Staking: a crypto path to reduce energy consumption

Ethereum is well known for transitioning from Proof-of-Work to Proof-of-Stake, a change that is commonly known as “The Merge”, and led to the appearance of Ethereum 2.0. Lots have been the benefits from this switch, Ethereum is now a more scalable blockchain, as The Merge has made it easier to build second layer platforms (like ZK rollups), but foremost, it is a more energy efficient and sustainable blockchain: it has reduces significantly its environmental impact.

Just before The Merge, Ethereum energy consumption was about 78 Twh/year, comparable to that of Uzbekistan, with a carbon emission equivalent to that of Azarbaijan (33 MT/yr). Ethereum 2.0, uses ~99.95% less energy, and on top of it, a highly active regenerative finance (ReFi) community is being built. ReFi applications use DeFi components to build financial applications that have positive externalities benefiting the environment. Sounds good right? Let’s analyze some points before getting to the nitty-gritty of this article.

1.Consensus mechanisms

2. Proof of Work Vs. Proof of Stake

• Proof of Work
• Proof of Stake

3. Ethereum 2.0 will drop power consumption by 99.95%

4. Future of Staking and Liquid Staking

5. Why to choose Stader?

Consensus mechanisms: An Introduction

In any centralised system, like a database holding key information about driving licenses in a country, a central administrator has the authority to maintain and update the database. The task of making any updates—like adding/deleting/updating names of people who qualified for certain licenses—is performed by a central authority who remains the sole in-charge of maintaining genuine records.

Public blockchains that operate as decentralized, self-regulating systems work on a global scale without any single authority. They involve contributions from hundreds of thousands of participants who work on verification and authentication of transactions occurring on the blockchain, and on the block mining activities.

In such a dynamically changing status of the blockchain, these publicly shared ledgers need an efficient, fair, real-time, functional, reliable, and secure mechanism to ensure that all the transactions occurring on the network are genuine and all participants agree on a consensus on the status of the ledger. This all-important task is performed by the consensus mechanism, which is a set of rules that decides on the legitimacy of contributions made by the various participants (i.e., nodes or transactors) of the blockchain.

Proof of Work Vs. Proof of Stake

Maybe you are an expert in crypto, maybe you aren’t, anyways, it is so important to establish the differences between Proof-of-Work based blockchains and Proof-of-Stake networks so that you can understand everything that will be covered in this article. Then, what are some of the differences between them?

1.Proof of Work

Bitcoin and Litecoin are blockchains based on a PoW consensus mechanism. Although this consensus mechanism can seem to be something completely innovative created in 2009 by Satoshi Nakatomoto (Bitcoin creator), the truth is that he retrieved it from Adam Beck, who back in 1997, created a system PoW based to fight against HashCash spam. What PoW consist of?

Basically, Proof of Work requires a copy of the complete blockchain to be installed on a local machine. This mining operation requires a lot of calculations, computing power and electricity (in other words, it requires a lot of work), so it is called Proof of Work.

Crypto mining is the process of creating new blocks of transactions and adding them to the blockchain. The PoW consensus mechanism establishes its own set of rules that check that the mining process is correct. The task of a miner is to find a new block for the blockchain, which requires a lot of computational power. The first miner who finds the correct solution receives newly generated coins as a reward. But the complexity of the network always changes and adapts and requires even more computing power over time. That's why some miners work together in pools or build large mining farms to increase computing power. The more computing power you have, the more likely you are to find the right solution sooner.

2.Proof of Stake

In 2011 a user participated on bitcointalk.org forum under the name of QuantumMechanic, and published the idea of a PoS based algorithm. In 2012, PeerCoin blockchain launched under Proof of Stake consensus mechanism. What does it consist of?

Stake algorithm uses users' digital assets (coins) staked in frozen wallets to verify transactions. Staking involves locking your native tokens in a blockchain for a certain period of time to get, in return, a reward for contributing to the blockchain's security. It works more or less like depositing money in a bank: the investor locks his assets in a fund and over time gets a reward (called interest). In Proof of Work, the more computing power you possess, the more advantage you have in mining, while in Proof of Stake, the probability of mining crypto assets depends on the amount of coins (stake) you have. For example, someone who owns 5% of all coins will create about 5% of new blocks.

Basically, the main difference between Proof of Work and Proof of Stake consensus algorithms is the principle of creating a new block on the blockchain. In PoW, the successful generation of a new block requires more energy usage, while in PoS it depends on the number of coins the user owns. As stated earlier, someone who owns 5% of all coins will create about 5% of new blocks. Therefore, PoS blockchains do not rely that heavily on power consumption, so it is a more sustainable approach to make crypto go green. Let’s talk about numbers now! We are really going to see what going green in crypto feels like!

Ethereum 2.0 will drop power consumption by 99.95%

After The Merge, Ethereum has switched to Ethereum 2.0, or what is the same, from being Proof of Work based to being Proof of Stake based. If we look at Digiconomist data and charts, we can see how Ethereum Merge (that took place on September 15, 2022) has dropped energy consumption significantly. As shown in the graph below, pre-Merge, from January to September of 2022, Ethereum energy consumption ranged from 46.31 terawatt hours (TWh) to 93.98 TWh/yr (maximum figure reached may 24, 2022).

Source: Digiconomist

After The Merge, Ethereum 2.0, as a PoS based blockchain, is now much more energy efficient, and has reduced its carbon emissions: its carbon footprint is just 0.01 Mt CO2, and electrical energy consumed 0.01 TWh.

Source: Digiconomist

We know… This Ethereum 2.0 shift is amazing in terms of having a green footprint.The Merge reduced global energy consumption by 0,2% as announced by Vitalik Buterin, Ethereum CEO, on his Twitter. Along with his announcement, Crypto Carbon Ratings Institute (CCRI) shared in a report that the change has reduced Ethereum need of energy by 99.988%, and also, carbon dioxide emissions have been cutted down by 99.992%. As depicted on the Digiconomist image from above, the energy used cannot even reach the average used in a U.S. household. What a change!

The long-awaited merger left cryptocurrency miners out of Ethereum's operation and changed the so-called proof-of-work (PoW) system to proof-of-stake (PoS), which does not need large server farms running complex calculations and stops being energy intensive. The amounts of energy used by the PoW mechanism, which is the way Bitcoin and other blockchains still operate, has come under great scrutiny by central authorities around the world, as it produces lots of greenhouse gas emissions and carbon credit that can be a high-moral barrier to entry into the crypto industry as society is demanding industries to be more carbon neutral and to opt for renewable energy. This demand society establishes also reverberates in the cryptocurrency industry.

According to Digiconomist, at the time of the writing, Bitcoin carbon footprint can be compared to that of Israel (64.86 Mt CO2), and its use of electrical energy (116.28 TWh) and electronic waste (42.79 TWh) to that of the Netherlands. Amazing right?

Source: Digiconomist

This energy saving approach provided by the Proof-Of-Stake consensus mechanism is what makes many blockchains to be based on it, which is why it is becoming so popular. And this leads us to our third and last topic: the future of staking (as it can only take place, as explained, in a PoS network) and liquid staking.

Future of Staking and Liquid Staking

In recent years, cryptocurrency staking, that happens on PoS based blockchains, has become much more popular because it is much easier than buying expensive hardware to solve complex mathematical calculations, as required in PoW. Along with Staking comes Liquid Staking, and here, Stader Labs comes into play. Stader was created to make staking accessible to everyone while solving main staking problems, which we address by providing the best risk-yield return for our validators and centering our protocol on a liquid staking approach.

Why to choose Stader?

Before analyzing the main problems Stader solve, we need to have very clear what is staking and what is its difference between liquid staking, so let me give a quick explanation about both of them. As seen before, both staking and liquid staking take place in PoS networks, not in PoW, where validating blocks is not achieved via staking but via mining. Having that clear, there is a key difference between both strategies:

• Staking involves locking your coins in a blockchain for a certain period of time to get, in return, a reward for contributing to the blockchain's speed and security. It works more or less like depositing money in a bank: the investor locks his assets in a fund and over time gets a reward (called interest) (we’ve seen this before)
• Liquid staking, however, goes a step further, because you don’t deposit just your funds/tokens in the blockchain network and wait for them to generate yields. You have that, you will generate returns for the money you have locked, but you will have a PLUS 1:1 token that represents the amount you have staked, so that you can keep using your funds in other protocols and you can perform the DeFi strategy you like most.

See the difference? Staking means you get rewards for having your money locked each period of time, and through that period of time, as your funds are locked, they have no more utility than that of being staked. However, with liquid staking, your funds are not fully locked, as you receive a token in representation of those staked funds and you can use it as a means to keep operating on DeFi while your funds are being staked+generating yield for that staked amount. So the benefits of liquid staking are x2. And at Stader, we are a liquid staking protocol, so we provide that utility for your staked funds. For example, you can use our protocol to stake NEAR and get in exchange a NEARX token. As you have staked NEAR in one of our vaults you will be contributing to the speed and safety of the network and you will be receiving rewards for your contribution, but ALSO, your amount staked is not just staked per se bc we gave you in exchange NEARX, a token that represents the amount you have staked and you can use it on other protocols to generate even more yield via liquidity mining, lending/borrowing, staking in other protocols, etc… That’s why we are TOP, we solve the problem of utility that, of course, is not present via solo staking. Besides, across PoS blockchains there are 3 main challenges:

1. PoS network face stake-centralization issues.
2. Delegators face complexity surrounding discovery and stake management
3. Node operators struggle to get the right visibility and delegations

At Stader, we believe that delegators come first, so we really put those that stake with us in the center of our strategy, providing them the best solutions. Fair enough right? Besides, as a PoS based blockchain, there is no doubt we are also energy efficient, and aligned with making crypto a more greener space.