EU securities regulator recommends ban on proof-of-work crypto

European Securities and Markets Authority is concerned over the risks bitcoin mining poses to meeting climate change goals under the Paris agreement.

Erik Thedéen, the vice-chair of the watchdog, told the Financial Times in an interview that there has been a significant rise in the amount of renewable energy dedicated to crypto mining. He added that mining has become a “national issue” for his home country Sweden.

Thedéen also said that he is not advocating to ban crypto in general but recommending a ban on proof-of-work mining move the industry toward the proof-of-stake model, which consumes less energy overall.

Mining has become a huge business over the last decade and shows no sign of slowing down. Computing power dedicated to the industry reached record levels at the end of 2021, despite a wholesale ban on mining and crypto in China which was one of the biggest crypto markets in the world.

Proof-of-work vs. Proof-of-stake

Proof-of-work is the process through which a blockchain verifies blocks, or transactions, as being legitimate. Miners dedicate computing power to compete against each other to solve complex problems in order to verify transactions. In return, they are rewarded with coins.

The Proof-of-work model requires every participant on the blockchain to verify transactions, which ultimately costs a vast amount of energy.

On the other hand, the proof-of-stake model allows transactions to be verified by a significantly smaller number of parties.  Participants stake their own crypto to generate validating nodes which then verify transactions.

The debate

Both consensus mechanisms, as they are known officially, have proven to be successful. However, there are trade-offs associated with each side.

POW costs a massive amount of energy and equipment to run but this also imbues the system with higher levels of security since a rogue element would have to dedicate enormous amounts of resources to gain 51% control of the entire network. The downside is that scaling the network is costly as the energy and equipment requirements go up over time.

POS networks are maintained by coins or tokens as validators and are quickly scalable as they do not have the prerequisite of equipment and energy. However, the downside is that network control can be purchased. All it takes to attack the network is money.