Will Bitcoin Adopt Proof Of Stake Consensus Mechanism?

Crypto mining is a key part of the framework that ensures the security of the Bitcoin blockchain and many other crypto blockchains. However, crypto mining does more than just secure blockchains; this process also ensures the creation and distribution of new crypto coins to miners who play a key role in validating transactions on a blockchain.

The security features provided during the crypto mining process is primarily down the operation of the proof of work and proof of stake consensus mechanisms present on the blockchain. Both consensus mechanisms offer several benefits and have a few disadvantages. 

Since, its inception, the Bitcoin and Ethereum blockchain have adopted the proof of work consensus mechanism for securing its blockchains. However, there has been a lot of criticisms against the proof of work (POW) consensus due to its high energy consumption.

This article will take a historical look at concerns that have been raised by organizations and regulatory bodies against Bitcoin’s POW crypto mining activities worldwide. We will also proffer possible solutions to the problem. However, to kick off this article, let us briefly explain how the proof of work consensus mechanism functions on the Bitcoin blockchain.

Proof Of Work Consensus

proof of work bitcoin

Although largely applied on many crypto blockchains, proof of work predates the creation of the first cryptocurrency (Bitcoin). Computers in proof-of-work systems must solve computational problems of a predetermined level of difficulty before they can perform certain tasks.

The computer then shares its solution as proof for solving the computational problem. After showing proof, another computer quickly verifies it and then gives approval for the initial tasks to be performed.

When applied to cryptocurrencies, the POW consensus is used to confirm and record all crypto transactions carried out on the blockchain. Blockchains can be likened to ledgers used for storing transactions performed on the blockchain. The transactions are arranged in sequential blocks, to prevent users from performing any fraudulent transactions. Additionally, the ledger is made public and then distributed over a wide range of computers to prevent interference or tampering by users.

There are many benefits to implementing a proof of work consensus. As an example, it enables the operation of stable, secure, decentralized blockchains. The proof of work consensus mechanism plays a crucial role in the creation and circulation of new crypto coins.

Despite the benefits it offers, the proof of work consensus mechanism has high energy requirements. In simpler terms, proof of work is an energy-intensive process that requires large amounts of energy for crypto mining to occur.

Proof of work mechanisms is also susceptible to scalability issues when there are a large number of transactions to verify on a blockchain. Despite its disadvantages, the proof of stake consensus offers greater security than any other consensus mechanism.

Some organizations and regulatory agencies have enacted laws to prevent crypto mining built on the POW consensus mechanism because of its high energy consumption. Let us take a historical look at some of these concerns.

Concerns Regarding Bitcoin Proof-of-Work Consensus Mechanism

There have been several complaints against top crypto asset Bitcoin due to the high energy requirements of running its proof of work consensus mechanism. In a statement released on Twitter last year, Tesla CEO, Elon Musk raised concerns over the high energy consumption of BItcoin mining.

Due to these concerns, Tesla suspended the use of Bitcoin as a means for payments on its platform. At the time, Elon encouraged Bitcoin miners to adopt the use of green energy for their mining activities. Furthermore, he added that Tesla will reinstate Bitcoin as a payment option once miners confirm that at least 50% of their energy is clean.

China has prohibited all types of crypto mining due to the high energy consumption associated with crypto mining. This was a remarkable move since previously Chinese miners controlled up to two-thirds of all Bitcoin mining in the world. However, by July 2021, all Bitcoin mining activities in the country was stopped.

In a bid to continue their mining activities, many Chinese miners relocated to other countries. Some moved to the US, Canada, and Kazakhstan. Many Chinese miners, however, sold off their mining equipments and pursued other opportunities in the crypto industry.

There has been strong opposition by some European countries against crypto mining against the crypto mining built on the proof of work consensus. Finansinspektionen, Sweden’s financial supervisory authority, calls for a crypto mining ban last year.

In a statement released in November 2021, this regulatory body stated “Sweden needs the renewable energy targeted by crypto-asset producers for the climate transition of our essential services, and increased use by miners threatens our ability to meet the Paris Agreement.”

In conclusion, this regulator called for a complete ban on all energy-intensive crypto mining activities. This view was also supported by Erik Thedeen, vice-chairman of the European Securities and Markets Authority. In a January interview with the Financial Times, Erik described Bitcoin mining as a national issue for Sweden.

In response to these concerns, legislators in Europe are drafting regulations to limit proof-of-work crypto mining activities. This decision is also based on reports carried out by researchers at Cambridge University.

According to researchers, mining for Bitcoin consumes an estimated 120 terawatt-hours of electricity per year. This is more electricity than is consumed in a majority of countries in the world every year.

Based on this report and previous criticisms expressed worldwide, the new regulations will insist on a ban for all proof-of-work crypto mining across all 27 states within the European Union. This regulation is part of larger Markets in Crypto Assets (MiCA) regulations aimed at monitoring crypto assets within all European territories.

With an imminent ban on all proof-of-work crypto mining across Europe, there is a need for Bitcoin developers to consider ways to ensure that Bitcoin mining continues to function. Let us consider some possible solutions to the high energy consumption of POW crypto mining activities.

Switch To A Proof Of Stake Consensus

bitcoin proof of stake

Switching to a proof of stake (POS) consensus seems like a viable option for Bitcoin developers looking to tackle the high energy issues attached to POW crypto mining. The proof of stake consensus uses the staking feature to replace the mining feature associated with proof of work consensus.

There are different variations of the proof of stake consensus. Some of them include proof of stake, distributed proof of stake, leased proof of stake, and proof of validation. However, all of these variations require crypto owners to stake their coins, in order to serve as nodes on the blockchain. By becoming nodes, network users can verify new transaction blocks and add them to the blockchain.

Previously created to run on a proof of work blockchain, the Ethereum blockchain has plans to switch to a proof of stake consensus mechanism with the rollout of its ETH 2.0 later this year. Bitcoin can make the switch to a POS consensus as a way to deal with the upcoming ban on crypto mining activities in Europe.

Despite its advantages, it is important to note that the POW consensus mechanism is much more secure than a POS consensus. Another flaw with the POS consensus is that it enriches crypto holders who stake the highest amount of tokens to form an oligarchy over other users.

Such holders will receive the largest rewards and then gradually dry up liquidity. The result of this will be an increase in the price of the cryptocurrency and little rewards for other participants looking to stake their tokens. For this reason, some crypto enthusiasts insist that Bitcoin should maintain it status as a proof of work consensus mechanism.

Completely Switch To Renewable Sources Of Energy

Even with the benefits attached to the proof of stake, some crypto enthusiasts believe Bitcoin should remain a POW consensus. These groups of investors are simply pushing for the increased adoption of renewable energy for Bitcoin mining activities.

Currently, Bitcoin mining is estimated to use within 40% to 75% of renewable energy worldwide. However, there are concerns over this use, since this renewable energy can be used for powering homes, factories, and electric cars.

Will Bitcoin Adopt Proof Of Stake Consensus Mechanism? 1

A complete switch to renewable energy will mean that Bitcoin developers will have to create or find new energy sources specially dedicated to Bitcoin mining activities. However, with a large number of bitcoin miners located in different parts of the world, this option may not serve as a complete solution.

Conclusion

The looming ban on all proof of work crypto mining activities in Europe does not bode well for Bitcoin and other crypto-assets built on this consensus. There are several benefits to the POW consensus, however, due to its high energy consumption, it may not serve as a viable solution in the long term.

As a result, we expect to see a possible solution from Bitcoin developers over the coming days. We won’t be too surprised if Bitcoin follows the example of Ethereum and switches to a proof of stake consensus mechanism.

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