Proof-of-stake is a mechanism for achieving consensus on a blockchain. Blockchain is a technology that records transactions that cannot be deleted or changed. It is a decentralized database, or ledger, that is not under the control of any person or organization. Since no one controls the database, consensus mechanisms, such as proof-of-stake, are needed to coordinate the operation of blockchain-based systems.
While Bitcoin popularized the technology, blockchain is now part of many different systems, enabling interesting applications such as decentralized financial platforms and non-fungible tokens, or NFTs.
The first widely commercialized blockchain consensus mechanism was proof-of-work, which enables users to reach consensus by solving complex mathematical problems. To solve these problems, users are usually given ownership stakes in the system. This process, called mining, requires large amounts of computing power. Proof-of-stake is an alternative that uses far less energy.
At its core, blockchain technology provides three important properties:
- Decentralized management and operation – the people who use the system get to jointly decide how to manage and operate the system.
- Verifiable state – anyone using the system can validate the correctness of the system, and each user can ensure that the system is working as expected and has been since inception.
- Data loss resilience – even if some users lose their copy of system data, whether through negligence or cyber attack, this data can be recovered from other users in a controllable manner.
The first property, decentralized governance and operation, is the property that controls how much energy is needed to run a blockchain system.
Voting in blockchain systems
Blockchain systems use voting to decentralize governance and operations. While the exact mechanisms of how voting and consensus are achieved differ in each blockchain system, at a high level, blockchain systems allow each user to vote on how the system should work, and whether a given operation – accepting a new block on the chain, for example – should be approved.
Traditionally, voting requires that the identity of the people casting ballots can be known and verified to ensure that only qualified people vote and do so only once. Some blockchain systems allow users to present a digital ID to prove their identity, enabling voting with negligible energy use.
But in most blockchain systems, users are anonymous and have no digital ID to prove their identity. What then prevents an individual from pretending to be many individuals and casting many votes? There are several different approaches, but the most widely used is proof-of-work.
In proof-of-work, users are given votes based on the amount of computing power they have compared to other users. They demonstrate their ownership of this computational power by solving difficult mathematical problems. If a user can solve twice as many problems as another user, they have twice the computing power of other users and receive twice as many votes.
However, solving these mathematical problems is extremely energy-intensive, leading to complaints that proof-of-work is not sustainable. Researchers at the University of New Mexico have found that the climate impact of bitcoin mining is greater than the impact of global beef production.
Proof of effort
To address the energy consumption of proof-of-work, another way to validate users is needed. Proof-of-stake is one such method. As proof of stake, users validate their identity by demonstrating ownership of an asset on the blockchain. For example, in Bitcoin this would be ownership of bitcoins, and in Ethereum it would be ownership of Ether.
Although this requires users to temporarily lock their assets in the blockchain for a period of time, it is far more efficient because it requires negligible energy consumption. According to the company’s estimate, switching from proof-of-work to proof-of-stake will reduce Ethereum’s energy consumption by 99.95%.
Ethereum’s “Merge”
This improved energy efficiency is why many blockchain systems intend to transition from proof-of-work to proof-of-stake. Ethereum plans to make this change during the week of September 15, 2022. This is known as the Merger. During this merger, operations will shift from being voted on using proof-of-work to being voted on using proof-of-stake. Upon completion of the merger, only proof-of-stake will be used to vote on transactions.
The hope is that this will set Ethereum up to be sustainable for the foreseeable future.
This article has been updated to include new research on the environmental impact of bitcoin mining.
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