Just as with mining in the real world, the people who mine cryptocurrency use powerful equipment to increase their chance of finding valuable resources.
But all that power comes at a cost: namely, massive energy consumption. However, an alternative method for unearthing digital gold could change all that. It’s called “proof of stake,” and it’s a much more computationally efficient form of cryptocurrency mining.
A very brief explanation of crypto mining
This section could fill an entire book, but the very basic idea is that cryptocurrencies are decentralized, meaning that there’s no “bank” that holds all the digital coins.
To make up for this, everyone who mines crypto maintains a “ledger” known as the blockchain.
When a new allocation of a cryptocurrency is released into the system, it’s done so as a super-complicated math problem. At that point, all the miners try to solve the equation; the first miner to do so successfully gets to add the next block to the blockchain and is rewarded with some cold, hard crypto-cash.
All the other miners—or “nodes”—on the network then get an updated version of the blockchain, and they all check it to make sure everyone has the same version. That’s how the blockchain maintains its integrity. Everyone else who buys and sells cryptocurrency—most of whom aren’t involved in mining—benefits from the existence of this universally accessible blockchain.
Mo computers, mo crypto
You see where this is headed, yes?
In the race to solve these lucrative math problems, the more processing power you have as a miner, the more chances you have to crack the code.
So while I, a simpleton, have a long-in-the-tooth desktop computer I bought during the Obama administration plugging away trying to make lucky guesses every so often, well-heeled miners are buying thousands of computers and stringing them all together.
And while leaving my dumpy computer on 24/7 to mine crypto isn’t exactly the most energy-efficient use of resources, imagine leaving an entire warehouse of computers running around the clock.
To wit: We now have eye-opening stats, such as that the Bitcoin network uses more power annually than Norway.
Another fun fact: To avoid inflation, the more miners on the Bitcoin network, the harder the problems get—and the more computing power everyone needs.
The method of crypto mining described above is known as “proof of work” and is used by lots of cryptocurrencies, including many of the big-name ones. You do the work, you get the reward. The more effort you put in—in this case, computing power—the better chance you have of successful mining.
With proof of stake, imagine a similar group of miners, except now they’re called “validators,” and computing power doesn’t really matter.
The “stake” part of proof of stake means that you, as a validator, need to feed some crypto into the system in order to join the network. It’s your stake. Your skin in the game, as it were.
Then when a new allocation of cryptocurrency is released into the system, a validator is selected at random to “forge”—instead of mine—the next block in the blockchain.
What’s the catch?
Ah, herein lies the rub. Your odds of being selected at random to forge the next block increase with the size of the stake you have in the system.
So I, a simpleton, put up $100 to join the network. You, a prosperous crypto savant, put up $1,000. Your odds of being chosen at random are 10 times better than mine.
It’s kind of like buying raffle tickets, but the idea is that you don’t need a supercomputer to try to solve math problems all day. You do have an obligation to keep a computer on and running all day so that you can help validate new blocks, but it can be a rickety old desktop like mine.
When a cryptocurrency is built on proof-of-stake technology, the prospect of it gobbling as much power as a good-sized country goes away. The big gotcha is that it isn’t easy to transition a currency from one system to another. There’s currently a debate going on about whether it might be feasible to move Bitcoin, the biggest energy hog of them all, from proof of work to proof of stake.
So the rich get richer, right?
Proof of stake doesn’t inherently democratize cryptocurrency. The barriers to entry can be high: For Ethereum’s proof-of-stake-based technology, Ethereum 2.0, you’ll need to put up 32 ether (the name of the coins traded in the Ethereum system) just to get a seat at the table. As I’m writing this, that’s currently north of $80,000.
But there are about a hundred other proof of stake coins out there, and there are certain things a network can do, such as value the length of service for validators, or the ages of their coins, to reward them for being there in the early days. This is all still in its infancy, so give it time. If it catches on, it won’t just be a boon for crypto fanatics—it’ll be good for planet Earth and all who inhabit it.