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Proof-of-What?

Behind most things lies nuance. Blockchain is no different. The recent controversy behind NFTs (?) has polarised debate about the ‘value’ of decentralised currencies, tokens, and the applications they allow.

There’s some important technical differences between how the decentralised networks behind various cryptocurrencies and tokens come to consensus. The point of this post is to explain these to the best of my current ability and knowledge. It’s based on my attempts to ensure that I’m not trying to save the world on the one hand while destroying it through my actions elsewhere.

In the course of buying and selling crypto, I’ve learned about an important difference between currencies such as Bitcoin which use ‘Proof-of-Work’ (PoW) consensus models, and others which use ‘Proof-of-Stake’ (PoS).

Both of these models are called ‘consensus mechanisms‘, and they are a current requirement to confirm transactions that take place on a blockchain, without the need for a third party.

BitDegree

The TL;DR, as far as my understanding goes is that, broadly speaking, PoW is energy intensive and killing the planet, whereas PoS is… less problematic.

Let’s be clear: cryptocurrencies and tokens aren’t going away. And I see plenty of upside in terms of trading value independently of governments. The following definitions are taken from the glossary part of CoinMarketCap’s very helpful guide to crypto called Alexandria.


Proof-of-Work (PoW)

A blockchain consensus mechanism involving solving of computationally intensive puzzles to validate transactions and create new blocks.

Example: Bitcoin, Ethereum*, Zcash

*moving to PoS at some point in the future

Proof-of-Stake (PoS)

A blockchain consensus mechanism involving choosing the creator of the next block via various combinations of random selection and wealth or age of staked coins or tokens.

Example: Cardano, Flow, Polkadot


Other approaches

  • Proof-of-Authority (PoA) — “A blockchain consensus mechanism that delivers comparatively fast transactions using identity as a stake.”
  • Proof-of-Burn (PoB) — “A blockchain consensus mechanism aiming to bootstrap one blockchain to another with increased energy efficiency, by verifying that a cost was incurred in “burning” a coin by sending it to an unspendable address.”
  • Proof-of-Developer (PoD) — “Any verification that provides evidence of a real, living software developer who created a cryptocurrency, in order to prevent an anonymous developer from making away with any raised funds without delivering a working model.”
  • Proof-of-Replication (PoRep) — “Proof-of-replication (PoRep) is the way that a storage miner proves to the network that they are storing an entirely unique copy of a piece of data.”
  • Proof-of-Spacetime (PoSt) — “In simplest terms, PoSt means that someone can now guarantee that they are spending a certain amount of space for storage.”

The legality of cryptocurrencies varies by territory, with India currently considering a ban. I predict that the difference in consensus models will be a determining factor, with a likelihood that Proof-of-Work models are banned in some jurisdictions because of their energy usage and associated impact on the environment.

Chart showing energy usage of Bitcoin compared to data centres and countries

Ultimately, for better or worse, once it’s got enough traction you can’t ban innovation from happening. Governments are going to want to issue their own stablecoin, meaning that they can’t completely ban cryptocurrencies and tokens.

That’s why I predict that Proof-of-Stake will be seen as a viable model without completely destoying the environment. I may, of course, be wrong on all counts. Caveat emptor ¯\_(ツ)_/¯


This post is Day 93 of my #100DaysToOffload challenge. Want to get involved? Find out more at 100daystooffload.com. Image via BBC News.

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