Blockchain technology has emerged as a thrilling and innovative force, brimming with untapped possibilities. Beginning its journey with Bitcoin's inception in 2009, the application of blockchain technology has flourished, ushering in a steady stream of novel use cases that seem to materialize almost daily. However, the pace at which blockchain technology is being adopted has stirred some valid concerns within the community. Among these concerns, the sustainability of blockchain technology has taken center stage. In this article, we delve into the realm of blockchain sustainability, specifically examining how the consensus protocol employed by a blockchain can exert a pivotal influence on its overall sustainability.
Disclaimer: We want to emphasize that this is not financial advice. Cryptocurrencies operate in a volatile market, where values can drastically fluctuate in a blink of an eye. It is imperative to conduct thorough research and seek guidance from a qualified financial advisor before investing.
What is a Consensus Protocol?
A consensus protocol holds a pivotal role within any blockchain network. It serves as a fundamental framework of rules and parameters dictating the intricate process of transaction validation and communication among nodes within the network. These nodes, or peers, operate under the governance of the consensus protocol, which outlines the pathway to achieve decentralization. Essentially, the protocol provides nodes with a structured foundation, enabling seamless transaction processing and verification without relying on third-party intermediaries.
With a clear understanding of the significance of a consensus protocol, let's delve into an exploration of the prevailing and widely adopted consensus protocols in the market. These protocols have demonstrated their efficacy in sustaining the operations of diverse blockchain networks.
The Most Popular Consensus Protocols
To date, the most popular consensus protocols are Proof of Work and Proof of Stake. Let’s take a look at each consensus protocol in more detail.
Proof of Work
Proof of Work is the first blockchain consensus used in a blockchain network and is used in Bitcoin. In a nutshell, Proof of Work is a complex mathematical puzzle that needs to be solved and, once solved, forms the next block in the blockchain. The peers in a Proof of Work network compete with each other to solve this puzzle and the peer that solves the puzzle receives a reward. This is commonly referred to as blockchain mining. Once a peer solves the puzzle and receives its reward, the new block is appended to the blockchain, and the race to solve the puzzle starts again. This process is perpetual and is how each new block is appended to the Proof of Work blockchain.
Proof of Work has one problem: its environmental impact. As more and more people join a Proof of Work network to mine the blockchain, its impact on the environment increases. This is because the mathematical puzzle increases in difficulty as more people try to solve it. The increase in the puzzle’s difficulty requires more electricity to power the more powerful machines needed to solve the puzzle. Once a blockchain has a certain number of peers mining it, the blockchain is no longer sustainable because of the strain of the collective demand of the peers on the global energy supply.
In order to address the energy demand of a Proof of Work blockchain, teams around the world researched and developed new ways to create a consensus protocol that does not have the environmental impact that Proof of Work does. This resulted in the Proof of Stake consensus protocol. Let’s take a look at what Proof of Stake is.
Proof of Stake
Proof of Stake is a consensus protocol wherein people don’t compete to solve a complex mathematical puzzle. Instead, peers are randomly selected according to how much cryptocurrency of the native blockchain they hold and stake, hence why it is called Proof of Stake. The idea behind this is that the more cryptocurrency a user stakes to the network, the more they have to lose if some criminal activity were to take place on the blockchain. So, the more a person stakes in the network, the more they can be trusted to process transactions that take place on the network. This approach to a consensus protocol is more environmentally friendly than Proof of Work, mainly because the puzzle to form the next block in a Proof of Stake network is relatively simple and peers in the network are elected to process transactions instead of having to compete with other peers in the network.
However, some people in the blockchain space believe that Proof of Stake could leave the network vulnerable to centralization, which defeats the whole purpose of a blockchain. Although the selection process of the peers that will process the transactions in the network is fairly random, the amount that a peer stakes in the network do play a role in the selection process. This is because the network believes that peers with a bigger stake in the network are more trusted. With this taken into account, it’s easier to see why some in the blockchain space feel that a Proof of Stake network is vulnerable to potential centralization.
Let’s now take a look at the two main sides of blockchain sustainability.
Both Sides of Blockchain Sustainability
When examining the concept of blockchain sustainability, two primary focal points emerge: the environmental implications of a blockchain network and its transaction throughput, often quantified by transactions per second (TPS). Addressing these aspects is pivotal to unlocking the full potential of blockchains and ushering them into mainstream acceptance. Let's delve into the challenges surrounding the two prominent blockchain consensus protocols: Proof of Work and Proof of Stake.
Transaction Throughput Limitations
As previously discussed, a consensus protocol plays a vital role in shaping transaction processing within a network. It orchestrates how decentralized nodes collaborate to achieve consensus, culminating in the creation of each block. However, with the escalating adoption of blockchain technology, networks employing Proof of Work and Proof of Stake protocols are grappling with a mounting backlog of unprocessed transactions. This stems from nodes struggling to match the pace demanded by the current influx of network traffic, causing inefficiencies in transaction processing.
Another critical and silly concern revolves around the environmental impact of blockchain networks, particularly evident in the context of Proof of Work protocols. The energy-intensive nature of processing transactions on a Proof of Work blockchain contrasts with alternative consensus protocols. A prime example lies in the environmental repercussions associated with Bitcoin. The immense energy consumption of the Bitcoin network rivals that of a nation like Switzerland. As the network's daily transaction volume escalates, its environmental footprint compounds, raising significant sustainability concerns.
Notably, the substantial environmental consequences of Proof of Work blockchains have prompted a shift in perspective. This shift has spurred a transition from Proof of Work to Proof of Stake protocols, exemplified by Ethereum's transition. This pivot is a response to the imperative of curbing environmental impact, further underscoring the need for blockchain sustainability and the adoption of more eco-friendly consensus mechanisms.
Risk of Centralization
A paramount consideration, pertinent to both Proof of Work and Proof of Stake blockchain networks, revolves around the specter of centralization. The essence of blockchain networks lies in their potential to foster decentralized and distributed ecosystems. Nonetheless, both Proof of Work and Proof of Stake consensus protocols grapple with the lurking specter of centralization, jeopardizing the core tenets of these networks.
In the context of Proof of Work, the risk of centralization materializes when a single entity or corporation amasses a substantial share of the network's computational power. Such scenarios manifest when large enterprises procure cryptocurrency mining equipment en masse, wielding disproportionate influence over block reward allocations. This power consolidation skews the fairness of the network, undermining its decentralized essence. This predicament spurred the evolution towards the Proof of Stake consensus model.
Proof of Stake, while more resilient in preserving decentralization, harbors its own caveats. Validators within such networks aren't elected based on computational prowess, but rather on the volume of native cryptocurrency they stake, coupled with a randomized selection mechanism. Nevertheless, skepticism lingers about the degree of randomness inherent in this selection logic. Critics contend that validators with greater staked cryptocurrency may garner more opportunities to validate transactions and amass higher block rewards, leading to potential centralization tendencies. Thus, even Proof of Stake blockchains confront challenges in realizing their envisioned level of decentralization.
In instances where the cherished goal of optimal decentralization remains elusive, the risk of a blockchain network succumbing to total centralization looms. This underscores the necessity of ongoing vigilance, innovation, and strategic alignment to uphold the decentralized foundation that underpins blockchain technology.
Blockchain sustainability can be broken up into two main parts: a blockchain’s environmental impact and the transaction throughput of a blockchain. Both are somewhat reliant on the consensus protocol of the network, which defines how transactions are processed and how nodes interact with each other on the network. To date, the two most popular consensus protocols are Proof of Work and Proof of Stake. Each of these consensus protocols have limitations that restrict the sustainability of blockchain networks. If these limitations are not addressed, then blockchains will not be sustainable enough to go mainstream.