On Thursday, Mozilla tweeted that it would start accepting donations in cryptocurrency. This was swiftly met with backlash, including from its founder. A day later, Mozilla announced that it has put this decision on pause. I’d like to explain some of the controversy.
Proof of Work
To break it down, a blockchain is a ledger of financial transactions that are distributed among multiple computers. They all have to agree, or reach consensus, that the transactions they are processing are accurate. Bring in consensus algorithms.
The “crypto” part refers to cryptography, and it deals with hashes. Hashes are a file’s signature that can help prove that it hasn’t been altered. One analogy is a fingerprint, and changes to the file will change the hash.
Proof-of-work, or PoW, is used by blockchains such as Bitcoin and Ethereum. In order to validate and add a new block of transactions to the chain, PoW miners need to solve a mathematical calculation that is included in each block, a.k.a the “nonce.” Miners compete to solve the nonce so they can be the first to receive the reward for solving it.
Quickly solving mathematical problems requires ever more powerful hardware, which results in big miner server farms using GPUs. All of that computing hardware creates thermal waste, although there are mining rigs that use renewable energy sources.
Regardless, the algorithm itself requires power, but there are alternatives.
Proof of Stake
Proof-of-stake, or PoS, is an alternative to PoW. It’s more energy efficient because it doesn’t require data farms filled with GPUs. This method changes the way that blocks are verified. Instead of data farms, stakers offer their own coins as collateral. It’s a way to keep validating blocks while investing in the blockchain.
“Staking” means that you select whatever amount of coins you want to help prove that the blocks are valid, in place of computation. Some blockchains have various requirements as to the minimum staking amount. The more coins you stake, the greater your position is as a validator, and validators are randomly selected. As an attempt to disincentivize the wealthy from owning the blockchain through sheer financial power, the rewards from staking diminish over time, relative to the amount of crypto you stake.
Ethereum, which is currently the most popular chain for smart contracts and NFTs, is currently PoW. However, the team has been at work to transition to PoS, and the final merge is expected to happen in the near future.
Although PoS blockchains don’t require energy-intensive rigs, it still favors the wealthy over the poor because it depends on how many coins you can afford to buy and stake. In any case, blockchains are not created equal when it comes to energy usage, and there are also more consensus protocols than these two.