The crypto market has become one of the fastest-growing markets in the world with more than $1.48T in market cap. With the rapid rate of crypto adoption, there has been an increasing demand for cryptocurrencies. The entry of institutional investors has largely contributed to the market’s growth. 

BTC (bitcoin), the most cryptocurrency has been widely adopted worldwide. The adoption has even spanned to a whole country with El Salvador being the pioneer. But the growing adoption was also coupled with growing concern about the way cryptocurrencies are mined or minted. BTC (bitcoin) has been at the center of the recent controversy with regards to its energy consumption and carbon emission that poses threat to the environment.

On May 13, Elon Musk announced on Twitter that Tesla halted accepting BTC (bitcoin) for purchasing vehicles. In his tweet, he stated that the reason behind his company’s action was the use of dirty energies like coal which has a negative impact on the environment. 

ETH (ethereum), the second most dominant cryptocurrency with its recent upgrade to 2.0  has already shifted from Proof-of-Work (PoW) to Proof-of-Stake (PoS). Other cryptocurrencies that currently use PoS include Polygon, Tezos, Polkadot, and EOS. In a report by NBC News, Danny Ryan, a researcher at the Ethereum Foundation has commented on the matter.

“It’s a fundamental breakthrough for humanity, we can now do things that we could not do otherwise. When humans find new tools they use them. So this decentralized thing, this crypto thing, it’s not going anywhere, but there’s also a much better way to do it.”

But what makes Proof-of-Stake seemingly superior and safe than Proof-of-Work? Before we delve more into that, let us first examine the different types of blockchain consensus mechanisms currently in use. 

Different Types of Consensus Mechanism

A consensus mechanism is a process of authenticating or validating a transaction in the blockchain or distributed ledger in a decentralized manner. The three types of consensus mechanisms currently in use right now are as follows:

  • Proof of Work (PoW)

Also called mining where the miners act as nodes. In this process, miners solve complicated mathematical puzzles that require extensive computational power. The concept was invented by Cynthia Dwork and Moni Naor in 1993 to counter denial-of-service attacks and spam on a network by requiring some work from a service requester. The term proof of work was later used by formalized in a 1999 paper by Markus Jakobsson and Ari Juels. BTC (bitcoin) was the first cryptocurrency to use the mechanism.

  • Proof of Stake (PoS)

This concept states that the number of mined or validated transactions depends on how many coins they can hold. This means the more coins a miner holds, the more mining power they have.

  • Delegated Proof of Stake (DPoS)

In this concept, users can stake their coins and vote for a particular number of delegates and the weight of a user’s vote depend on their stake. The delegate that receives the highest number of votes gets a chance to produce new blocks. Hence, this type of consensus mechanism is often referred to as a “digital democracy”.

  • Proof of Authority (PoA)

With this concept, transactions and blocks are validated by approved accounts, known as validators. Validators run software allowing them to put transactions in blocks but the process is then automated and does not require validators to be constantly monitoring their computers. Individuals earn the right to become validators and they are incentivized by retaining the position they have gained. The term was first used by  Gavin Wood, co-founder of Ethereum and Parity Technologies.

  • Proof of Capacity (PoC)

It is a consensus mechanism algorithm used in blockchains that allow for mining devices in the network to use their available hard drive space to decide mining rights and validate transactions. This process is also called plotting. Users can utilize storage devices filled with solutions for mathematical puzzles for producing blocks. The fastest user gets a chance to create a new block. Also, users with the highest storage capacity will have higher chances of producing a new block.

  • Proof of Elapsed Time (PoET)

This type of consensus mechanism prevents high resource utilization and high energy consumption and keeps the process more efficient by following a fair lottery system. It uses a randomly generated elapsed time to decide mining rights and block winners on a blockchain network. It also enhances transparency by running a trusted code within a secure environment and ensures lottery results are verifiable by external participants.

  • Proof of Activity (PoA)

This concept ensures that all transactions occurring on the blockchain are genuine, as well as ensures that all miners arrive at a consensus. PoA is a combination of two other blockchain consensus algorithms: proof-of-work (PoW) and proof-of-stake (PoS).

  • Proof of Identity

It is a piece of cryptographic evidence for a user’s private key that is cryptographically attached to a specific transaction. It ensures the integrity and authenticity of created data by comparing the private key of a user with an authorized identity.

These mechanisms aim to guarantee that all participants dispose of identical copies of the distributed database files. Among these types, PoW (proof-of-work) and PoS (proof-of-stake) are widely used in blockchain projects today. Between these two, which is better?

Proof-of-Work vs Proof-of-Stake

China, the largest crypto mining hub in the world has recently launched a crackdown on crypto miners in the country. Bitcoin miners in the country account for more than 60% of the bitcoin network’s collective hash rate. But with the recent move by the government against bitcoin miners and other crypto miners in the country, the whole crypto market is under threat. 

On May 21, an order by the Chinese government for a crackdown on bitcoin mining has resulted in a BTC (bitcoin) price dip which led to a market crash. BTC (bitcoin) is known to utilize the PoW consensus mechanism or mining. The use of fossil fuels like coal to mine the cryptocurrency has raised concern about its carbon footprint that poses a hazard to the environment. 

Tesla, a company owned by Elon Musk has recently removed BTC (bitcoin) as payment for purchasing cars. In a report by BBC, Musk commented on the matter:

“We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel.” 

He further added:

“Cryptocurrency is a good idea… but this cannot come at great cost to the environment.”

In his recent tweet, Musk stated that he will start accepting BTC (bitcoin) again once mining shifted to using more sustainable energy sources.

PoS (proof-of-stake) is more energy-efficient and a promising alternative to PoW (proof-of-work). Since it doesn’t require hard computing work, it has the potential to immensely reduce the energy needed to add blocks to a cryptocurrency’s blockchain. With ETH (ethereum), the second-largest cryptocurrency transition to PoS after its upgrade to 2.0 gives humanity a glimpse of hope. Other projects that have also utilized PoS were Avalanche, Cardano, Oasis, and Harmony just to name a few and the number keeps growing. 

Will it be possible for BTC (bitcoin) to shift to PoS also? That remains to be seen. In the meantime, we just hope that other major cryptocurrencies will also consider shifting to PoS, and also startup projects will focus on utilizing the energy-efficient blockchain consensus mechanism, PoS.