Cryptocurrencies are unregulated digital “currencies” which are often used in scams or illegal transactions. Wannabe investors love speculating on them, driving up their nominal costs in real money (if you can ever cash out, that is – a lot of trading hubs and digital wallet providers are themselves scammy). This has basically created a pyramid scheme – people “invest” in cryptocurrencies because they’re counting on them rising continually in value, but this can only work for so long as there’s a continuous stream of new suckers wanting to “invest” in crypto. The vast majority of cryptocurrencies are also extremely bad for the environment.
Cryptocurrency transactions are all recorded on an immutable ledger, called “the blockchain”. In order for a new transaction to be recorded, a new block needs to be added to the chain. There also needs to be consensus on what new blocks are added to the chain – legitimate transactions need to be verified and dodgy ones need to be rejected. Verifying new blocks also has cryptocurrency rewards attached (tokens) – this is the method by which new cryptocurrency comes into existence. Currently, there are two main methods for verifying new blocks and apportioning tokens: proof of work and proof of stake.
Cryptocurrencies like Bitcoin, Ethereum and Dogecoin operate on a “proof of work” basis. This means that miners are required to compete to compute the cryptographic hash of all recent transactions on the network (an extremely taxing mathematical problem, even for computers), with tokens generally doled out to those with the beefiest computer systems. Bad actors are thwarted by the fact that their hashes wouldn’t match everyone else’s hashes. But this process is insanely energy-intensive! A single transaction on the Bitcoin blockchain consumes as much energy as the average American household does in 77.8 days (that’s over 2½ months!). The entire network consumes more power than most countries. A single Ethereum transaction consumes as much electricity as the average American household does in 8 days. Ethereum has been promising to switch to a less-destructive “proof of stake” model for ages, but it remains to be seen whether they ever will or whether it’s an empty promise.
The proof of stake model, instead, asks people to send their currency to a special wallet (“stake them”), where it’s “frozen”. Then effectively, the people who have the most cryptocurrency staked (“validators”) vouch for new additions to the blockchain – they (or their computers) have to confirm the legitimacy of new transactions. I guess the idea is that the validators are not going to approve dodgy transactions, because they’re the ones with the most to lose if the cryptocurrency’s integrity is undermined. New cryptocurrency is then doled out in proportion to the existing crypto “staked”, so for example, if you have 10% of all of a specific cryptocurrency staked in your name, then you’ll get 10% of all the new cryptocurrency generated. The main proof-of-stake cryptocurrency that I know of is Solana.
The proof-of-stake model is considered less secure than proof-of-work, as well as being a real “rich get richer” scenario, but it is also far more scalable (proof-of-work is slooooooow and there are long queues for transactions to get processed) and, you know, doesn’t contribute to the looming destruction of the planet through rising sea levels, more frequent and severe natural disasters, droughts, crop failures, the disintegration of ecosystems and so forth. So really, what’s worse! (Although that said, proof-of-stake cryptocurrencies are still subject to speculative “investment” that makes them basically pyramid schemes. I’m not going to start supporting them on the basis that “at least they’re eco-friendly pyramid schemes!”)
As of May 2022, the value of many cryptocurrencies is going into freefall. Apparently this has been exacerbated by the total collapse of the “stablecoin” Terra and its “sister coin” Luna, which fell in value by 99% after a $1 billion Saturday night trade. Some people have lost their life savings, and even worse, some went into debt to gamble on these now-collapsed cryptocurrencies, I guess because they have zero comprehension of risk and are easily manipulated. The country of El Salvador, which for some bizarre reason decided to adopt Bitcoin as an additional form of legal tender, is expected to default on its national debt now partially as a result of the economic instability this decision caused.
See Also / References
- Mozilla stops accepting cryptocurrency, Wikipedia may be next: Are dominos falling?
- Proof of Stake vs Proof of Work: What’s the Difference?
- El País: El Salvador expected to default as bitcoin plummets (11 May 2022)
- ABC News: ‘Evil genius’ may have caused Terra and Luna cryptocurrencies to crash in a ‘death spiral’ (13 May 2022)
- Jacobin: Is This the Beginning of the End for Crypto? (13 May 2022)