The Promise of Proof of Stake

The Promise of Proof of Stake

Blockchain technology has long been billed as a disruptor for a large number of different industries, including finance, file storage, supply chain management, digital rights management, education, entertainment, healthcare, and more.

But it’s got a problem. Right now, the two most popular blockchains use far more than their fair share of energy and as a result, are a significant contributor to global warming and all of the problems that brings with it.

This is largely down to Proof of Work (POW), the first blockchain consensus mechanism, and the primary way Bitcoin and Ethereum achieve Sybil resistance.

Here, we take an in-depth look at one of the most promising alternatives currently in the works. Known simply as Proof of Stake (POS), it’s becoming increasingly recognized as a more environmentally friendly and energy-efficient way to secure a blockchain, and one of the biggest POW blockchains today is set to put it to its biggest test yet.

The Problem with Proof of Work

The vast majority of the first generation of cryptocurrencies are backed by a Proof of Work blockchain. This means they’re secured by a network of specialized computers, known as miners, who work to mine blocks and package transactions into those blocks for permanent storage on the ledger.

Unfortunately, the computer hardware used to complete this necessary function requires a great deal of energy to operate, since mining is an incredibly computationally challenging process, that requires specialized circuits known as ASICs (application-specific integrated circuits) or high-end graphics processing units (GPUs) to successfully get any work done.

While this results in incredible security, many successful POW blockchains — including both Bitcoin and Ethereum — now have such an extensive mining network that the energy burden is becoming a problem. Indeed, both the Bitcoin and Ethereum mining networks now consume as much electricity as a small country, at around 200 TWh for Bitcoin alone, while Ethereum comes in at 94.1 TWh (as per data from Digiconomist).

Image courtesy: Digiconomist

Some argue that this is an unacceptable burden on the environment, given that a large proportion of the energy used to power these mining networks comes from fossil fuel sources. Nonetheless, work is well underway to balance the benefits of modern blockchains with their energy requirements, ensuring they become an attractive platform for more businesses and applications.

Why Proof of Stake is a Suitable Alternative

In the last three years, Proof of Stake (POS) has emerged as the potential successor to Proof of Work.

Similar to POW, which requires a huge number of mining nodes to secure the network and maximize decentralization, POS also requires a large network of validator nodes to achieve the same.

Unlike POW, these nodes do not need to crunch complex functions to discover and mine new blocks. Instead, POS nodes put up collateral in order to take part in network consensus and transaction processing, this collateral is the network’s native gas token, e.g. for Cardano it’s ADA, whereas for TRON it’s TRX — and as we’ll soon see, it’s ETH for Ethereum.

the odds of processing the next block is determined algorithmically, based on the size of a node’s stake, such that users with more value staked have a higher chance of being selected as the next block producer.

Proof of stake blockchains achieve Sybil resistance by making it incredibly expensive to take over the network. An attacker would need to control more than half of the tokens staked in order to seize control of the chain, and depending on the exact implementation of POS, they might need to control upwards of 90% of the supply.

Moreover, unlike POW-based blockchain, which typically employ the longest chain rule for chain selection (i.e. the chain with the highest block number), POS implementations like Ethereum’s Casper the Friendly Finality Gadget (FFG) consensus can vary in their chain selection rule — but often select the chain with the most value at stake.

The benefit of this is that network security is no longer directly related to the amount of energy the platform consumes since there is no need for mining hardware. Instead, the network is secured by a network of far more power-efficient nodes, while providing a similar level of security to POW.

Rather than making it computationally challenging (or near impossible) to break the security of the blockchain, it ensures consensus is kept by slashing any nodes that are acting maliciously. Depending on the severity of the infraction, nodes could have their entire stake confiscated — though a fraction of the stake is rewarded to other nodes that identify the dubious behavior.

Beyond this, node-holders are rewarded for their help in maintaining consensus and processing transactions, since they typically receive a fixed reward for each block they process in addition to the transaction fees of transactions included in that block. This reward, in addition to the slashing risk, is a strong incentive to operate honestly.

Ethereum’s Beacon Chain

Ethereum’s transition to Proof of Stake has been years in the making, but the first definitive step in the right direction was the activation of the Ethereum Beacon chain in December 2020.

The Beacon chain introduces Proof of Stake to Ethereum and is designed to dramatically improve the efficiency of the network (in terms of absolute power usage) and prepare the platform for further upgrades, such as sharding.

Right now, the Beacon chain operates independently from the Ethereum mainnet and is only tasked with managing Ethereum’s Proof of Stake protocol and assigning rewards to validators. It is not smart contract capable and currently has no influence over the Ethereum main chain.

At some point, likely in early-to-mid 2022, the Beacon chain will be merged with the Ethereum mainnet, and the platform will officially transition to a Proof of Stake consensus system — simultaneously ousting its current mining network.

Image courtesy: Ethereum

The transition will mark the biggest upgrade in Ethereum’s short history and will pave the way for a more economical and efficient smart contract platform and decentralized payment system.

Though the exact figures are still yet to be determined, the transition is expected to result in a more than 99.95% efficiency improvement for the platform, dramatically improving its carbon footprint and long-term viability.

At the same time, it will put Ethereum on a more even footing with next-generation blockchain platforms like Solana, Cardano, and Terra — which already use POS or some variant of it.

The transition to Proof of Stake will also moderately increase the scalability and throughput of the Ethereum network while cutting transactions fees considerably. Depending on its success, it may even eliminate the need for second-layer scaling solutions, such as rollups (both zk or optimistic), sidechains, or plasma — reducing reliance on platforms like Arbitrum and Optimism.

In total, there are currently more than 260,000 validators active on the Beacon chain, with close to 8.5 million ETH staked. This makes it one of the largest POS networks in current operation by both validator count and staked value.

Image courtesy: beaconcha.in

Advantages and Disadvantages

Despite being a relatively new innovation, Proof of Stake has already been successfully battle-tested by a range of platforms, including Solana, Cardano, and Algorand. But while POS certainly has its advantages, it also has its fair share of quirks that some may consider a disadvantage.

Tackling the Energy Problem

As we previously touched on, the main challenge facing the blockchain industry today is its energy usage. This stems from an over-reliance on POW for security, since the two largest blockchains are POW-based.

Transitioning from POW to POS is arguably the most likely way this energy burden will be resolved, since not only has it been proven secure, but it also maintains the core tenets that major platforms like Bitcoin and Ethereum were founded on — like decentralization, permissionless access, and transparency.

In the coming months, POS will be put to its final test when Ethereum — by far the largest smart contract platform — completes the Beacon chain merger. This will see its annual energy drop from almost 100 TWh to ~1.4 GWh, which is equivalent to downsizing from the energy usage of the Philippines to that of around 100 average US households.

At the same time, carbon emissions will be cut dramatically, positioning Ethereum as one of the most environmentally friendly blockchains — which could be key to its mass adoption.

Depending on how well received the change it, it’s not entirely out of the question for other major chains to potentially make the switch too, Bitcoin included.

Want to learn more about blockchain technology and keep informed of the latest Master Ventures news? Considering following us on Twitter and Medium!

About Master Ventures

Master Ventures is a blockchain-focused venture studio helping to build the next generation of blockchain-based Web 3.0 system innovations within the crypto industry. Launched in 2018 by Founder and CEO Kyle Chassé, the company’s ethos can best be summarized in the acronym #BeBOLD: Benevolent, Open, Love, Decentralized.

Master Ventures co-creates with entrepreneurs and businesses worldwide to turn the best ideas into innovative and disruptive products. They do this by investing as strategic partners through offering advisory services to the projects they believe in. To date, Master Ventures has invested in over 40 crypto projects, including the likes of Kraken, Coinbase, Bitfinex, Reef, DAO Maker, Mantra DAO, Thorchain, and Elrond.

For any questions, please feel free to reach out to us on:

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Website: master.ventures

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