Ethereum's merge to a Proof-of-Stake (PoS)
On September 14, 2022, Ethereum (ETH-USD) finalized its merge to a Proof-of-Stake (PoS) consensus mechanism from Proof-of-Work (PoW), a transition in a bid to switch its consensus mechanism away from energy-intensive to reduce energy usage and boost its network security. According to the Ethereum community, compared to PoW, PoS improves better energy efficiency by eliminating the need to use lots of energy on PoW computations, lowers the barriers to entry as reduced hardware requirements for creating new blocks, reduces centralization risks, and incentivized participation with low energy requirements for less ETH issuance.
“Proof-of-stake underlies certain consensus mechanisms used by blockchains to achieve distributed consensus. In proof-of-work, miners prove they have capital at risk by expending energy. Ethereum uses proof-of-stake, where validators explicitly stake capital in the form of ETH into a smart contract on Ethereum. This staked ETH then acts as collateral that can be destroyed if the validator behaves dishonestly or lazily. The validator is then responsible for checking that new blocks propagated over the network are valid and occasionally creating and propagating new blocks themselves.”
As Ethereum finalized its switch to PoS, many have asked if Bitcoin will ever be based on Proof of Stake. At present, miners earn Bitcoin by verifying transactions and blocks. However, they pay their operating expenses like electricity and rent with fiat currency. What's really happening then is that miners are exchanging energy for cryptocurrency. The amount of energy required to mine proof-of-work cryptocurrency profoundly affects the market dynamics of pricing and profitability. There are also environmental aspects to consider since PoW mining uses as much energy as a small country. We are likely to see Bitcoin starting its transition to PoS if ETH has proven successful and taken more market shares and participants to the PoS consensus mechanism while avoiding the “51% attack” concerns.
The 51% attack
A 51% attack is an attack on a cryptocurrency blockchain by a group of miners who control more than 50% of the network's mining hash rate. Owning 51% of the nodes on the network gives the controlling parties the power to alter the blockchain, according to Jake Frankenfield (2022) It is not only very expensive to have 51% of the staked cryptocurrency. The miner(s) that attempt to reverse a block through a 51% attack would lose all of their staked coins. This incentivizes miners to act in good faith for the benefit of the cryptocurrency and the network, as explained by Logik Labs (2022).
The applications of blockchain in sustainable development. As Proof-of-Stake brings improvement of sustainability via its energy efficiency features, its applications in sustainable development have been growing with carbon credits being one of the most popular applications to apply blockchains.
For example, Flowcarbon states that its technology is deployed by maintaining a low carbon footprint via a Proof of Stake (PoS) consensus mechanism and uses blockchain technology to put carbon offset credits on the chain, accelerating the creativity and scalability of climate change solutions. Flow Carbon is headquartered in New York, United States, and was founded in 2021. Flowcarbon has raised a total of $70M in funding over 2 rounds. Their latest funding was raised on May 24, 2022, from a Series A round.
Launched in October 2021, Toucan Protocol builds infrastructure for carbon markets to finance the world's best climate crisis solutions. According to its documents, the Toucan Meta-Registry is essentially a set of smart contracts, which live on energy-efficient blockchains (currently Polygon). And Polygon is an EVM-compatible blockchain running on an energy-efficient Proof of Stake consensus mechanism. Toucan Protocol raised an undisclosed amount / Seed from Earth shot Ventures on Jun 15, 2022. However, Bloomberg news (2022) has pointed out that Users of Toucan now account for purchases of more than a quarter of all carbon credits by the world’s largest verifier of offsets has shown serious concerns over the quality of projects that backs these on-chained carbon credits.
BloombergNEF projects the carbon offset market could reach $190 billion in sales by 2030. While blockchain technology underpinning cryptocurrency can be used to keep a public record of accounts involved in transactions for carbon offsets, even while buyers remain anonymous. Yet less than 5% of offsets actually remove carbon dioxide from the atmosphere, as many of the credits on Toucan’s platform are from projects that are more than a decade old when standards were much lower. Too old to qualify and limited quality makes such initiatives backfire. (Bloomberg, 2022)
Building on Proof-of-Stake transitions, initiatives are trying to make an effort to utilize the latest technology to boost sustainable development marking a start for transitional innovations, where it moves forward should lead by the solutions to address these underlying issues. While an energy-efficient crypto’s decentralized feature makes transactions more transparent and clean, to some extent, the next innovations should focus on more quality development of transitional actions to combat climate change.