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24 Jun 2021 | 19:00 GMT

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

By Edd Gent

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.

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.

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 Anders Wenngren

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.

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.

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
Anders Wenngren
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.”