Does the transition to the proof-of-stake consensus protocol tame the response of cryptocurrency volatility to energy shocks?

Abstract

Purpose This study investigates the impact of transitioning from the proof-of-work (PoW) to the proof-of-stake (PoS) consensus protocol on the relationship between cryptocurrency volatility and energy shocks.

Design/methodology/approach We exploit the random nature of the transition to the PoS consensus algorithm as a quasi-natural experiment. We analyze this issue for the volatility processes of four digital currencies with high market capitalization using GARCH models.

Findings Our cross-sectional findings suggest that after the transition to the PoS consensus protocol, cryptocurrency volatility becomes significantly less responsive to energy market shocks.

Originality/value The findings of this study advocate for the migration from the energy-intensive PoW consensus protocol to the more environmentally sustainable PoS protocol. Moreover, this study advances the literature on green finance by documenting a strong case for cryptocurrency stakeholders to switch to the PoS protocol.