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Conscious consensus

How the energy efficiency of different blockchains affects the world

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Blockchain technology is powering a revolution in the way we think about value and ownership in the digital world. But not all blockchains are created equal. Different blockchains suit different use cases, whether as a store of value, like digital gold, or for smart contracts such as non-fungible tokens (NFTs), and the mechanisms that govern them are different too. With the use cases for blockchain increasing, it’s important to understand these mechanisms – not only for businesses, but also for consumers who want to make the best decision on what type of blockchain to interact with.

Let’s start with what a blockchain is. A blockchain is an electronic ledger system. These ledgers record transactions that are agreed upon by a network of decentralized validators running nodes. A validator is someone that participates in the operations of the blockchain by running a piece of hardware, a node, that processes transactions.

Let’s start with the definition of a blockchain. A blockchain is a decentralized electronic ledger system. These ledgers record transactions, and the order of those transactions. The ordering of events and transactions is agreed upon by the different nodes in these ledgers.

Each blockchain has a set of rules. Since a blockchain supports decentralized systems, meaning there is no central authority, its validation process must also serve as its method of security. A consensus mechanism is the process by which trust is achieved among all the validators and how transactions are recorded on the blockchain. The mechanism a blockchain uses affects everything from how it upgrades, the level of energy it consumes, and how fast the transactions are processed.

The story of blockchain technology today is a story of two consensus mechanisms: Proof of Work and Proof of Stake. Both mechanisms are widely used by the largest blockchains, and both are proven to safely secure the networks, but they are fundamentally different.

Proof of Work is the original blockchain consensus mechanism, introduced in the Bitcoin whitepaper by the psydononymous developer Satoshi Nakamoto. In Proof of Work, the validators, known as miners, secure the blockchain by means of solving cryptographic puzzles – whoever solves the puzzle first gets to write the next block and earn the block reward, or fee. These rewards, paid in the form of cryptocurrency, are for performing the computational ‘work’ of verifying a block.

The more miners that compete to do this work, the more secure the network becomes. A major downside is that all of those miners, with all of their computers, competing to do all that work, collectively use a lot of energy. And since there can only be one ‘winner’ assigned to each new block, the energy expended by every other miner goes to waste.

Those rewards are what create an incentive for all of the miners to participate” says Dr. Cathy Barrera, a founding economist for the Prysm Group, a consulting firm that works with emerging blockchain companies. “Everyone wants to win the contest and add the next block so that they can get this block reward. And that block reward also compensates the miner for all of the costs that are incurred in running all synergy, running all of these computer processes in order to try to win that contest.”

Other blockchains use the Proof of Stake consensus mechanism. Unlike Proof of Work, where validators compete against each other to solve puzzles, in Proof of Stake, the network is secured by validators staking the native cryptocurrency of the blockchain. So, rather than lots of validators competing against one another for a chance to validate a block, in Proof of Stake, users effectively put down a deposit for a chance to be chosen as a validator. Trusted validators are chosen at random to process a block on the blockchain and earn a block reward for doing so. This makes Proof of Stake blockchains, like Tezos, vastly more energy-efficient than their Proof of Work counterparts.

Furthermore, Proof of Stake enables blockchain networks to scale efficiently. For example, a recent report found that total energy consumption of the Tezos Proof of Stake blockchain has actually decreased, even as transactions on the network have skyrocketed. With Proof of Work, as the volume of transactions increases, the amount of energy expended also grows.

In fact, the amount of energy used annually by the largest Proof of Work blockchain, exceeds that of the country of Norway. Globally, that accounts for over half a percent of the entire world’s electricity consumption. But the story of Proof of Work isn’t as simple as ‘Proof of Work is bad for the environment’. Because Bitcoin can be mined anywhere, on-site Bitcoin mines can be deployed to make use of excess energy resources that would otherwise have been wasted.

Regardless of which consensus mechanism is used, how does a decentralized software create a secure environment for its users? The answer again lies in its consensus mechanism. For a blockchain that uses Proof of Stake, security comes from the fact that in order to attack it, the attacker would need to stake at least 51% of the entire network.

Dr. Barrera explains that “the security model is to exclude bad actors from participating in the system to begin with. We want all of the validators who are processing transactions and updating the blockchain, to be honest actors who are well intentioned.”

The Proof of Stake consensus mechanism creates an effective security protocol, while using only a fraction of the energy used by Proof of Work. Dr. Barrera goes on to say, “the way that we mainly do this is by making it so costly to conduct an attack that no one would really want to do that in the first place.”

In summary, both Proof of Work and Proof of Stake are valid consensus mechanisms, and work well for different use cases. But as blockchain technology becomes more and more important to our digital future, it’s important to know the difference between them, and to understand when, and where, energy-efficient Proof of Stake blockchains like Tezos might provide benefits over older Proof of Work platforms.

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