The market for NFTs—tokens that represent digital versions of artwork, music, movies, and other such items—exploded to $44 billion in 2017. This brought quite a lot of interest in Ethereum, the blockchain network where most NFTs are traded.
It also brought to light another concern, namely the energy waste associated with cryptocurrency mining.
Blockchains do not have a central gatekeeper, such as a bank, to authenticate transactions. Instead of using a consensus method known as “proof of work,” the two largest cryptocurrencies, Bitcoin and Ethereum, rely on it to keep a chronological record of transactions. Crypto miners are at the center of such processes.
The cost of decentralization is high. In the case of proof of work, this cost is the power of the computer. Miners compete against each other in Proof of Work to solve a difficult math puzzle.
In exchange for updating the ledger by adding a new block to the chain, the first person to solve the problem is rewarded with newly minted coins. This requires a considerable amount of power from the computer and, as a result, electricity.
Ethereum uses 113 terawatt-hours of energy per year, the same as the Netherlands, according to Digiconomist. More energy can be consumed in a single Ethereum transaction than a typical US household consumes in over a week. Bitcoin uses even more electricity than usual.
Why is Blockchain facing a challenge?
The current energy crisis, which contributed to China’s ban on cryptocurrency mining last year, as well as the expulsion of miners from places like Kosovo and Kazakhstan and the cutting off of their power, is to some extent to blame for the current state of things. These countries need energy to keep their homes warm and their businesses running.
Proof of employment wastes energy and produces electronic waste. On rare occasions, after 1.5 years, specialized computer systems used for cryptocurrency mining can remain operational and end up in landfills.
Adding to these issues, the Ethereum system has a painfully slow average transaction rate of 15 transactions per second. And it can’t be climbed. The 2017 release of the CryptoKitties video game, which allows users to breed and trade cartoon cats, caused a backlog of online transactions.
Given the cash that venture capital firms are pouring into Web3, a futuristic paradigm in which all applications will operate on decentralized blockchains, most powered by Ethereum itself, now is an opportune time for Ethereum to withdraw from Proof-of-work mining. And that’s the plan of action.
In a dramatic event known as “The Merge,” Ethereum plans to transition its entire network to proof-of-stake, which it claims would require 99 percent less energy and allow the network to expand and perhaps help reach 100,000 transactions per second, sometime in the first half of 2022.
Actually, the switch to proof of stake for Ethereum has been planned for six months. “[We] anticipated that [the POS implementation] would require a year… but in reality [it has] taken about six years,” Ethereum founder Vitalik Buterin told Fortune in May 2021. This is true. as it is a challenge to create such a model.
What is a proof of work?
Bitcoin was the first blockchain. Its creator wanted to get rid of the impact that third parties, such as states or large banks, frequently had on financial systems.
On a blockchain where users keep a shared ledger, the creator of Bitcoin had to come up with a way to prevent someone from trying to tamper with the system and spend the same coins again. A smart solution provided as proof of concept; Although it wasn’t perfect, it was enough.
Requiring a significant upfront investment, “Proof of Something” discourages bad actors from setting up a sizable number of supposedly independent virtual nodes and using them to control the network. Essentially, you have to pay to play.
The hardware is the investment in Bitcoin’s proof of work. Approximately every ten minutes, bitcoin miners compete to solve a challenge. The winner wins the block reward, which is new bitcoins, and adds the next block to the chain.
But trying to find the solution is like trying to hit the jackpot. Until you succeed, you must continue to speculate. The more powerful the machine, the more accurate estimates it can produce.
Large server farms are used for this purpose all over the world, making trillions of guesses per second. Larger mining operations also save more money, increasing their market share. The idea of decentralization is undermined by this. Any proof of work system must necessarily become more centralized.
In the case of Bitcoin, this ultimately resulted in a small number of powerful corporations controlling the network.
However, crypto enthusiasts have been looking for alternative consensus methods since the beginning of Bitcoin’s existence that can maintain some form of decentralization and are less wasteful and environmentally damaging than proof-of-work.
This eventually led to some strong companies controlling the network in the case of Bitcoin.
However, since the birth of Bitcoin, cryptocurrency enthusiasts have been searching for alternative consensus mechanisms that can maintain some level of decentralization and are less wasteful and environmentally damaging than proof-of-work.
How does it work?
First offered on the BitcoinTalk online forum on July 11, 2011, proof of stake has become one of the most popular solutions. In reality, the new blockchain was designed with the intention of serving as Ethereum’s initial security mechanism when it was first announced in a white paper in 2013.
Buterin said in 2014 that developing such a system was “so not easy.” trivial that some even consider it impossible.” Ethereum began developing a proof-of-stake algorithm, but ultimately decided to adopt a proof-of-work architecture for its initial release.
When there is proof of stake, the “validators” act as miners. Instead of buying power hungry computer farms, invest in native system money.
To become a validator and receive block rewards, you must stake, or lock, your tokens in a smart contract, a blockchain-based piece of computer code. When you send bitcoins to the smart contract wallet address, it is received and stored there as cash in a safe.
The transition of Ethereum to proof of stake has required a lot of work. Thousands of smart contracts are currently in use on the Ethereum blockchain, putting billions of dollars worth of assets at risk.
Furthermore, even though staking does not instantly damage the environment in the same way that computer storage facilities do, opponents point out that proof-of-stake and proof-of-work are equally good at sustaining decentralization. The highest bets produce the highest payouts.