⚡️ Proof of what?

Learn the meaning behind proof of stake (PoS) and proof of work (PoW)

There is much more than low gas when “NFTing” in altcoins like Tezos, Cardano, and Solana. As I chat with more people every day, it is clear that not everyone is aware of this—the network where the transaction happens influences energy consumption significantly. I decided to step away from crypto art in this edition (although I included some cool clean NFTs 🌱) and go down into the machines room to talk bout crypto protocols and tech in simple terms.

Just like real-life currencies, there needs to be a mechanism to “print” money. Each country decides how to do it by a mix of decision-makers like a central bank, economists, and lawmakers. Similarly, crypto coins like Ethereum, Tezos, Cardano, and Solana have their own mechanisms to print money. There are two popular mechanisms, Proof of Work (PoW) and Proof of Stake (PoS). They were created before crypto but became widely used with the emergence of these technologies.

Proof of Work (PoW)

PoW is a form of cryptographic zero-knowledge proof in which one party (the prover) proves to others (the verifiers) that a certain amount of a specific computational effort has been expended. Verifiers can subsequently confirm this expenditure with minimal effort on their part. The concept was invented by Cynthia Dwork and Moni Naor in 1993 as a way to deter denial-of-service attacks

Wikipedia

Alright, so let’s translate that to more straightforward terms. Before a crypto-miner gets paid in crypto coins, they need to “work” and “proof” they did it.

Work is just computer operations. Yes, like considerable amounts of sums, divisions, solving equations, etc. Then, the miner shows that they did X work, and they get paid in coins back. As time goes by and more miners enter the field, the number of computer operations needed to receive coins grows, and the amount of received coins decreases. The beauty of this is that there is no human intermediary. The algorithm itself handles the validation, and anyone can enter the network and become a miner. Everything is happening in the background.

So, what’s the problem?

Well, computer operations can take vast amounts of energy.

According to the Cambridge Center for Alternative Finance (CCAF), Bitcoin currently consumes around 110 Terawatt Hours per year — 0.55% of global electricity production, or roughly equivalent to the annual energy draw of small countries like Malaysia or Sweden.

Harvard Business Review

Keep in mind that most popular cryptocurrencies use PoW (Bitcoin and Ethereum). Ethereum Foundation is trying to switch to PoS - more on this later.

Proof of Stake (PoS)

Fortunately, there is a cleaner solution. PoS technology solves the same challenge and pays miners (also called validators) with coins. The difference is that they get paid by locking or staking cryptocurrencies. Instead of making computer operations, they just hold coins (or “stake” coins) to mine more coins. PoS has evolved into additional forms, such as staking NFTs instead of coins, giving rewards related to the NFT in play.

In contrast to PoW, to form an attack into a PoS network, attackers would need to purchase enormous amounts of the cryptocurrency to “stake out” other miners and validators. In Tezos, this is called baking, and there are many “baking nodes”, guaranteeing that there is no control over the staking by one particular group.

Of course, this sounds very simple. PoS is a complex topic; I suggest you read this if you want to dig deeper into it.

The most important advantage of this procedure is the reduction in energy consumption levels.

Cardano for example is 1.6 million times more energy-efficient at the moment than Bitcoin

Tech Fortuner

Ethereum, when clean energy?

I use Eth daily; it is the most mature network and an apparent technological breakthrough by introducing dApps and a whole spectrum of possibilities. Exciting things are happening there. Nevertheless, leaping Eth V2 (and thus, switching to PoS instead of PoW) will be huge for it to continue its dominance. If it takes longer than expected (1> years), they could lose a lot of ground to smaller but fast-moving coins like Tezos, Cardano, Solana, etc.

Besides the technical complexity of such transition (which could have a terrible impact if done incorrectly), many stakeholders oppose it, such as the current Ethereum miners. They have invested a lot of time and effort, therefore transitioning to PoS comes with a substantial economic cost.

I hope this summary helped you understand the basics behind the technology, its impact, and the meaning behind clean NFTs.


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