Proof of stake

Cryptocurrencies such as Bitcoin use huge amounts of electricity. In 2021, the Bitcoin network consumed upwards of 100 terawatt-hours, more than the typical annual energy budget of Finland. 

Proof of stake offers a way to set up such a network without requiring so much energy. And if all goes as planned, Ethereum, which runs all sorts of applications in addition to the world’s second-largest cryptocurrency, will transition to it in the first half of 2022. The shift has been projected to cut energy use by 99.95%.

Cryptocurrencies run on blockchains—digital ledgers of transactions that must be secure from cheats, fraudsters, and hacks. Bitcoin and Ethereum currently ensure that security using proof-of-work algorithms: “miners” solve cryptographic puzzles, competing for the right to verify a new block of transactions. Successful miners are rewarded for their work with cryptocurrency. 

Finding solutions to proof-of-work puzzles requires massive amounts of computing power and, thus, electricity. 

With proof of stake, validators don’t have to vie against one another, spending big on energy and computing hardware. Instead, their cache, or stake, of cryptocurrency allows them to enter a lottery. Those who are chosen gain the authority to verify a set of transactions (and so earn more cryptocurrency). In some networks, validators who display bad behavior are penalized—they lose some portion of their stake. 

Ethereum will be the largest network to use proof of stake. It has built a new blockchain for the system, which has been running in parallel. All that needs to happen now is “The Merge,” transferring over the layer that actually executes transactions and holds users’ assets (and dropping proof of work in the process).

If successful, Ethereum’s proof-of-stake blockchain could set the stage for wider adoption of the energy-saving technology. Other networks have contemplated a switch, but they seem to be taking a wait-and-see approach.