Solving crypto’s sustainability issues with proof-of-stake

The energy-intensive nature of crypto mining continues to be a thorn in the side of the crypto sector – which has suffered a turbulent 12 months, characterised by high volatility in the price of many cryptocurrencies and compounded by the collapse of crypto exchange FTX towards the end of last year.

But despite the large footprint of crypto mining, a recent evolution beckons the prospect of far less impactful cryptocurrencies in future. In September, Ethereum announced it had managed to make the switch from a ‘proof-of-work’ protocol to a ‘proof-of-stake’ protocol, which it claimed could cut out 99.9% of the energy consumption used in the origination of its cryptocurrency. 

What’s the difference between proof-of-work and proof-of-stake?

“The original cryptocurrency creation mechanism – proof-of-work – achieves verification of transactions by having miners solve complex mathematical puzzles using computational power,” explains Yaroslav Musii, Delivery Director for Financial Services and Insurance at technology company Intellias.

“Proof-of-work miners need to continuously expand computational power to solve complex mathematical puzzles, create new blocks and validate transactions. This requires specialised mining hardware that consumes a significant amount of energy. The energy consumption of proof-of-work mining is directly proportional to the amount of computational power being used, and this can lead to significant energy consumption and environmental impact.

“Proof-of-stake, on the other hand, uses a different method where transactions are validated by those who hold cryptocurrency and ‘stake’ in the network, based on the amount staked. Those ‘validators’ put up a portion of their own cryptocurrency as collateral to verify transactions, and they receive rewards for their participation. Virtually no energy is consumed using this method,” Musii says.

“One of the main benefits is lower energy consumption thanks to reduced computational work and energy use,” elaborates Daniele Servadei, CEO and Founder of ecommerce solution Sellix. “What’s more, it reduces e-waste, with less specialised hardware and fewer device replacements required. There are also benefits around scalability, with proof-of-stake improving network efficiency and supporting greener growth.”

Does proof-of-stake make proof-of-work redundant?

Ethereum’s switch to a proof-of-stake model – known as The Merge – has been described as one of the largest open-source software events in the history of cryptocurrencies. It’s no wonder that crypto staking is offering hope to an industry that has long been plagued by its poor environmental track record. The need for change is drastic; according to a 2021 report by Katten, a single transaction of bitcoin has the same carbon footprint as 680,000 Visa transactions or 51,210 hours of watching YouTube. 

“The growing focus on preventing climate change has brought intense scrutiny to Bitcoin and other cryptocurrencies’ energy usage,” states Neil Robson, Partner at Katten UK.

So, will crypto staking – and the vast environmental improvements that it creates – lead to the end of crypto mining altogether?

“It’s unlikely that proof-of-work will be entirely replaced by proof-of-stake or other consensus mechanisms in the near future,” notes Daniele Servadei, although he acknowledges that “the growing emphasis on sustainability and environmental impact may encourage a shift towards more efficient alternatives”.

Servadei also believes that we will witness a greater emphasis on sustainability within the crypto space generally. “We’ll see increased public awareness and demand for sustainable practices,” he predicts. “There’ll also be regulatory pressure driving greener solutions, while market dynamics will increasingly favour environmentally-friendly projects. Technological advancements promoting sustainability (like proof-of-stake) and collaborative industry initiatives addressing environmental concerns will also increase.”

To realise wholesale environmental improvement, Bitcoin will need to join Ethereum in adopting the proof-of-stake mechanism. But that’s not likely, according to Teunis Brosens, ING’s Head Economist for Digital Finance and Regulation: “[The Merge] could put Bitcoin on the defensive in terms of prospective adoption by traditional finance. But the Bitcoin community is conservative, and we don’t see Bitcoin transitioning from proof-of-work to proof-of-stake anytime soon.”

Yaroslav Musii is perhaps a little bolder. He believes proof-of-stake does have the potential to make proof-of-work crypto mining redundant – but he believes there is a broader, more existential dilemma that emerges from this debate. “Some argue that proof-of-stake makes crypto more centralised and therefore goes against one of the founding principles,” he explains. 

Is crypto progressing towards renewables?

Even before The Merge, crypto mining operations were making some progress towards adopting renewable energy, and in the process cleaning up their act. But the extent of this was limited, with The Merge being a definite catalyst, Musii says.

“Up until The Merge, most of the crypto mining has been powered by fossil fuels, particularly coal as one of the cheapest and most widespread sources of energy,” he says. “The Merge has undoubtedly been a positive development for the crypto industry, but more work is needed to promote the adoption of renewable energy sources in mining and other crypto-related activities.”

This will be particularly true of Bitcoin and other cryptocurrencies are hesitant in adopting the proof-of-stake mechanism, as has been predicted. According to Katten’s report, Bitcoin accounted for about 68.4% of the total power usage of the top 20 mineable cryptocurrencies by market capitalisation in 2020. Other well-known coins like Ethereum, LiteCoin and Monero accounted for 11.5%, 2.6% and 3.4%, respectively, at the time – although the company points out that this data was before the explosion of DogeCoin, which is likely to affect more recent versions of the same dataset.

“Efforts continue to be made by some mining operations to use renewable energy and improve energy efficiency,” Servadei says. He claims that adoption of greener practices within crypto are being driven by a combination of market pressure and public scrutiny. “Despite these efforts, the overall environmental impact of proof-of-work cryptocurrencies is still high and not comparable to proof-of-stake,” he says.

And what of the future of crypto mining and staking? 

“There’ll be incremental changes,” Servadei believes. He expects to see a “gradual adoption of energy-efficient consensus mechanisms like proof-of-stake across various projects”, alongside “continued efforts to use renewable energy sources for mining operations” and “improved mining hardware efficiency to reduce energy consumption”.

These changes could be accompanied by more drastic shifts, such as increased uptake of proof-of-stake; regulatory intervention that forces the issue; or new technologies that change the way coins are minted, such as layer-2 solutions, sharding, or other scalability improvements.