All About Proof of Stake, Ethereum’s Plan for Greener Crypto

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Where does money come from? Dollars are printed by the US Mint. For cryptocurrencies, the answer is more complicated. Until now, both of the most widely used digital tokens, Bitcoin and Ethereum, have only been issued to pay for tasks performed by so-called miners in what are known as proof of work systems. It’s an approach that has drawn increasing criticism for the large amounts of energy consumed and pollution produced. Ethereum is switching to a different system, called proof of stake, in a process known as the Merge. Proponents say the approach can cut Ethereum’s electricity use by 99%.

1. What are the ‘proof of’ systems for?

Cryptocurrencies wouldn’t work without blockchain, a new technology that performs the old-fashioned function of maintaining a ledger of time-ordered transactions. What’s different from pen and paper records is that the ledger is shared on computers all around the world. Blockchain has to take on another task not needed in a world of physical money — making sure that no one is able to spend a cryptocurrency token more than once by manipulating the digital ledger. Blockchains operate without a central guardian, such as a bank, in charge of the ledger: Both proof of work and proof of stake systems rely on group action to create, validate and safeguard a blockchain’s sequential record.

In Bitcoin and Ethereum’s main network today, transactions are grouped into “blocks” that are published to a public “chain,” but only after “proof of work” ordering is performed. With Bitcoin’s software, that happens when the system compresses the data in the block into a puzzle that can only be solved through potentially millions of trial-and-error computations. This work is done by miners who compete to be the first to come up with a solution and are rewarded with free cryptocurrency if other miners agree it works.

3. What are proof of work’s drawbacks?

When Bitcoin was worth pennies, mining was also…

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