Over the last few years, there has been a lot of debate in the crypto space regarding proof of stake. Many new blockchains use this consensus mechanism and some major chains like Etheruem plan to transition from proof of work to proof of stake soon. But as miners usually rely on proof of work mining rewards, will proof of stake kill mining?
Yes, proof of stake will kill mining in the traditional sense. Block rewards will be earned by validators with staked capital instead of miners with powerful GPU cards.
In this article, I’ll expand upon proof of stake and its benefits compared to proof of work. I’ll also examine the impact of proof of stake on mining.
How Proof Of Stake Will Affect Mining?
Before diving into the nuance of proof of stake’s impact on mining, let’s first understand some key definitions:
Proof of stake
- Consensus mechanism where network participants (stakes or validators) validate block data by risking their capital
- Validators earn block rewards relative to their proportion of total staked capital. For example, by staking 1% of total capital a validator would earn 1% of the rewards.
- Theoretically less capital intensive as there are fewer hardware and energy costs. However, some chains have a minimum stake. For example, Ethereum will require validators to stake a minimum of 32 ETH.
- Validators acting maliciously have their capital ‘slashed’ (ie, deducted). Thus, proof of stake relies on financial incentives rather than energy expenditure to secure the network.
- Typically faster and more efficient than proof of work. Later in the article we will examine the environmental benefits of proof of stake.
- Examples include Ethereum 2.0, Cardano, EOS
Proof of work
- Consensus mechanism where network participants (miners) validate block data by competing for mining rewards via energy expenditure
- Native token rewards are paid to miners. For example, Ethereum miners receive ETH.
- Miners earn rewards by spending energy on complex mathematical problems. It is this energy expenditure which acts as the ‘proof of work’.
- Mining is very capital intensive. Miners must pay for expense GPUs and other hardware upfront, as well as costly electricity
- This mechanism therefore ensures network security by making it very expensive to control or attack the network
- Examples include Bitcoin, Dogecoin, Litecoin.
Block rewards (what miners/stakers get paid) are paid out very differently in proof of work compared to proof of stake:
‘Mining’ in the traditional sense refers to participants being rewarded for spending energy to secure the network. They are paid block rewards to compensate them for their time and expense.
Proof of stake does not have this traditional form of mining. Instead, validators are simply paid block rewards to risk capital as they validate network data. No expensive hardware or energy costs are required. Capital is instead staked and deducted when validators make errors or act maliciously.
Proof of stake is much more economically sound. It saves the environment and makes blockchains potentially more decentralized.
Therefore, we can conclude that ‘mining’ will be killed by proof of stake. Indeed, Ethereum miners who have paid millions of dollars on mining hardware will lose 100% of their revenue once Ethereum transitions to proof of stake.
These miners have huge financial incentives to prevent the change to proof of stake. Some of them have been disruptive and have threatened network security to delay Ethereum 2.0. Some people even suggest they may initiate a hard-fork that will keep a version of Ethereum as proof of work!
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Is Proof Of Stake Better For The Environment?
Proof of stake has been in the news recently as being a green alternative to proof of work. This intuitively makes sense, given that proof of work intentionally burns energy as a feature.
While proof of stake chains still use energy, this is not central to their security model. Energy consumption is, therefore, lower in proof of stake compared to proof of work. This is true on an absolute and per transaction basis.
Danny Ryan, a lead Ethereum Foundation researcher, recently estimated Ethereum’s energy expenditure to drop 99.9% compared to after shifting from proof of work. This improvement is vast, as illustrated diagrammatically below.
Most proof of stake chains has similarly impressive energy profiles versus their proof of work counterparts.
If we use energy consumption as a proxy for the environmental impact we can therefore conclude that proof of stake is far greener than proof of work. However, is this assumption fair? I believe greater nuance is required to assess proof of work’s environmental impact.
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Is proof of work envionmentally friendly?
It is true that proof of work consumes extreme amounts of energy. Bitcoin mining, for example, uses more electricity than some countries at this point.
Below you see a comparison between Bitcoin miners and the country Norway when it comes to energy usage:
Most people see charts like the one above draw the conclusion that proof of work is terrible for the environment, but that’s a logical fallacy. Just because something uses a lot of energy does not mean it is bad for the environment.
Hear me out:
It is not electricity itself that is damaging. Rather it is carbon dioxide and other pollutants emitted during its creation that is the issue. Most miners obtain their electricity from renewable sources that may be cheap due to seasonal or regular overabundance.
For example, much of the Bitcoin network’s miners are located around geothermal or solar energy. Most of Bitcoin’s hash rate was historically derived from cheap Chinese hydroelectricity. In this sense, not all the energy used by proof of work is actually environmentally damaging.
Similarly, some suggest energy-intensive mining combined with Bitcoin’s rising utility and profile may spur innovation. Because miners who obtain cheap energy can make huge profits, this incentivizes research into cheaper energy sources. As the world shifts from carbon-based to renewable energy sources, much of this research will be into green energy. Hence some argue that proof of work may actually benefit the environment over the long term.
Much of the energy used by proof of work is also isolated and cannot be used for other purposes. It is typically very expensive and inefficient to transport energy. As such, it isn’t economical to use the energy created a long way from urban centers (eg, at solar plants in the desert). Proof of work can help solve this problem. By using isolated energy by placing miners right at the energy source, proof of work can utilize energy that would otherwise be wasted. Some argue this actually reduces the burden on national grids significantly and allows isolated energy to be used extremely efficiently.
Some even compare Bitcoin to batteries, given the argument above. It effectively stores electricity in the form of value, which can be “discharged” by using it.
Despite these counterarguments, it is clear that at present proof of stake has a lower environmental footprint than proof of work. Similarly, the public perception (which often drives commercial decisions) is that proof of stake is green.
Is proof Of Stake Better Than Proof of Work?
The question as to whether proof of stake is better than proof of work is complex. It is more a case of each consensus mechanism having advantages and disadvantages. We need to weigh these in aggregate to subjectively conclude one way or another, and your view may differ from others.
Let’s, therefore, review the relative advantages and disadvantages of proof of stake:
Advantages of proof of stake
- Far lower energy footprint. This is probably better for the environment and definitely better for public and media perception. Perception is central to driving adoption.
- Theoretically more inclusive, as barriers to entry are lower. Ongoing costs are minimal and there is no need to invest in powerful hardware upfront. However, as token prices rise, minimum staking amounts increase in USD terms. For example, at $3,000 per ETH the minimum requirements to stake on Ethereum 2.0 equates to $96,000. Clearly, not everyone has this capital. Staking pools such as Lido Finance can help mitigate this problem. These allow small stakers to combine to meet minimum taking requirements.
- Lower energy requirements result in a far faster network and lower transaction costs. This is crucial for mass adoption.
- Reduces chance of 51% attack. Controlling 51% of the hashrate means you can attack the network. This is expensive but not necessarily impossible. Attacking proof of stake chains would require 51% of the staked capital. Attacking the chain would therefore destroy the value of the attacker’s capital and is thus economically irrational.
Disadvantages of proof of stake
- Can create a ‘rich get richer’ dynamic. The greatest share of rewards go to the largest capital holders. This is arguable antiethical to crypto’s founding philosophies. Similarly, over time is results in decentralisation as richer stakers gain a greater network share (and greater network influence).
- By destroying costly energy, some argue that proof of work mining rewards have inherent value. Energy expenditure is equal to the mining reward’s inherent value. Proof of stake has no comparative inherent value. Staking is therefore more dilutive than mining.
- Theoretically, proof of work is more open to small scale network participants. In practice, this isn’t the case due to the high hardware costs required to be competitive in the mining pool.
- The competitive element of proof of work leads to more decentralised validators. However, again in practise this does not always hold true as small scale miners often aggregate their hashpower in ‘mining pools’.
Clearly, there is no absolute answer to whether proof of stake or proof of work is better. In my opinion, the environmental and performance-related benefits of proof of stake are very important. Probably more so than the theoretical and philosophical advantages proof of work maintains. This is not an argument that has been settled and both sides have their high-profile proponents.
Conclusion: Proof of stake will kill mining
To conclude, yes, proof of stake will kill mining. There will be no more rewards for investing heavily in hardware. Block rewards instead flow to those who control capital. Proof of stake also has other benefits such as cleanliness, media narratives, and network performance. However, proof of work is not obsolete. Many believe deeply that proof of work provides greater value, security, and fairness as a consensus mechanism.
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