After the bitcoin whitepaper was first published in 2008, the prospect of viable digital currency suddenly seemed realistic, if not inevitable, to a growing number of people. The global economy was in peril, and central banks were the subject of broad populist ire. These factors have helped fuel interest in bitcoin as a comparatively decentralized currency, as well as its underlying peer-to-peer technology (now known as “blockchain”). But the proof of work (PoW) mechanism that validates transactions on the bitcoin ledger comes with energy consumption costs that increase exponentially as the network expands. Newer blockchain consensus mechanisms address this issue, among the foremost being proof of stake (PoS).
The point of a blockchain consensus mechanism, generally speaking, is to provide trustless validation and fault tolerance to a peer-to-peer network. This is largely how bitcoin has managed to gain such significant momentum as a currency. By resolving issues such as the Byzantine generals dilemma and the double spend problem, the bitcoin ledger can effectively operate as a network with no central point of authority or failure. (Want to learn the bitcoin basics? Check out How the Bitcoin Protocol Actually Works.)
Proof of Work
PoW consensus actually predates bitcoin by at least a decade, but never became widely utilized until after Satoshi Nakamoto's whitepaper was made public. The term "proof of work" was coined in a document published in 1999 by Markus Jakobsson and Ari Juels, and the concept had already existed in some limited form as early as 1993. In the context of bitcoin (and several other cryptocurrencies) PoW is not only a way to secure and validate a peer-to-peer network, but also a method by which to earn (or “mine”) currency. Each miner on the bitcoin blockchain contributes computing power to solve the equations that validate the ledger, and are in turn rewarded with cryptocurrency upon successful completion.
PoW has been very effective in securing blockchains and proving, to some extent, the viability of digital currency. But it is also demonstrably wasteful as a computing algorithm. Much of the processing power that is devoted to PoW consensus goes to waste, as many of the hashes generated do not meet the required criteria to mine/validate successfully. And every time a successful hash is achieved and a "block" is added, the PoW blockchain becomes more difficult (and inefficient) to validate. The year 2017 in particular saw a significant increase in bitcoin network activity, and by June of the following year, estimates indicated a combined yearly energy consumption rate of about 70 terawatt hours for bitcoin and Bitcoin Cash.
Proof of Stake
Proof of stake has existed as a concept since at least 2011, and was gradually adopted by cryptocurrencies like Peercoin and Blackcoin over the proceeding few years. Arguably the most notable PoS adoption came in 2017 with the Casper hard fork of the Ethereum blockchain. Instead of miners, the PoS protocol appoints nodes that possess a certain threshold of wealth on the blockchain (typically within its core wallet) as transaction validators. Their "stake" refers to the amount that they own that is locked for validation, as well as circulation timestamps indicating the ages of transactions. Although not without its own issues, the PoS validation model requires significantly less energy consumption (at least over the long term) than PoW.
There are also a number of notable variations of the PoS protocol, as well as similar models that don’t necessarily use stake as a form of validation. For example, delegated proof of stake (DPoS) and delegated byzantine fault tolerance (DBFT) both conduct community elections to grant validating power to stakeholding nodes. Proof of importance (PoI) models (like that of the NEM blockchain or the controversial Petromoneda cryptocurrency) reward nodes for positive contributions (such as special payment protocols) to their respective networks.
While PoW and PoS both share the common goal of network integrity through some form of collective validation, their consensus methods differ significantly in both philosophy and functionality, which tends to have divergent effects on the blockchain community as a whole. The key difference between the two protocols is that PoW temporarily devotes computing power to help secure its network, while PoS temporarily devotes existing wealth (or stake) as a validation tool.
Environmental impact is a growing concern that illuminates significant potential hazards of PoW adoption. As recent authoritative studies overwhelmingly warn of abnormal increases in Earth’s surface and ocean temperatures, rising sea levels, and all sorts of other alarming shifts in climate data, the widespread adoption of a PoW-based cryptocurrency (like bitcoin) would likely evoke profound social and political ramifications by virtue of its energy inefficiency alone (let alone several other factors, such as financial regulation and global trade).
Nevertheless, the potential of blockchain in many different sectors (including fintech and beyond) is too profound to ignore. There are aspects of the technology that offer both transparency and anonymity to systems ranging from banking to media and communication. The inherently immutable nature of a blockchain can make it as accountable to the public as it is fault-tolerant. Additionally, decentralized applications (DApps) highlight the prospect of blockchain technology as a platform for highly democratized software development, distribution and integration. (Cryptocurrency is also a hotbed for hackers. Learn more in Hacking Activities Increase Along with Cryptocurrency Pricing.)
The concept of a decentralized network or ledger has endeared blockchain technology to people and institutions worldwide. However, whether or not either PoW or PoS can remain purely decentralized in the long run is subject to debate. With the gradual evolution of bitcoin validators from CPU to GPU, and now to specialized ASIC miners (not to mention in very localized mining regions), PoW hardware and mining by extension have arguably become highly centralized. And PoS (unchecked by any community-enforced norms or restrictions) tends to concentrate wealth, and thereby centralize power, by its very nature. These issues combined highlight the possible benefit of a hybrid PoW/PoS system, as well as that of newer models like DPoS and PoI.
Other innovations (like the Bitcoin Lightning Network) are working toward solutions that could possibly alleviate some of the energy consumption in existing PoW blockchains. But if PoW networks continue to grow, it seems unlikely that they would maintain a long-term energy efficiency standard comparable to the newer consensus models (PoS, PoI, etc.). And how governments and regulating bodies deal with the growing issue of blockchain technology as a whole remains to be seen.