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Many blockchains use significant amounts of energy. However, there are examples of blockchains being developed or adapted to reduce energy consumption. There are also arguments that blockchain technology – even Bitcoin mining – can act as a catalyst for green energy investment. In this article, we explain why some blockchains use so much energy and review the issues on both sides of the debate.
A blockchain is a digital ledger that records information. The information on the ledger is contained in blocks that are strung together and stored on a distributed network of computing centres known as nodes. The nodes are connected to each other without any kind of central controller or regulator. Their role is to upload data onto a blockchain and to verify its contents (more on this later).
Well-known public blockchains include the Bitcoin blockchain and the Ethereum blockchain. They keep a record of cryptocurrency transactions and are accessible to anyone who downloads the software onto their laptop or smartphone.
A common criticism of some blockchains is that they use huge amounts of energy. To understand this better, it is worth reviewing why blockchain needs energy in the first place.
As noted above, nodes must verify and agree upon the information stored on a blockchain. This is called a consensus mechanism. There are two main consensus mechanisms, proof of work (POW) and proof of stake (POS).
The POW method, used by the Bitcoin blockchain, infamously requires country-sized energy consumption to verify information. This is because a node must solve a complex mathematical puzzle before it can record new information on the blockchain. Solving the puzzle requires significant computational power (and therefore electricity consumption). The puzzle-solving process is intended to act as a barrier for incorrect or fraudulent entries. It also operates as a reward mechanism, because the first node to solve the puzzle receives new Bitcoin. In the context of the Bitcoin blockchain, this process is known as Bitcoin “mining”.
On the other hand, the POS method does not require nodes to solve a puzzle. Instead, before uploading information to a blockchain, the node must prove it has a stake in the network by depositing something of value, such as cryptocurrency. The deposit will only be returned to the node if the ledger entry is approved by other nodes on the network. The risk of losing the stake also deters false information from being uploaded onto the blockchain and requires significantly less energy consumption (this may be as little as the energy used to refresh a webpage).
POW is currently the dominant consensus mechanism used by the largest blockchains, including Bitcoin and Ethereum. However, its high energy use and increasingly slow transaction speed have caused some blockchains to look for alternatives. The most high-profile is Ethereum itself, which is due to transition to POS later in 2022. It claims that the transition will reduce the network’s energy use by 99.95%. This reduction was recognised by the Massachusetts Institute of Technology (MIT), which listed POS technology as one of its 2022 technological breakthroughs.
The vice-chair of the European Securities and Markets Authority (ESMA), Erik Thedéen, recently called on the EU to ban the POW method. Thedéen expressed concerns about the amount of renewable energy that Sweden, his home country, devotes to mining Bitcoin rather than powering other services.
There are several different strands to the arguments advanced by blockchain advocates about making blockchain, and in particular POW blockchains, more sustainable. Due to their power consumption requirements and incentive to use cheap energy, blockchain providers and Bitcoin miners may seek out and finance more renewable energy projects. Because of the decentralised nature of blockchain, those projects may include new initiatives, which are higher risk, more innovative and in increasingly remote locations (including volcanoes!).
The Bitcoin Clean Energy Initiative (BCEI) has taken a more radical stance, publishing a report that envisages a future in which POW undertaken by Bitcoin miners can be used to prevent energy wastage. This would involve Bitcoin mining as a potential ‘energy buyer of last resort’ that stabilises the supply of green energy, using surplus energy to mitigate the natural variation in supply and demand and the (current) difficulties of storing energy from renewable sources.
In the next few years, we are likely to see blockchain being developed and marketed in ways that are better aligned with ESG objectives. Ethereum’s migration from POW to POS is a good example of this happening already. It will be interesting to see if those solutions can successfully overcome the negative perceptions about the sustainability (or otherwise) of blockchain and deliver genuine improvements.
Some blockchain applications, like Bitcoin, have so far resisted calls to move away from the energy-intensive POW consensus mechanism. Despite the BCEI’s claims that Bitcoin could incentivise clean energy developments in the future, businesses and consumers will be hesitant to adopt technology that relies on and incentivises mass energy consumption. The reality is that Bitcoin mining today is still overwhelmingly powered by fossil fuels and diverts significant energy resources from other uses.
As we outlined in our first article in this series and will explore further in future editions, there are a vast range of blockchain applications, stretching far beyond the confines of Bitcoin and other cryptoassets.
Any organisation that is considering investing in or developing a blockchain solution should ensure it investigates the credentials of the solution provider and the operating model of the particular blockchain. This will be vital for all organisations who have serious ESG objectives and want to ensure their blockchain innovations contribute to those objectives rather than undermining them.
Contributor: Elizabeth Smillie (Trainee Solicitor, Financial Services, Energy & Public Sector)
06 June 2022