Can blockchain become more energy efficient by getting rid of mining?

After I published my last blog post on bitcoin mining, I had a few friends start asking about the other flavor of the day regarding blockchain: energy consumption. A part of this curiosity is likely driven by Elon Musk’s somewhat oddly timed announcement that Tesla will no longer allow purchases using bitcoin due to the high environmental impact of mining (…although Tesla will continue holding onto bitcoin as an investment). It’s close to impossible that he wasn’t aware of the potential impact before he started pushing up the value of cryptocurrency only to influence its fall a few months later, but that’s another subject altogether… However, it is true that bitcoin mining does suck up a lot of energy, and there are now other ways to validate transactions without going through this mining exercise (also called Proof of Work) which is responsible for most of the high energy consumption.

So what are we even trying to “prove”? — Before I go any further, it may be helpful to take a step back from mining to talk through what blockchains achieve at a macro level. Blockchains are a way to keep track of things (e.g. ledgers) in a decentralized way. Normally, we trust our banks, title companies, and other institutions to keep track of who owns what stuff as money, property, etc. changes hands. If you want to get rid of these central authorities for managing ledgers, you need to find a way to trust that the masses are going to accurately validate transactions rather than manipulate the system for personal gain.

Blocks are sets of transactions that manage who owns what (for me to give you 1 bitcoin, I need to have at least 1 bitcoin to start and then I need to debit my account by 1 bitcoin and credit yours by 1 bitcoin). Every single transaction from the very first bitcoin transaction is part of the overall blockchain, and it’s what makes decentralized ledgering possible. Proof of Work (or mining) essentially makes it hard enough to propose a new block of transactions that you wouldn’t want to waste all that “work” or effort to try to propose a false block of transactions.

Manipulating Proof of Work — The only real way to beat the system is to have a majority of the total mining computing power to then start validating illegitimate transactions or control which blocks are added to the blockchain. As the algorithm that powers bitcoin continues to become more complex, the computing power required to figure out the mining math problem becomes larger than most people or entities have access to. So then, you have just a few big players racing to solve the problem and win new bitcoins, which both increases energy consumption and starts centralizing miners to a select few (today about 50% of bitcoin mining runs through 4 major mining pools, and 50% of Etherium is mined through 2 mining pools).

Work versus Stake — One of the reasons that Ethereum has gotten a lot of love recently is that they are in the process of moving from “Proof of Work — PoW” to “Proof of Stake — PoS”. With PoW, we’re essentially telling everyone that it’s a free-for-all to try to win new bitcoin, propose new blocks and validate those blocks. That’s what makes blockchain so hard to manipulate, but it also creates incentives that generate waste. PoS, as it works with Ethereum, requires that everyone proposing or validating a block put aside a “stake” of 32 ETH (ETH is the currency of Etherium and 32 ETH is about $65k as of July 1, 2021) to participate. The person proposing the block is chosen somewhat at random and puts her stake on the line as the majority of others validate the transactions in that block. If she intentionally or unintentionally screws up a proper block creation, she stands to lose a part or all of her “stake”. If the block is validated properly, the reward is a small transaction fee that comes in the form of ETH.

So in Proof of Work, we’re asking everyone to compete against each other to validate transactions and get a reward, and you’d have to be crazy to spend that much energy or “work” to try to mess with the ledger. Unless you have the majority of the computing power (which is no longer outside of the realm of possibilities), you’re going to have a hard time taking control of the ledger for your own gain.

In Proof of Stake, we’re asking everyone who wants to play to throw in some money ($65k) and then we’re choosing one person at random to propose the next block with the threat of losing it all. So to try to validate a bad transaction, you would need to have the majority of that currency (Etherium in this case) to be selected as a proposer and validate the block as a majority. But it would pretty hard to keep up with the randomness to stay in control and likely will cause your own massive “stake” of Etherium (a majority stake today is well over $100 billion) to devalue quickly once you’re not the one proposing the next block. With Proof of Work, you could theoretically just cause chaos within the system with no material financial consequence of driving the value of bitcoin up or down.

Using blockchain for more than currency — If we’re going to start using blockchain technology like Etherium to validate things like smart contracts, NFTs and more, it’s clear that we need to have a system that is fast, truly distributed and ideally more energy efficient. With PoS, we can theoretically achieve all of these things by:

1. Making it easier for anyone to propose and validate blocks without massive computing power (a laptop will be just fine)
2. Awarding transactional fees rather than coins
3. Reducing time to validate new blocks
4. Removing the “race” to mine bitcoins (which in turn lowers wasted effort)
5. Creating a financial disincentive to mess with the system (by ensuring that validators have skin in the game)

This is not to say that Proof of Stake is the only way forward and that Proof of Work will fail. We still need to see how PoS fares in the real world with lots of transactions and criminals who want to manipulate the system, but it does appear to resolve a lot of the elements that are problematic with mining without sacrificing distributed and trusted consensus.