What is a Proof of Stake (PoS)? What was the first Proof of Stake Coin? Is it good for the Environment? Does it require mining?
Table of contents
- What is Proof of Stake (PoS)?
- Does Proof of Stake (PoS) require Mining?
- What was the First PoS Coin?
- How does Proof of Stake Work(PoS)?
- What is Blockchain Consensus?
- Pros and Cons of Proof of Stake in Crypto
- Is Proof of Stake Good for the Environment?
- PoS and the Sustainable Goals
- PoS and the Green Blockchain Initiative
What is Proof of Stake (PoS)?
Chiefly, it is a consensus protocol for creating new blocks and processing transactions. As well as, maintaining the integrity and infrastructure of the blockchain.
It also functions as an economic incentive for you to stake your own crypto tokens.
Indeed, the objective behind PoS is to accomplish scalability and security while being energy efficient in blockchain networks.
Since cryptocurrencies are decentralized and not under the control of financial institutions, they need a way to verify transactions. One method is Proof of Stake.
It is a type of consensus mechanism used to validate crypto transactions.
With this system, their coins, give them the right to check new blocks of transactions and add them to the blockchain.
This method is an alternative to proof of work, the first consensus mechanism developed for cryptocurrencies.
Since proof of stake is much more energy-efficient, it has gotten more popular as attention has turned to how crypto mining affects the planet.
Proof of work is the original crypto consensus mechanism, first used by Bitcoin. Proof of work and mining are closely related ideas.
One of the most tremendous developments in the digital currency ecosystem is Staking.
Staking is when you pledge your coins to be used for verifying transactions.
Your coins are locked up while you stake them, but you can unstake them if you want to trade them.
Does Proof of Stake (PoS) require Mining?
In recent years, many critics have lamented the amount of energy crypto mining demands. Even the participants have tried to resolve this common issue.
Could PoS be the answer to these challenges in the future?
The future is bright, considering the number of protocols and coins adopting the proof of stake method.
It does not focus on mining. However, industry experts say that the PoS can be linked to minting rather than mining. Mainly, because it does not solve intricate mathematical puzzles through immense computational power.
Instead, PoS users are selected to validate transactions and produce new blocks based on their stake.
The more coins participants own and insert into the system as collateral, the greater the chance of being chosen to validate transactions and generate rewards.
The mining power of a stake depends on the amount of coins a validator is staking.
If you stake more coins you are more likely to be chosen to add new blocks. Each PoS works differently in how it chooses validators.
There is usually an element of randomization involved, and the selection process can also depend on other factors such as how long validators have been staking their coins.
Although anyone staking crypto could be chosen as a validator, the odds are very low if you are taking a comparatively small amount.
If your coins make up 0.001% of the total amount that has been staked, then your likelihood of being chosen as a validator would be about 0.001%.
That’s why, most participants join staking pools. The staking pool’s owner sets up the validator node. Then, a group of people pool their coins together for a better chance of winning new blocks.
Rewards are split among the pool’s participants. The pool owner may also pay a small fee.
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What was the First PoS Coin?
The first crypto to integrate PoS into its infrastructure was Peercoin. It was launched in 2012, combining PoS and PoW.
The digital currency utilized PoW mainly for the initial distribution of the coins. Employing PoS for regular network consensus and security.
Since then, PoS virtual coins have popped up;
The most notable transition was Ethereum which kicked off “The Merge” in the summer of 2022.
This was crucial for both the token and the industry as a whole because the second-largest crypto underwent the shift from PoW to PoS.
The cryptos that use proof of stake are able to process transactions quickly and at a low cost. Which is a key for scalability.
You can stake your crypto to earn rewards and earn passive income.
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How does Proof of Stake Work(PoS)?
Conversely, this model allows you to stake coins and create your own validator node.
When a block of transactions is ready to be processed, the cryptocurrency’s proof-of-stake protocol will choose a validator node to review the block.
And then, the validator checks if the transactions in the block are accurate. If so, they add the block to the blockchain and receive crypto rewards for their contribution.
However, if a validator proposes adding a block with inaccurate information, they lose some of their staked holdings as a penalty.
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What is Blockchain Consensus?
Merriam-Webster defines consensus as “first, general agreement, and second, group solidarity of belief or sentiment”.
So, what exactly is a consensus mechanism?
Because public blockchain networks lack a central authority, consensus mechanisms enable trust-less oversight. These autonomous rules are specific to the blockchain network on which they operate.
For any transaction to occur on a decentralized network, all network participants (nodes) must reach a consensus (agree).
Although novel in concept, reaching a consensus can sometimes require the use of a lot of electricity.
Further, because blockchains rely on a vast network of decentralized computers, they naturally draw more energy than centralized solutions.
In combination, these factors drive an eco-conscious narrative that questions the sustainability of specific consensus mechanisms namely, Proof of Work.
Although, Proof of Stake blockchains, still use cryptography, their energy consumption is dramatically lower than PoW-driven alternatives.
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Pros and Cons of Proof of Stake in Crypto
Provides fast and inexpensive transaction processing
Does not require special equipment to participate
Not as proven in terms of security as proof of work.
Validation can have an excessive influence on transaction verification.
Some proof-of-stake cryptos require locking up staked coins for a minimum amount of time.
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Is Proof of Stake Good for the Environment?
Over the last few years, cryptocurrencies have gained momentum and become a favorite among investors, despite their volatile nature.
A defining characteristic of cryptos is that they are decentralized, which means there is no centralized exchange (like Visa or PayPal) monitoring the transaction.
The lack of a central authority responsible for verifying transactions presents a challenge.
Cryptos overcome this by using a “consensus mechanism” to regulate the process. In which transactions are verified and added to the blockchain.
Proof of Work is the most widely used consensus mechanism by the two largest cryptocurrencies Bitcoin and Ethereum 1.0.
At the core of this mechanism are crypto miners -virtual miners who are required to solve a complex mathematical problem.
The first miner to solve the problem updates the blockchain with the latest verified transactions and receives a predetermined amount of crypto in return.
So, this process requires an enormous amount of computing power and, thus, electricity.
Some experts estimate that a single Ethereum 1.0 transaction can consume as much energy as an average US household uses in a week.
There is also a major issue with electronic waste generated from the special hardware and computer servers used for mining. Which tend to have a limited obsolescence period.
As such, the environmental impact of cryptocurrency mining (using the proof of work consensus mechanism) is obvious.
Ethereum has switched to a consensus mechanism known as Proof of Stake. In this system, a network of “validators”, contribute or stake their own crypto in exchange for the chance to validate the new transaction, update the blockchain, and earn a reward.
Essentially, the network uses an algorithm to select a winner based on the amount of crypto each validator has in the pool and how long it has been there.
Once the “winner”, has validated the block of transactions, other validators can attest to the accuracy of the block.
When a threshold number of attestations have been made, the network updates the blockchain.
All participating validators then receive a reward in the native crypto, depending on their original stake.
The energy consumption between the two consensus mechanisms is notable.
It has been reported that using the proof of stake consensus mechanism uses 99% less energy than the proof of work mechanism.
Additionally, the hardware required is less specialized and more equivalent to an average laptop, which increases the amount of electronic waste that is generated.
As energy costs and environmental concerns grow, we can expect the more energy-efficient and cost-effective cryptos utilizing the proof of stake mechanism to grow in popularity.
Because the process is energy intensive in order to verify that the record is accurate, so-called bitcoin miners expend a significant amount of computing power.
The miners verifying the records are then rewarded for their expenditures with Bitcoin. The security of the system is built into the enormous amount of computing power that is required to run it.
And so, any cryptocurrency built on a proof of work protocol is going to be plagued by, as Musk put it, “insane” energy demands as it scales larger.
The Cambridge Center for Alternative Finance, a part of the Cambridge Judge Business School, found that Bitcoin uses about 10% terawatt-hours per year, which is similar to what Malaysia and Sweden use.
The basis of proof of stake does not require any extra energy to prove trustworthiness. It is much more energy efficient.
Unlike in proof of work, where specialized computing equipment like high-end graphics cards is needed, the proof of stake protocol can be run off a laptop. The nodes are virtual spaces, not physical equipment.
As a result, participating in the “mining” process has a much lower barrier to entry, meaning that more people can participate in the process.
And given that a core principle of crypto is decentralization, having more people participating in securing the blockchain helps secure the whole system.
The whole process uses marginally more energy than a computer would if it was just on.
Researchers believe that the result is energy consumption for proof of stake is 99.99% lower than for proof of work.
As such, many in the industry have begun exploring PoS and other energy-efficient alternatives in response to growing environmental awareness.
PoS and the Sustainable Goals
The Sustainable Development Goals (SDGs) are a set of 17 global goals adopted by the United Nations in 2015 to address the most pressing challenges facing humanity and the planet, such as poverty, climate change, and peace.
PoS can potentially support the achievement of some of these goals by providing a more efficient, inclusive, and transparent way of managing and distributing resources.
It can help promote SDG 7 (Affordable & Clean Energy) by reducing the energy demand and carbon footprint of blockchain networks, and SDG 13 (Climate Action) by incentivizing low-carbon solutions and innovations.
Proof of Stake can also help industry and infrastructure by enabling more people to access and participate in the blockchain economy, regardless of their location, wealth, or technical skills.
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PoS and the Green Blockchain Initiative
It is a global movement that aims to promote the adoption of green and sustainable blockchain solutions and practices.
The intiative was launched in 2018 by the Blockchain Climate Institute, a non-profit organization that advocates for the use of blockchain technology to address the climate crisis.
The initiative brings together various stakeholders, such as blockchain developers, and researchers to collaborate on creating and implementing green blockchain standards, guidelines, and best practices.
The initiative also supports and showcases green blockchain projects and platforms that contribute to the SDGs and the Paris Agreement.
PoS is one of the key technologies that the initiative endorses and promotes, as it offers a more energy-efficient and environmentally friendly alternative to PoW.
While Proof of Stake is still emerging as a consensus mechanism for blockchain. It holds significant potential.
With lower energy demands and a higher level of accessibility for everyday people to participate as validators, proof of stake has many attractive features that could bring it to the mainstream for blockchain security.
The biggest challenge of the Ethereum blockchain and all others that run the proof-of-stake consensus mechanism is that interested users must own the native cryptocurrency before becoming validators.
Proof-of-stake consensus mechanisms reduce energy usage significantly when compared to the proof-of-work consensus mechanism used by the Bitcoin network.
It is less energy-intensive than PoW. Since it does not require every miner to be online in order to verify transactions.
According to Ethereum’s estimations, their energy consumption has reduced by 99.95% thanks to “The Merge”. Thereby, allowing Ethereum to continue operations in a far more environmentally conscious manner.
The energy consumption and carbon footprint of these two PoS networks are very low. Considering the number of transactions, that are being validated. In fact, CCRI estimates that the carbon emissions of the companies behind these networks are higher than the carbon emissions of the networks themselves.