Bitcoin — the world’s first cryptocurrency — famously used the proof of work algorithm. This was a state of the art feature that was ahead of its time when it was first rolled out in 2009. Proof of work (PoW) is a mechanism by which the nodes processing the blockchain reach agreement (or consensus). This is a critical function for the blockchain, and without it the chain would be susceptible to attacks.
The PoW method maintains the integrity of the blockchain through the solving of complex computer algorithms. The “work” done is representative of the amount of computing power used to solve these algorithms. The sum of all of the work being done on the network at any given time is called the “hash-rate.” In order to receive higher mining rewards, there has been an arms race for increased hash power for mining rigs. And with this increased hash rate comes a cost: higher energy usage.
Digicomist keeps an up-to-date index on Bitcoin’s energy consumption, which is on pace to consume a whopping 73.12 Terra-Watt hours of power in 2019. This is a higher amount of electricity than what is used in the entire country of Austria in one year.
The carbon footprint and massive cost of maintaining the network at this hashrate is another factor that must be considered. The Bitcoin blockchain alone has the carbon footprint equivalent to the nation of Denmark. And calculating the cost of running this network with an average global electricity cost of $.14/kWh, the 73.12 TWh of electricity use costs an incredible $10.24 Billion per year.
Consider this: the electricity consumption for the entire world in 2018 was about 22,500 Twh. This means that the bitcoin network’s energy consumption alone was about ⅓ of 1 percent of the global supply. While it may not seem like much on a global scale, the effect is significant. These numbers are already staggering and they are projected to continue growing. In the past two years, the energy consumption has risen 450%, and will likely continue to rise with Bitcoin’s upcoming block reward halving.
The above numbers are only representative of the Bitcoin blockchain. If you add Ethereum to the mix, you add another 10 Twh of electricity consumption to the total, and so on. While these two account for the majority, the overall effect is disastrous for the environment. The amount of pollution produced is 35,000 kt of CO2 (that’s 35,000,000 metric tons).
It’s no secret that Bitcoin is in the public eye, and has caught the attention of regulators globally, who are seeking to find ways to control the decentralized currency. As countries are simultaneously clamping down on environmental restrictions, Bitcoin’s rapidly growing environmental impact will not be viewed positively. If Cryptocurrency is going to finally achieve the “mass adoption” that everyone dreams of, it must move away from the Proof of Work model. While it was a great start to blockchain, it has become unsustainable and the industry needs to evolve away from “work” and move to a more eco-friendly “stake” method of consensus.
Proof of work consensus algorithms are unsustainable for a number of reasons. Wasteful, purposeless and ever-increasing energy consumption, increased vulnerability to 51% attacks, and severely limited scalability are probably the three leading reasons for its inadequacy.
All true cryptocurrencies are blockchain based and trustless. In order for a network to be entirely trustless, it must be decentralized. But for open source, decentralized networks to function, there must be some method of consensus. This consensus method must answer two fundamental questions: What is the Byzantine Security level, and how likely is it that this level will be met?
In order for two different blockchain processing nodes to reach consensus, there must be a secure and fault tolerant protocol. This is because it is not guaranteed that both of the nodes are displaying the same information. What would happen if one of these nodes was malicious and sought to attack the network?
This scenario is often allegorized with what is called the Byzantine Generals problem. In a nutshell, this problem is about two generals fighting a battle. One army is located within a walled city, the other is surrounding the city, and each are waiting to attack. If these armies are not able to attack simultaneously, the army outside of the walled city will lose. All of the generals must agree to attack at the same time.
This problem is a great example for what is the core of cryptography — sending messages in a corruptible environment. The only way that the generals can communicate is by sending a messenger into the city to convey the plan of attack. This problem was not solved from when it was first proposed in 1982 until 2008 when Satoshi Nakamoto solved the problem. Essentially the solution is to have the general outside the city use encrypted messages when he sends the messenger into the city. If he uses ever increasingly stronger encryption, the message can not be decoded in time for a malicious action to be taken. For blockchain, this looks like having a greater hash power on the chain than off the chain.
In blockchain, both expected and unexpected chain splits can occur. In the scenario described above with a malicious node, this would result in an attempted chain split. In theory, if this chain split were to occur, the malicious node would have complete control over the blockchain — and in some cases the blockchain’s history. The result would be disastrous — uninhibited coin minting and double spending would undoubtedly occur. In the case of Proof of Work chains, the chain with the highest active Hash power being mined is validated as the true chain. This is problematic for a couple of reasons:
1. Nearly all PoW miners use mining pools, which creates a large centralization of hash power.
2. Hash power is available for rent.
If someone were to control 51% of the hash power of a network, they have control over the network. This is what is referred to as a 51% attack. While many would think this is extremely unlikely, the reasons listed above have made this a common occurrence. Bitcoin Gold, Verge, Ethereum Classic, and even Bitcoin itself have all experienced 51% attacks at some point in their history. Blockchain’s supposed “secure store of value” proposition may not be foolproof — at least not when PoW is the consensus.
This article series titled “Why Proof of Stake Is The Future” is exploring blockchain solutions and evaluating their sustainability. Since Proof of Work was the first and most common method of consensus, the first few articles in the series have detailed some of the biggest concerns with work-based algorithms, including: the extreme waste of electricity, vulnerability to 51% attacks, and now: scalability.
What Is Scalability
First we must understand what this term is referring to. The word “scalable” can be defined as, “the ability of a computing process to be used or produced in a range of capabilities.” As it pertains to blockchain, this is often applied to the volume of transactions that can be handled by the network at any given time.
Since Bitcoin is the most popular Proof of Work blockchain, it will be used for means of comparison.
The on-chain processing ability for the Bitcoin network is limited by Bitcoin’s block size and block time — which are 1 megabyte and 10 minutes, respectively. Calculated using a median transaction size, this limited capacity would produce a throughput of around 3.3 to 7 transactions per second.
For all of the cryptocurrency proponents who constantly talk about “mass adoption” — this number is pitiful. It does not provide anything close to the throughput required for Bitcoin to be used on a regular basis by the public for buying, selling, or storing value. The fact of the matter is that in its current state, the mathematical limits of Proof of Work technology will constrain blockchain’s growth. Crypto enthusiasts must come up with a different option, which I will argue in a later article will be Proof of Stake.
Comparing Bitcoin To Other Means of Exchange
When I use the term “Means of Exchange” I am referring to anything of value that is used to buy or sell goods. Surely when people mention “mass adoption” and “Bitcoin” in the same discussion, they are implying that the average person will use Bitcoin to make purchases. Now that we understand some of the inherent limitations of Bitcoin, let’s take a look at other means of exchange.
Visa claims that their network can support a whopping 150,000,000 transactions per day. If we take this number and extrapolate down to a tx/s, we get the following:
150,000,000 tx/day / 1440 min/day / 60 sec/min = 1736.111111 tx/sec
That’s 1736.1111 transactions per second, or roughly 250 times more scalable than Bitcoin.
Proposed Solutions: Are They Enough?
People have been aware of Bitcoin’s scalability issues for a while. As a 2018 survey conducted by Tata Communications points out that 44% of participating companies are implementing Blockchain technology, this scalability issue is causing serious limitations for its adoption. After all, if companies are going to build profitable applications on top of the blockchain, the chain must be able to adapt to the demands placed on it by its growing pool of institutional users.
Some have suggested that in order to mitigate this problem, Bitcoin developers should consider implementing a hard fork to allow shorter block times and higher block sizes. Segwit would theoretically increase the block size to 4MB, which though it is an improvement, it falls tragically short of the requirements of companies that rely on high speed networks.
The sad truth is that Proof of Work is old technology, and is not capable of meeting the demands of a modern digital economy. If Blockchain is going to continue to blossom into adoption by consumers and institutions alike, these issues must be addressed. It’s time for Blockchain to mature past Proof of Work. Enter: Proof of Stake.
Now we will take a “bird’s-eye” view on a different blockchain architecture, and discuss how it solves some of the aforementioned issues.
Proof of Work Recap:
Proof of Work blockchains use a work-based algorithm to verify blocks. The term “work” refers to the amount of computing power required to solve the complex algorithm. The term “hash” refers to all of the work being done on the network at any given time. As block difficulty increases, the network hash continues to climb. In an attempt to maximize mining profitability, a hash arms race has ensued, exponentially increasing the waste and carbon footprint of Bitcoin mining. In 2019, Proof of Work blockchain mining will account for nearly half of a percent of global energy consumption — a number larger than many countries.
Proof of Work blockchains are also inherently limited in the number of transactions that can be supported on the network. This scalability issue has undoubtedly slowed the adoption of cryptocurrency into the mainstream, largely because of its inability to support institutional demand.
These types of blockchains are more vulnerable to attacks as well, now made possible through “rentable hash.” If someone really wanted to, they could rent the computing power necessary to conduct 51% attacks and rewrite the blockchain’s history.
How Proof of Stake Solves These Issues
Proof of Stake does not require miners to solve complex algorithms in order to mint new blocks. Instead, a staking mechanism is employed through the implementation of economic incentives in order to ensure chain security. Removing electricity guzzling miners makes this method of consensus far more efficient, and much more eco-friendly.
For most Proof of Stake coins, the only electricity requirement is that your wallet must be open to receive stakes. This means that the only power consumption comes from your computer running (or in some cases, your VPS). However, there are some blockchains that support cold-staking, which would allow mining even from hardware wallets.
The result of this is that PoS blockchains are several thousand times more power efficient.
To mine a PoW chain, no investment specific to that chain is required. One simply has to contribute some hash to the network, and they are rewarded with coins. In PoS, the only way to receive rewards is to actually hold a stake in the currency. This stake must be held in an open wallet. The result creates a two fold economic benefit: it creates a natural demand for coins and holds coins out of circulation.
When it comes to security, this is a much more stable solution. The only way for a 51% attack to be carried out on a PoS chain is for one wallet to possess more than 51% of the coins in circulation. The amount of capital required to purchase 51% of coins (if that many are even available on exchanges) would be astronomical. And spending this amount of capital on acquiring this many coins would automatically disincentivize any attack — because carrying out such an attack would harm the value of the attacker’s holding! Therefore, while 51% attacks are theoretically possible on PoS chains, they are extremely difficult, costly, and pointless.
By not requiring a complex computational process to produce blocks, the speed at which new blocks can be minted is greatly accelerated. For PoS chains to propogate, it simply requires ⅔ of nodes to sign a block — thus verifying its authenticity. While this is a slight limitation, block times can be scaled to massive sizes and incredible speeds. For example, the EOS blockchain (which runs on PoS) boasts a block time of three seconds. This is lightspeed compared to Bitcoin’s 10 minute blocktime.
PoS also makes new blockchain technologies (such as sharding) possible, which increase the theoretical network throughput to a whopping 27,000,000 tx/s. This architecture would provide the basis for global adoption once perfected.
In order for global adoption to occur, the issues of energy waste, chain security, and scalability must be addressed. With the inherent limitations and inefficiencies of PoW technology, the blockchain industry must evolve. The necessity of this evolution is already being pursued, with Ethereum planning a transition to PoS in 2019–20. While not perfect, PoS technology is a much better solution for these issues and opens the door for new innovation. PoS truly is the future.