the case of Proof of Stake, we should address "minting." More precisely, with Proof of Work, "mining" is more commonly used. In fact, "mining" is used more often in everyday language, so we will use that term for simplicity instead.

In a Proof of Work protocol, miners compete when it comes to validating a block. To win, a miner must first find the "proof," i.e., the correct hash code in the block. The winner receives a reward directly in cryptocurrency (e.g., bitcoins in bitcoin mining). This reward is used to create and circulate new tokens. Proof of Work has been used since the inception of Bitcoin. Over time, it has proven effective and met expectations. Thanks to Proof of Work, Bitcoin is now the most broadly used and popular cryptocurrency globally.

Proof of stake, on the other hand, compares differently. Validators get rewarded blocks based on how much capital they are willing to risk. In other words, a person can mine by validating block transactions depending on how many shares they have in the network. The validators can lose their investment capital at stake if they act maliciously.

Is Proof of Stake the easiest and best way to mine cryptocurrencies?

Let's look at some practical aspects of it without going too much into the technical details. There are main advantages in terms of scalability and power consumption. Spoiler alert: Yes, PoS will kill mining.

Weighing advantages and disadvantages of the two algorithms

Energy efficiency: Proof of Stake algorithms is energy efficient because it eliminates energy consumption from the extraction process. The energy consumption of mining with Proof of Work is enormous and equivalent to the energy production of several nuclear power plants. This operational process has consumed more energy than the total power consumption of some nations.

But Proof of Stake radically changes this. There is no need to stress about spending astronomical amounts of electricity to validate transactions and enter them into the Blockchain.

Decentralization: An improved democratized access to the network

Anyone can participate in the network as long as they meet their participation quota. Large mining pools (groups of miners connecting their resources) can control 51% of networks with Proof of Work systems, resulting in a genuine threat of centralization. Hence, the main advantage of Proof of Stake is that it is 51% more resistant to attacks, as there is no competition between miners.

Since there is no competition, there is also less competition for hardware than in Proof of Work. To become a validator, all you need is a certain amount of crypto, a stable internet connection, and a computer or mobile device (phone or tablet). You don't need much, which is why the doors are open to you. Inevitably, this means that even small investors can help secure the network and passively receive a reward from the network for doing so.

Security concerns and other threats to economic interests: Attacks on 51% are one of the main fears in Proof of Work networks. It is enough for a malicious mining group to have 51% of the computing power in the worst-case scenario. This is only possible in a Proof of Stake system if the attacker owns 51% of all coins. If the attacker makes such an attack, the value of the coins tends to drop. This leads to substantial financial losses for the attacker. This situation acts as a deterrent to prevent these attacks while maintaining network security.

Scalability: The speed and scalability of Proof of Stake networks far surpass Proof of Work networks. This makes it ideal for blockchains that want to be used as payment systems in retail, requiring verification of many transactions per second.

Another significant advantage is that the Proof of Stake operation is scalable, meaning it can process transactions faster. This is used as one of its main features. There is no need for intensive and time-consuming computational work.

As explained already, Proof of Work is about contests. Only the winner's work allows the block to be accepted and move on to the next block. Actually, the work of the other "losing" miners participating in solving a cryptographic puzzle is worthless. So, the Proof of Work blockchain evolves at the same speed as the fastest miner. With the Proof of Stake, things are different. When miners are selected, multiple of them can work in parallel for various validations. The capability for processing block transactions is thus decoupled.

Proof of Work is costly: Like in the case of Ethereum, its tokens can be mined with expensive equipment that uses graphics processing units (GPUs). Another disadvantage is that if the network starts to saturate, the transaction costs rise higher and higher.

Proof of Stake is a growing alternative that seeks to address the energy consumption (and hardware overhead) that pervades current generations of chains. With this alternative, miners send an amount of the chain's currency so that they receive a reward for signing a block in the form of transaction fees. And they can lose their stake if they sign a block in a way that is inconsistent with the chain's rule, i.e., no double-spending.

How Proof of Stake is a more reliable choice to stop harming our planet: One of the use cases to consider is how it is deployed in the NFT case. NFTs and cryptocurrencies are a means for various industries and artists to bypass economic market barriers. From an environmental perspective, they are the fast digital fashion of the day. And require extreme amounts of electricity to produce items whose positive social benefits have not been proven to outweigh their negative impact on the environment.

There is a general lack of awareness about the environmental impact of NFTs. However, experts in the field recognize a need to replace the system with something like this alternative that does not use thousands of giant mining facilities to consume energy.

In this 2.0 model, the Ethereum algorithm simply chooses a miner to authenticate the new block based on the number of coins he already owns. This eliminates the need for miners to compete with each other and emit vast amounts of emissions to solve the puzzle.

The rise of eco-friendly blockchains: Fortunately, the Proof of Stake model is not only available for Ethereum. A handful of NFT marketplaces have emerged using this blockchain algorithm (created for, e.g., on Cardano) to provide a greener alternative to Ethereum-based services.

Proof of Stake and the threat of elitism: This algorithm is not without its disadvantages. For example, it can quickly create an elitist system by selecting the validators who contribute the most. Simply put, the wealthier contributors earn more mining power. The result will be that the same validators will always be selected and thus enrich themselves. Ideas are in works to avoid this tendency.

Another thing is the Proof of Stake system depends on a validator being successful. What happens if the validator does not or wants to do their job correctly? Therefore, solutions such as creating additional pools of validators are being considered.

Proof of Work when powered by renewable energy: Would it be fair to label mining as a detriment to the environment if it just ran on renewable energy? More than half of Bitcoin mining used to be run on renewable energy obtained from China. It's a very different situation now as crypto mining got banned in China recently. Sure, mining like that in 50% of the case is not environmentally harmful. However, renewables have their limit only to power about one-third of the world's electricity. And as the appetite for mining grows, if all miners use renewable energy, the supply limit will shrink for other essential use cases.

The latest data from benchmarking report conducted annually by Cambridge University shows that 39% of the energy used in mining comes from renewable sources. However, in practice, this number must be put into perspective and is not average. When environmental issues can no longer be ignored, the carbon footprint of mines is a genuine concern for the future.

Conclusion

Broadly speaking, it is safe to say that Proof of Stake is a lesser evil from an ecological perspective and has yet to prove itself in the future. One of the reasons there has been a weak response to greener alternatives is the general lack of awareness of, e.g., Ethereum's massive energy consumption. This signals that neither the currency nor the major NFT auction platforms want to develop these figures transparently for fear of scaring off potential buyers with environmental awareness.

We can talk all day long about stats and bla. If you look at the track record, there has absolutely been no way to know where the mining energy had been drawn from. Traditionally, the miners have moved to where the cheap power had been available.

The advocates of Ethereum might argue that every good thing comes at a cost. But as people become conscious about the environment, their concerns can't be ruled out. However, investors and consumers are likely to turn to other cryptocurrencies unless they switch to greener mining methods and energy sources. And that awareness alone will threaten the future of Proof of Work.

From both economic and ecological efficiency perspectives, avid researchers will need to first monitor the effectiveness of Proof of Stake. Afterward, reasonable conclusions can be drawn which route will be sustainable, benefiting the economy and at the same time eliminating carbon footprint. Will we see a hybrid system develop in the future? Maybe but only time will tell. For now, we can only wait and watch.