Recently, there has been quite a debate around the energy consumption of various cryptocurrencies. There has been a lot of critique on cryptocurrencies based on the energy consumption figures. Given that we are becoming more and more aware of the environmental implications of CO2 footprint and the changing climate, the critique is justified.
Major cryptocurrencies, with Bitcoin at the top of the list, require an extensive processing system to run each transaction. Of course, these processing systems are powered by electricity. The problem arises with the computational difficulty that is required in each transaction and mining. Your ordinary computers do not have the processing power to deal with such complex problems. For this purpose, special ASIC processors are required. These processors inherently consume marginally large amounts of energy as compared to your regular processors. And in turn, large networks of these processors, installed for the purposes of clearing transactions and mining of various cryptocurrencies, consume large amounts of power.
Proof of Work Mechanism
Proof of Work mechanism is a methodology employed in verifying transactions for cryptocurrencies. When Bitcoin was first introduced, there was a need for a transaction verification system that would eliminate any third-party interference into the transaction. To cater to this requirement, Proof of Work was incorporated in the system, which gave Bitcoin its uniqueness by allowing two parties to make transactions without going through a centralized system. This method of verification was later adopted by many cryptocurrencies that followed in the footsteps of Bitcoin.
Bitcoin at that stage was an experiment, and while it was a big achievement, it was not the perfect cryptocurrency. The concept of Proof of Work was conceived specifically for the bitcoin, but it had some flaws which weren't rectified.
The way Proof of Work executes what defines a cryptocurrency. It is basically a method to verify each transaction by solving a unique and very complex mathematical equation. This ensures that the transaction is valid and there is no foul play involved. This transaction verification is what we know as adding a block on the blockchain. For every transaction that is verified, a person gets some rewards in the form of Bitcoins or whatever cryptocurrency you are working on.
However, the two major flaws with this model are that it is a first-come, first-serve model, and the network takes a relatively long time to authenticate a transaction. In the case of bitcoin, the time taken by the network is around 10 minutes, and the blockchain can only cater to 7 different transactions at a time. Both of these factors contribute to large energy consumption and waste of energy as well.
Since it is a first-come, first-serve model, a lot of different mining units are competing against each other for the same block of transaction. Whoever solves the equation gets the reward. We have established that these problems are extremely complex and hence require a lot of high-powered processors, which account for large energy consumption. However, this first-come-first-serve model also means that once any one of the miners has cracked the equation and the block has been added to the blockchain, all the energy that was utilized by all the other miners on the same equation goes to waste. You can lose the reward in a matter of seconds, which means you have essentially gone through the whole process for zero return on your investment. For more information you can visit trustpedia trading software reviews
When people realized the energy requirements and faced the critique, many shifted towards renewable energy solutions such as hydropower. However, the wastage of large amounts of energy remains persistent even if the energy is created through renewable sources.
The Better Alternate
It can be said that in order to reduce the CO2 emissions for Bitcoin, which is the biggest cryptocurrency based on the Proof of Work model, we should look for a change in methods of verifying transactions. The answer to this query about the verification model is the Proof of Stake model.
Proof of Stake
Proof of Stake was specifically made as an improvement over the existing Proof of Work model. Even though many followed in the footsteps of bitcoin, improvements were still made to Bitcoin's system. Ethereum, which is second to Bitcoin, also tweaked its Proof of Work model to incorporate more transactions at a time. However, Proof of Stake was introduced by Peercoin. A cryptocurrency launched in the second half of 2012. It also took a lot of inspiration from the framework of Bitcoin, but it tackled the idea of a first-come, first-serve reward system. There is also news about Ethereum shifting towards a Proof of Stake model. However, it is still a work-in-progress.
Even though Proof of Stake also requires new blocks to be created, it does not pit miners against each other in a way that Proof of Work does. Basically, in order to get the objective of mining, you will have to put some amount up as a stake. The system checks how much the individual has staked against the blockchain transaction that they want to mine. Based on this value, the amount in cryptocurrency that you stake, you get your transaction fee for each transaction. Whereas in a Proof of Work system, you get a set reward for each block.
The element of randomness in the system of Proof of Work eliminates the constant need for mining. It is reducing energy consumption by as much as 90%. Moreover, it also improves the transaction time required by a significant amount.
This tweak in the method of mining can be fruitful for Bitcoin. It is already the most valued cryptocurrency and will only benefit from this update while tackling the energy consumption issues. Ethereum has taken steps to shift from Proof of Work to Proof of Stake, which further gives us reason to believe that it is possible to adopt a new model of verifying transactions.