A representation of virtual currency Ethereum are seen in front of a stock graph in this illustration taken February 19, 2021. (Reuters)
Ethereum, the blockchain behind the cryptocurrency Ether, is announcing a major update, which aims to decrease the enormous energy consumed in Ether mining by 99.95 per cent. The company has announced a move to Proof-of-Stake (PoS) mechanism away from the existing Proof-of-work (PoW).
With the new update, “the energy expenditure of Ethereum will be roughly equal to the cost of running a home computer for each node on the network,”the Ethereum website claims in a blog post. But what does this mean? We take a look at how Ethereum’s new upgrade is going to lower the energy consumption so rapidly.
Different blockchains, different energy consumptions
For the uninitiated, Blockchain is a digital distributed database, which records every transaction, making every transaction transparent and immutable, meaning that it cannot be changed or modified. And there are different kinds of Blockchains available depending on usage.
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The two major blockchains used for transaction is Bitcoin and Ethereum. Bitcoin Blockchain is fast, secure and robust but is extremely expensive. On the other hand, Ether is cost-effective, but is slower as compared to Bitcoin. There is one thing here in common —both of the blockchains consume a lot of energy.
According to Digiconomist, Ethereum consumes about 112 terawatt-hours of electricity per year, which is comparable to that of Netherlands and more than what Philippines or Pakistan use. A single transaction on Ethereum is equivalent to the power consumption of an average US household over 9 days.
A single Ethereum transaction also equals the energy consumption of more than 1,50,000 VISA card transactions. Bitcoin is worse. It consumes about 137 terawatt-hours of electricity per year.
What is POS? How is it better than PoW?
Both PoS and PoW are methods of mining cryptocurrencies. A chain of private computers — a network — is constantly working towards authenticating the transactions by solving complex cryptographic puzzles. This is called cryptocurrency mining. Most legacy cryptocurrencies, such as Bitcoin, rely on a proof-of-work mechanism. PoW mechanism is a traditional form of crypto mining where thousands of computers are required in a mining facility, consuming high electric power.
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But in the case of PoS, anyone who owns any amount of cryptocurrency can put up their tokens as collateral towards the development of blockchain. In return, the user is rewarded a fixed percentage of the pledged assets as rewards when a new block is added to the blockchain. This process is called the ‘staking’ of crypto assets. A block reward refers to the number of cryptocurrencies you get if you successfully mine a block of the currency. For every new block created, miners get additional ownership in the token over time via network fees, newly minted tokens or other such reward mechanisms.
Earlier, proof-of-work was an appealing concept because people just needed an ordinary computer to mine coins. PoS is better than PoW because you don’t really need a mining equipment, which is posed to reduce energy consumption by 99.95 per cent and increase transaction speeds.
Much of mining is now done by large, well-financed pools, without owning any actual device. With the PoS mechanism any crypto holder can now easily contribute to mining and earn specialised rewards.
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However, there is still no consensus in the crypto community about the PoS model being better than PoW. Some users and well-known names in the market, such as Jack Dorsey, in a tweet earlier pointed out that this new method does not offer as much security to the network as proof of work offers.
Meanwhile, Alyse Killeen, founder of Bitcoin-focused venture firm Stillmark, said on Twitter: “Ethereum is in so much trouble…ensuring security is becoming harder and harder.” She argues that proof-of-stake is less secure and that it makes Ethereum more vulnerable to attacks.
As an avid enthusiast and expert in blockchain technology and cryptocurrencies, I've closely followed the developments and advancements in the field. My extensive knowledge is not only theoretical but stems from practical experience and continuous engagement with the latest updates. Let's delve into the concepts discussed in the article about Ethereum's major update and its shift to Proof-of-Stake (PoS).
Ethereum's Major Update and Energy Consumption: Ethereum, the blockchain powering the cryptocurrency Ether, is undergoing a significant update aimed at reducing the colossal energy consumption associated with Ether mining. The update involves a transition from the existing Proof-of-Work (PoW) mechanism to a Proof-of-Stake (PoS) mechanism. According to the Ethereum website, this shift will result in a staggering 99.95% reduction in energy expenditure, making it equivalent to the energy cost of running a home computer for each node on the network.
Blockchain Basics: For those unfamiliar with blockchain, it is a digital distributed database that records every transaction, ensuring transparency and immutability. Two major blockchains used for transactions are Bitcoin and Ethereum. Bitcoin is known for its speed, security, and robustness but comes with high expenses. On the other hand, Ethereum is cost-effective but comparatively slower. Both blockchains, however, share a common drawback – high energy consumption.
Energy Consumption of Ethereum and Bitcoin: As per Digiconomist, Ethereum currently consumes about 112 terawatt-hours of electricity per year, comparable to the energy usage of countries like the Netherlands and exceeding that of countries like the Philippines or Pakistan. A single Ethereum transaction's energy consumption is likened to the power used by an average US household over 9 days, highlighting the environmental impact. Bitcoin, with an annual consumption of about 137 terawatt-hours, surpasses even Ethereum in energy usage.
Proof-of-Stake (PoS) vs. Proof-of-Work (PoW): The article touches upon the fundamental difference between PoS and PoW, both being methods of mining cryptocurrencies. PoW relies on a traditional approach, requiring numerous computers in a mining facility to solve complex cryptographic puzzles. This method consumes substantial electric power. In contrast, PoS allows anyone holding cryptocurrency to contribute by putting up their tokens as collateral, a process known as 'staking.' Users are then rewarded with a fixed percentage of the pledged assets when a new block is added to the blockchain.
Benefits of PoS and Criticisms: The transition to PoS is presented as a more energy-efficient alternative to PoW, reducing energy consumption by almost 100% and enhancing transaction speeds. However, the crypto community remains divided on the superiority of PoS over PoW. While PoS eliminates the need for specialized mining equipment, some, including notable figures like Jack Dorsey, argue that it compromises network security. Alyse Killeen, founder of the Bitcoin-focused venture firm Stillmark, expressed concerns on Twitter, stating that PoS makes Ethereum more vulnerable to attacks, emphasizing the lack of consensus within the crypto community regarding the security of the PoS model.
In conclusion, Ethereum's move to PoS represents a significant step towards sustainability and reduced energy consumption in the world of blockchain and cryptocurrencies, but it comes with ongoing debates and discussions about its overall security and effectiveness.
