Cryptocurrency Blockchains Don’t Need To Be Energy Intensive

Bitcoin’s proof-of-work protocol is only the first among a range of creative possibilities

4 min read
Image of multiple icons together.
Anders Wenngren

Blockchain is a generic term for the way most cryptocurrencies record and share their transactions. It’s a type of distributed ledger that parcels up those transactions into chunks called “blocks” and then chains them together cryptographically in a way that makes it incredibly difficult to go back and edit older blocks. How often a new block is made and how much data it contains depends on the implementation. For Bitcoin, that time frame is 10 minutes; for some cryptocurrencies it’s less than a minute.

Unlike most ledgers, which rely on a central authority to update records, blockchains are maintained by a decentralized network of volunteers. The ledger is shared publicly, and the responsibility for validating transactions and updating records is shared by the users. That means blockchains need a simple way for users to reach agreement on changes to the ledger, to ensure everyone’s copy of the ledger looks the same and to prevent fraudulent activity. These are known as consensus mechanisms, and they vary between blockchains.

Blockchain consensus mechanisms decide which user gets to create the next block in the chain, prescribe how other users can verify the block is valid, and ensure users add only genuine transactions through incentives, deterrents, or both. Here we’ll discuss four primary consensus mechanisms.

The granddaddy of all consensus mechanisms—behind Bitcoin, Litecoin, Monero, and (for the time being at least) Ethereum—is called proof of work. Essentially, PoW makes adding transactions to the blockchain computationally—and therefore financially—very expensive, so as to discourage fraudulent activity. At the same time, users who go to the trouble of creating valid blocks, known as mining, are rewarded with cryptocurrency.

Blockchain consensus mechanisms decide which user creates the next block, prescribe how blocks can be verified, and ensure only genuine transactions can be added.

The only way miners can game a PoW system is if they control over 51 percent of the blockchain’s mining power, which is almost impossible for a large network like Bitcoin. The downside to PoW is that it requires huge amounts of electricity to power all these computations, which is both inefficient compared with other financial systems and bad for the environment.

Three alternatives to proof of work are being used in other cryptocurrencies and could offer real competition for ­Bitcoin’s PoW (the industry gold standard) in the years ahead.

Each alternative, of course, has its own upsides and downsides. The three consensus mechanisms outlined here—proof of stake, proof of burn, and proof of capacity—each consume far less energy than PoW. But proof of stake (PoS) and proof of burn (PoB), for instance, could lead to a “rich getting richer” scenario because they both reward users who hold lots of their coins. PoS could also encourage hoarding among its holders. As an upside, proof of capacity has a lower cost and less of an environmental impact compared with PoW because memory uses much less energy than processing. On the other side of the coin, PoC invokes the fear that if it becomes popular, it could also lead to massive price inflation of memory chips and nonvolatile storage. That may already be playing out, after the launch of the PoC currency Chia, in March, led memory prices to spike with shortages in some markets. Most important, none of these alternatives have had their security tested at scales comparable with those of Bitcoin.

Image of a lock. Anders Wenngren

Proof of Work

Miners following this protocol compete to crack a cryptographic puzzle using sheer computing power. The first miner to solve it gets to create the next block. Other users then validate the block, including the transaction data inside it. If the block passes muster, it’s added to the blockchain. The successful miner then gets a reward, in the form of cryptocurrency.

Image of stacked coins. Anders Wenngren

Proof of Stake

PoW’s main rival is used by the Cardano platform’s Ada cryptocurrency and by Peercoin. Ethereum is also in the process of switching to this mechanism. With PoS, it’s not the amount of work that determines who makes the next block; it’s how much of their crypto holdings users are willing to lock up as a stake. Normally an element of chance is built in so that the richest user doesn’t win every time.

Image of stacked coins and fire. Anders Wenngren

Proof of Burn

Rather than investing computing resources or putting up a stake to win the right to create new blocks, users “burn” some of their cryptocurrency by sending coins to a one-way address from which they can’t be retrieved or spent. The more coins users burn, the better their chances of winning. Burned coins devalue with age, though, so users must continually invest in the network.

Image of a magnifying glass. Anders Wenngren

Proof of Capacity

In contrast with PoW’s real-time competition to solve cryptographic puzzles, users compute thousands or millions of potential answers and store them on their hard drives. The more memory the users have, the more potential answers they can store. Each time a new block needs to be made, users search for an answer to the puzzle. Whoever is fastest gets to mine that block.

About the Author

Edd Gent is a freelance science and technology journalist based in Bangalore, India.

This article appears in the July 2021 print issue as “Four Ways to Secure Blockchains.”

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