Proof-of-stake could make Ethereum 99.95% more energy-efficient. How does it work?

This is proof-of-steak:

Proof-of-stake, on the other hand, isthe next security foundation for Ethereum. The blockchain will complete its migration to PoS in the coming months, the Ethereum Foundation said yesterday.

Ethereum is the clear platform of choice for Web 3.0. Created in 2015, the Ethereum blockchain has emerged as a globally distributed computing layer for all manner of decentralized applications, from financial services to one-of-a-kind tokens.

• Ether, the cryptocurrency that powers Ethereum, is up 255% this year (but down 25% over the last 24 hours). It’s the second largest crypto by market value after bitcoin.

Many of you have written in asking us for more explainers of cryptocurrencies and the fundamental technologies that power them. Today we’re excited to roll out a new piece of coverage in that wheelhouse. Expect more from us soon.

Before diving in, let’s cover the basics

• What proof-of-stake is: A consensus mechanism
• What is that? An algorithm that keeps blockchains—distributed networks of nodes—humming. By establishing and synchronizing one ledger of transactions across nodes, these protocols keep blockchains secure and prevent double-spending attacks.
• What’s the status quo? Bitcoin’s blockchain uses proof-of-work (PoW), as does Eth 1.0.

With that, we now return to the topic of juicy beef. Of late, Elon Musk has been setting Twitter aflame by criticizing bitcoin and saying Tesla would no longer accept it as payment for vehicles. His nominal reason for opposition = the “rapidly increasing use of fossil fuels for bitcoin mining and transactions.”

• But Tesla is apparently still holding its bitcoin. 🤔 And Musk still promotes dogecoin, which (currently) uses PoW. 🤔

PoW is largely to blame for Musk’s comments about bitcoin’s carbon footprint. The process requires “mining,” a computationally and energy-intensive system of solving complex cryptographic puzzles. Thanks to PoW, crypto’s original and most widely used consensus mechanism, the bitcoin network itself has not been hacked. But! As the hash rate—the aggregate compute power—of this brute-force process has climbed, so has its carbon footprint.

Proof-of-stake, compared to PoW (or the methane-emitting animals that become steak), is more energy-efficient. The TL;DR, according to the Ethereum Foundation, is that PoS will use ~99.95% less energy “post merge.”

So, how does it work?

We’ll use $ETH to explain.

Network participants “stake,” or put up, their ETH as validators to clear transactions and establish new blocks of the ledger. The cutoff to become an Ethereum validator is a cool 32 ETH (~$90,000). At random, the network tasks validators with creating blocks or ensuring that others’ are legit. These nodes are paid ETH as a reward.

• You can’t use staked ETH for a non-fungible token spending spree, because it’s locked up as collateral.
• If your node isn’t available when called upon to validate, you could lose a portion of your staked ETH. If you try any funny business—like colluding with others to tamper with consensus and create a new version of reality—your stake will be confiscated.

As logical thinking goes, you wouldn’t be incentivized to collude and tamper because it would tank the value of your asset. Alfred Pennyworth would counter: “Some men just want to watch the world burn.” Rational thinking likely has the edge over Alfred. Besides, you’d need 51% of all staked ETH—an ungodly sum of money, nearly $1 billion minimum—to successfully attack the Ethereum blockchain.

The benefits of steak staking

In addition to its efficiency, Ethereum’s developer community highlights a few other PoS plusses:

• Staking makes it easier to run a validator node. You don’t need to invest tens of thousands into specialized hardware, like ASIC machines and GPU chips.
• Because of the lower barriers to entry, staking is more accessible and decentralized. Since not many people have $90,000 worth of ETH laying around, there’s also the option to join a staking pool.
• “Staking allows for secure sharding.” We’ll save sharding for another day, but basically, the process could help Eth 2.0 process 100,000 transactions per second (TPS). ETH 1.0 supports ~30 TPS; BTC supports 4.6 TPS.

As for potential drawbacks, the biggest is that PoS is more of an unknown quantity. Smaller and newer cryptocurrencies, such as Cardano, already use PoS. But PoW is the only model that has truly stood the test of time. Plus, migrating to PoS is no easy affair. The Ethereum developer community has delayed the transition, which is occurring in phases, multiple times over the last few years.

Bottom line: When Eth 2.0 finally rolls out in full—an event that is expected “in the upcoming months,” per the Ethereum Foundation—it could solve the crypto's current headaches.