Bitcoin (BTC), the original cryptocurrency that started it all and to this day still drives market sentiment, has faced many challenges along the way. The final challenge appears to be related to the mining and Proof of Work (PoW) consensus and its subsequent impact on the environment.
The high energy consumption of the Bitcoin network has been one of the hottest topics of the past year, as the likes of Elon Musk fueled the feeling that BTC in its current form is bad for the environment. Fortunately, mining companies have been exploring the use of renewable energy for some time, and the latest reports indicate that 58% of the BTC network’s energy comes from renewable sources.
In 2022, the debate appears to have shifted from the use of clean energy to a complete change in the mining consensus, with a lobby composed of billionaires and Proof of Stake (PoS) proponents calling for a change in the Bitcoin token. This sentiment is also fueled by the change of Ethereum from Proof of Work to Proof of Stake, scheduled to be completed by the end of 2022.
PoW is the original cryptocurrency mining consensus popularized by Bitcoin and adopted by many early crypto projects. PoS came into existence with the launch of Peercoin in 2013, and although it wasn’t very popular at first, its scalability and energy efficiency made it a popular choice for new crypto projects.
“The primary mistake that Greenpeace, Larsen, and other critics of Bitcoin’s energy consumption make is that they judge Bitcoin by its ‘components,’ rather than by displaying its value,” William Zamoszege, CEO of Bitcoin mining platform Sazmining, told Cointelegraph. He further added:
“We must judge a new invention by the degree to which it solves a problem in the community. PoW enables healthy money and decentralized currency backed by real power. PoS cannot do that.”
Recently, the Bitcoin Mining Council (BMC) responded to a letter sent to the US Environmental Protection Agency (EPA) stating that Proof of Stake and Proof of Work are qualitatively different. Thus, it is misleading to refer to Proof of Stake as a “more efficient” form of Proof of Work, because it does not achieve the same thing.
Proof of Work provides true decentralization
PoW is touted as the most reliable way to reach consensus on the blockchain. It helps in decentralizing transactions while removing intermediaries and ensuring that transactions are correct. Mining consensus provides equal opportunity for everyone and new miners are incentivized to add more hardware and spend more energy to receive their share of mining rewards.
On the other hand, PoS uses a staking system where a certain amount of capital in the form of network tokens is required to become a validator. Its security is supposed to be derived directly from the perceived economic value of the network or how expensive it is to purchase a majority stake.
While Bitcoin has a lot of energy consumption, which is definitely on the higher side when compared to other crypto projects, crypto naysayers often see energy consumption as a standalone metric. Meanwhile, Bitcoin’s energy consumption is directly proportional to its security, making it truly decentralized.
A lot of efforts are being made to make Bitcoin mining greener even in its current form. According to a study by Galaxy Digital, the Bitcoin network consumes nearly half of the energy used by banks and gold mining.
Critics often assume that the energy used by bitcoin miners is either stolen from the most productive use cases or leads to increased energy consumption. However, research studies have shown that bitcoin miners use non-competing power that may or may not be wasted.
The demand for changes to the basic principles of the Bitcoin network is nothing new. During the bitcoin block size war from 2015-2017, many exchanges and miners backed the bitcoin hard fork but the bitcoin community once again struggled to keep the network true to its value, as created by Satoshi Nakamoto himself. Joe Burnett, a mining analyst at Blockware Solutions, believes that any attempt to change the consensus algorithm in Bitcoin “will definitely fail,” telling Cointelegraph:
“Bitcoin users, or node operators, have been able to resist the consensus changes and upgrade the network in a backwards compatible manner. This war set the precedent that Bitcoin is very resistant to any changes that could alter its value proposition by being completely scarce, portable, robust, divisible, and exchangeable.” “
Looking back at some of the crossroads of 2018, when the block size debate was at its height, gives a true picture of why Bitcoin hasn’t changed its codes. The two blockchain networks that emerged during the “block size war” were Bitcoin Cash (BCH) and Bitcoin SV (BSV). Both networks faced significant centralization and security issues and the sophistication of these networks declined over time.
Another notable endorsement of the Proof of Work mining consensus was last year’s Chinese mining ban. China contributed more than 60% of bitcoin mining capacity, but the blanket ban led to a complete shutdown, as miners were forced to halt their operations. Overnight, the hash power of the Bitcoin network fell by more than 50%. However, within a couple of months, mining power had returned to its pre-ban levels, demonstrating the true power of decentralization.
Major POS networks have problems
The biggest argument in favor of PoS is its energy efficiency and scalability. However, these advantages come at the expense of decentralization – the founding principle of cryptocurrencies. For example, Bitcoin was created with the principle of equality, promising to offer equal opportunities to anyone looking to participate. However, PoS creates a staking barrier where the biggest bet has the first say in the decision-making process.
While it is true that PoS validation is less energy-intensive than the currently in place Proof of Work system, there are fundamental barriers with the PoS model that significantly reduce the chances of Bitcoin changing its consensus mechanism anytime soon. One of the main concerns with PoS networks is the level of centralization and its subsequent impact on network security. Noble Dracula, podcast host for The Certified Investor, told Cointelegraph that “Point-of-sale networks may be green but they are not decentralized.”
This is evidenced by numerous protocol violations in many decentralized finance protocols based on PoS and non-perishable tokens (NFT) games. Even the largest PoS network like Solana, which has seen a huge rise in adoption, has experienced many outages over the past year. Most of the outages were caused by Distributed Denial of Service (DDoS) attacks, which resulted in a loss of consensus among validators.
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Ether (ETH), the second largest cryptocurrency by market cap, has decided to switch to PoS to solve scalability issues on its platform. However, the transition has been delayed on numerous occasions and even switching to PoS will not guarantee smooth operation. Draculan further explained:
“Moving to POS puts security at risk without looking at secondary solutions to making POWs work. Environmental concerns around the Bitcoin network have led to a lobby group calling for a change in code from Proof of Work to Proof of Stake. However, Proof of Work is key to Bitcoin decentralization.” .
The need for consensus mechanisms not only secures the network, but enables scalability. Ether, for example, has different use cases compared to Bitcoin and needs to scale up as a result, leading to Eth2 PoS adoption going forward.
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On the other hand, Bitcoin only needs to process transactions on the network which allows PoW to build towards maximum network security while taking advantage of Layer 2 applications like Lightning Network or Stacks to offset that scalability as the mining side moves towards more energy-efficient options.