What is standing in the way of blockchains getting environmentally sustainable?
How to stop blockchain’s insatiable energy appetite?
If you have been following along, you probably know by now that the number one criticism and the biggest drawback of cryptocurrencies and the underlying blockchain technology is that operating them requires an immense amount of energy and it is only getting exponentially worse with the growing popularity of the technology.
Some shocking statistics include:
- Coin mining uses more energy annually than an entire smaller country like New Zealand or even Hungary
- Bitcoin mining consumes 7x times more electricity than all of Google’s global operations
- Mining a single bitcoin costs multiple years of electricity of a typical household (it is in fact somewhere between 9 to 12 years)
- It is not just emissions, getting the latest and most powerful mining equipment also causes a huge e-waste problem where Bitcoin alone generates more e-waste than most mid sized countries
This means that right now we have a bottleneck in making the technology more mainstream as its carbon footprint and environmental impact is only marginally compensated by the advancements it brings.
Mining, forging, mintig.. What is the deal?
In order to understand the problem we need to look a bit deeper into how the system works in the background. I am sure everyone has heard the term “coin mining” or has a friend who at some point built a computer (“mining rig”) in his bedroom to try mining at home.
Mining is often referred to as solving really complex “Cryptographic Hash Puzzles”, so it is imagined as solving difficult mathematical problems but I would strongly encourage anyone interested to check out this article for a much better analogy.
Following that, let’s say that it is a global guessing game which rewards its winners with Bitcoins that are worth quite a bit of money by now. These winners are actually validating transactions in the background. If you enter a standard “block” of Bitcoin (transaction) into its public ledger, you get rewarded with 6.25 newly mined Bitcoins, each worth about $40,000 (this varies widely depending on the time you are reading this article).
The more computer power you have, the more guesses you can make quickly in the game which raises your chances of winning. Also, the Bitcoin network is designed to make the guessing game more and more difficult as more miners join, putting further premium on speedy, power-hungry computers. It’s designed so that it always takes an average of 10 minutes for someone to win a round and there is a hard cap, we know that the total supply of Bitcoins is 21 million.
(In fact, the difficulty adjustments above make Bitcoin the only asset with a truly fixed and set supply schedule but that is a different story altogether.)
So even though there is a new bitcoin every 10 minutes, a more reasonable estimate for most users who have large setups is 30 days to mine a single bitcoin (on average) and although bitcoin mining software is free, there are tremendous costs involved in both (application-specific integrated circuit – ASIC) hardware and electricity costs. The specialized mining hardware can cost between a few hundred dollars to $10,000. Mining equipment is also very power-hungry. Depending on the cost of electricity in a miner’s area, it could potentially cost $73,000 to process one bitcoin in a month’s time. So, the usual way to reduce this cost is to join a mining pool that harnesses the computational power of hardware owned by multiple miners. The drawback is that each miner receives only a small portion of each mined bitcoin.
But, why are we doing this if it is so energy hungry?
Sometimes it is really hard to separate cryptocurrency and blockchains as the two concepts are so intertwined but some of the most interesting blockchain use cases have in fact nothing to do with crypto. Bitcoin was arguably the first widely successful digital currency that could work without a central government, bank, credit-card network or any other middlemen controlling its transactions but in order to make it work it needed a new technology that could provide a public, immutable ledger.
Since then this blockchain technology came a long way, there are thousands of new “alt coins” in existence and we also realized that this distributed technology can be used for a magnitude of things, even to revolutionize the internet and create what is called Web 3.0.
This is enabled by the combination of a few things:
- The hash linking of the blocks that essentially creates the chain of blocks
- The anti sybil mechanism that prevents altering the block hashes easily
- And the consensus mechanism used for approving new blocks
Out of the 3 main elements, the anti sybil mechanism is what is mostly responsible for the really high energy consumption. The PoW or Proof-Of-Work was created to prevent users from printing extra coins they didn’t earn, or double-spending. If users were able to spend their coins more than once, it would effectively make the currency worthless. In most digital currencies, this problem is easily solvable as the bank that is in charge of the system keeps track of how much money each person has but in crypto land there isn’t such an entity.
In addition to the already discussed high energy usage of PoW there are a few other problems that this method has. Namely:
- 51% attacks: if one mining entity would be able to accumulate 51% of the mining hashrate, it could then flout the rules temporarily and start double-spending coins or blocking transactions.
- Mining centralization: PoW is about creating decentralization but in practice the system has still become somewhat centralized as only three mining pools are controlling almost 50% of Bitcoin’s computational power. (Although, developers are attempting to at least alleviate this issue.)
So, we are paying this high price in the name of decentralization. In Web 2.0, computers use HTTP in the form of unique web addresses to find information, which is stored at a fixed location, generally on a single server. Web 3.0 on the other hand, because information would be found based on its content so it could be stored in multiple locations simultaneously and hence be decentralized which would break down the massive databases currently held by Internet giants like Facebook (now Meta) and Google, and would hand greater control to users.
Not all blockchains are created equal!
As technology has moved forward and we realized that the simple Bitcoin data block that only has Sender, Receiver and Amount of coins “baked in” there could be much more sophisticated setups allowing the creation of Smart Contracts and dApps harnessing the computational power of the network.
The most well known is probably still Ethereum which at the moment still uses PoW but is about to move to a new PoS – Proof of Stake method (Ethereum 2.0). Their calculation shows that this will reduce power consumption by 99.9% making the entire network a lot more “green”.
However, to go one more step further, if for example blockchains are to become a significant public infrastructure, particularly in the space of civic engagement, then we can see that the Proof of Stake (requiring ownership of a given cryptocurrency so) “one-dollar-one-vote” or Proof of Work (requiring ownership and use of mining hardware so) “one-CPU-one-vote” setup will not suffice and in order to enable democratic governance, “one-person-one-vote” protocols that signal unique human identities must be created (for example Proof of Personhood Protocols).
The mechanism used also affects the speed of the network:
- Bitcoin 7 transactions per sec
- Ethereum 30 transactions per sec (ver 1.0)
- Visa 1 700 transactions per sec but it is scalable up to 24 000
- Solana 65 000 transactions per sec
Ethereum and Solana differ in terms of the underlying technology and consensus mechanism that they utilize. Solana follows PoH – Proof of History tailored to offer high-speed and low-cost transactions but Ethereum for example still offers a mature and much more developed DeFi ecosystem.
Directions and developments
This mostly shows how blockchains evolve on the architectural level and how the new algorithms and mechanisms can reduce their carbon footprint or make them tailored towards more specific tasks.
However, we also see developments where providers switch to renewable energy, for example El Salvador mining bitcoin using the energy from its volcanoes, or Square’s $5 million investment to build a solar-powered bitcoin mining facility. Also, one of my favorite headlines from last year was “Mining Bitcoin for Heat, Strawberries and Chickens” from a Canadian farm.
Some of the more forward thinking projects go in a different direction and for example The Bank for International Settlements Innovation Hub Hong Kong Centre and Hong Kong Monetary Authority are collaborating on Project Genesis which is a green finance project for the tokenisation of green bonds using blockchain technology. The project will leverage blockchain, smart contracts, internet of things and digital assets for green bond distribution and improving transparency on the use of proceeds which helps in meeting regional and global environmental and sustainability goals.
As many organizations are committed to contribute to the Sustainable Development Goals (SDG), there is a need for a solution which enables them to calculate carbon footprint and assist in creating their ESG reporting. Tokenized energy certificates using Hyperledger Fabric and Tokens-SDKs can offer an intelligent solution and provide a full disclosure certification of energy. In addition to the amount of energy generated by mixed sources, tokens created in the network could also store other useful characteristics such as CO2 emissions in the energy supply chain.
We are right now doing our own research in algorithms and architectures that could greatly reduce the energy consumption of a new blockchain generation. If you are interested in such aspects or just want to nerd out about NFTs, please drop us a line and start a conversation with us.