Stock Analysis & Ideas

Newer Blockchains are Overcoming Energy Consumption Limitations of Earlier Models

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The latest data highlights that newer blockchains leveraging proof-of-stake consensus are making tremendous strides in energy efficiency relative to their first generation of proof-of-work blockchain peers.

As a frontrunner on the list of pivotal technological disruptors of the 21st century, blockchain is busily remodeling many entrenched businesses and industries by advancing decentralization and introducing intermediary-free applications. Over time, blockchains have evolved tremendously, addressing many of the drawbacks and overcoming the limitations posed by earlier models, especially concerning energy consumption. 

While cryptocurrency does have an environmental impact, not every cryptocurrency or underlying blockchain has the same carbon footprint. As new advancements are made across the blockchain ecosystem, several promising solutions have emerged to tackle environmental concerns raised by critics, each achieving varying degrees of success.

Between purchasing carbon offsets, experimenting with novel energy-efficient consensus mechanisms, and forming non-profit organizations, among others – blockchain and crypto communities are leaving no stone unturned to reach the goal of eliminating carbon emissions from the crypto industry by 2030.

The work done so far is yielding promising results. A recent report compiled by crypto research firm Messari highlights this progress, “Through drastic programming overhauls and funding carbon offset projects, protocols are actively breaking down the stigma that crypto is harming the planet.” 

Proof-of-Stake is More Efficient than Proof-of-Work

Compared to the legacy chains like Bitcoin (BTC-USD) and Ethereum (ETH-USD) that use the proof-of-work (PoW) consensus mechanism, second and third-generation blockchains like Solana, Cardano, Avalanche, Tezos, and Algorand that use the proof-of-stake (PoS) consensus mechanism are highly energy-efficient.

As of July 27, 2022, the Bitcoin network’s annual energy consumption stands just shy of 90,000 Gigawatt hours (GWh). Ethereum, which currently employs the PoW mechanism and will soon transition to the PoS mechanism, used around 17,000 GWh. 

By contrast, PoS chains like Polkadot and Tezos’ annual energy consumption are merely 0.1 GWh, outperforming nearly all major peers by a wide margin while underlining their significantly lower carbon footprint relative to the Bitcoin network. Meanwhile, Cardano and Algorand’s energy consumption stands at 0.6 GWh and 0.5 GWh, respectively. Despite being the outlier in the PoS group, Solana exhibits an annual energy consumption of 1.9 GWh, which is still more efficient than Bitcoin and Ethereum.

Tezos and Polkadot are the frontrunners in the energy efficiency race because of the underlying proof-of-stake (PoS) consensus mechanism. Unlike the proof-of-work (PoW) chains, Polkadot, Tezos, and the rest of the PoS chains don’t depend on the computational power to secure their networks and validate transactions. Instead, these highly efficient PoS chains implement other direct economic incentives to encourage the network’s stakeholders to participate in the transaction and block validation process, lowering energy consumption significantly. 

How Do Proof-of-Work Chains Validate Transactions?

Proof-of-work (PoW) chains like Bitcoin and Ethereum incentivize network participants to provide the computational power required to operate a network and maintain its security. As the network expands, the need for computational power continues to increase. To provide the required power, the network participants (miners) required to validate transactions and mine new coins must invest in high-end devices (mining rigs), consuming vast amounts of electricity. 

This reward model increases competition among the network participants because those with the highest computational power are usually selected to validate the block (process the transaction) and add it to the network, thereby earning block rewards in the process.

How Do Proof-of-Stake Chains Validate Transactions?

By contrast, PoS removes all forms of competition. Instead of each network participant competing to provide the highest computational power, the selection is made based on the participant’s stake in the network. So, participants who own a certain number of the platform’s native tokens are randomly picked to participate in validation and block creation. 

The entire process of validating transactions and adding them to the blockchain doesn’t require any high-end device to operate. As a result, PoS-based chains like Polkadot, Tezos, Algorand, Avalanche, and Cardano can easily maintain zero e-Waste, produce minimal greenhouse gas emissions, and exhibit a noticeably lower carbon footprint than PoW peers. 

Moreover, energy efficiency is just one of the many benefits of the PoS consensus mechanism. PoS-based chains offer better scalability, throughput, and cost-efficiency than PoW-based chains. Ethereum, too, is on the verge of transitioning to the PoS mechanism, thereby making a strong case for the energy-efficient consensus mechanism. A recent report by the Ethereum Foundation acknowledged that Ethereum’s transition to the PoS model would lower the network’s energy consumption by 99.95%

On top of this, the PoS-based chains are continuously unlocking new features and functionalities to address the ongoing challenges clouding blockchain technology, also known as the “blockchain trilemma,” of maintaining the right balance of scalability, security, and decentralization.

Takeaway: The Blockchain Industry is Becoming More Energy Efficient

While there is no denying that PoW chains are energy-intensive, it is also essential to consider that PoW was the first working iteration of decentralized blockchain technology. Over the years, the blockchain industry has taken tremendous strides toward energy efficiency, and the latest data from Messari underlines this progress.

As blockchain technology continues to evolve, more innovations are likely to enter the crypto ecosystem, each contributing toward the common goal of a greener planet without compromising technological excellence.


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