The Cryptocurrency Industry Needs to Reconsider Proof-of-Work
Addressing the climate crisis is a priority for every segment of society and the economy — including new emerging technologies such as cryptocurrencies. That doesn’t just mean moving to renewable sources of energy, but also reducing unnecessary energy use.
Cryptocurrencies are exploding into the mainstream, and that’s a good thing — it means hundreds of millions more people will have access to more efficient and affordable financial services. Crypto was built for this purpose — to create a more inclusive and efficient financial system for all.
But there’s a problem in today’s cryptocurrency market. While many newer cryptocurrencies are already low consumers of energy or even carbon-neutral, early protocols such as Bitcoin use a core technology called Proof-of-Work (PoW) to validate transactions, which is not only a huge and growing source of CO2 emissions but also uses massive amounts of energy, both from fossil fuels and “green” sources. It’s encouraging to see many crypto market participants (including miners) commit to using 100% renewable energy, and decarbonizing their individual emissions, but this is only part of the solution.
Cryptocurrencies that use PoW should consider a code change to another validation method such as Proof-of-Stake (PoS) or Federated Consensus (or something yet to be developed), which have also proven effective in securing their stored value while using a tiny fraction of the energy. (Because cryptocurrencies use decentralized ledgers rather than a central authority, a consensus method, such as PoW or PoS, is necessary to maintain an accurate ledger). I know this is a bold proposal, but it is worth a serious discussion given what the world looks like today (in comparison to when Bitcoin was launched in 2009). While there are passionate debates about PoW versus other validation methods, we now have almost a decade of data to review.
The XRP Ledger has been using Federated Consensus to validate transactions and secure its public ledger for almost nine years. It’s closed 62+ million ledgers without downtime, uses the energy equivalent of just 50 U.S. homes per year, and is already carbon neutral. While fairly new, Binance Coin (BNB) operates a version of PoS that secures a market cap of over $80 billion, and the Ethereum community has begun the process of switching to PoS. They should be commended for their sustainability efforts. While PoS and Federated Consensus are slightly newer than PoW, these technologies are battle-tested and proven to be decentralized.
Even early Bitcoin developers like Hal Finney pointed out the massive energy use of PoW was a concern. Today, non-PoW-based coins (including Ethereum’s anticipated switch) make up 43% of all cryptocurrencies by market cap, and the majority of new cryptocurrencies introduced today choose to eschew PoW. It’s clear which way the trend is moving.
I would argue that such a change is critically important for Bitcoin to remain the world’s dominant cryptocurrency. PoW’s current energy demands and carbon footprint are already unsustainably high, with Bitcoin alone consuming an average of 132 TWh a year (equivalent to roughly 12 million U.S. homes), and releasing an estimated 63 million tons of CO2 annually. While other coins utilize PoW, Bitcoin accounts for 98% of all coins’ hashrate that use ASICs (specialized hardware used to mine bitcoin). With more individual investors and corporations taking significant bitcoin positions — PoW is heading for levels society will find tough to tolerate as the world works to avert a climate disaster.
We should see PoW for what it is — a brilliantly designed technology that is becoming outdated in today’s world. In no way does this suggest that bitcoin and other PoW cryptos themselves are outdated. Their widespread adoption speaks for itself. But they need to separate themselves from this early technology that is not built for today’s climate needs, and embrace low energy/low carbon alternatives to secure their ledgers.
U.S. institutional investors are driving the crypto boom of 2020/21, a powerful endorsement for the entire industry. This boom is happening just as companies are committing to climate action. They will undoubtedly face pressure (from consumers and regulators alike) to reduce or divest their PoW crypto holdings — including bitcoin. The Bitcoin community should see this as a significant risk and work to address it.
Unfortunately, many of Bitcoin’s most prominent advocates turn a blind eye or even ‘greenwash’ the problem with questionable claims.
We hear things like PoW uses ‘trapped’ energy that’s otherwise going to waste. This is partly true today, but scientists are already working on building proper capture technology for this “trapped energy.” This will be a moot point soon. Also, if you can build a crypto mining operation using ‘trapped energy,’ you can also build facilities that, unlike crypto, actually need the vast amounts of energy to work — such as data centers, green hydrogen plants, or direct air capture facilities (which qualify for California carbon credits even if located in the most remote regions of Earth).
We’ve heard arguments that PoW energy demands will catalyze the renewable industry, turbocharging capital investment, innovation and supply. This argument is also spurious. Large-scale solar and offshore wind are already very economically attractive and are drawing substantial institutional investment. Just look at renewable energy pioneer NextEra Energy, which is now the third-largest energy company in the U.S., or Breakthrough Energy Ventures, which has raised over $2 billion.
We’ve also heard that PoW draws on an unlimited global supply of renewable energy — and some believe that PoW energy use is the “highest and best use” of renewables. Quite the contrary — until we become globally carbon-neutral, PoW is in direct competition with more urgent energy needs that must make the switch to renewables; industries like concrete and steel, air travel, and agriculture. Again, crypto doesn’t need meaningful amounts of energy to work; transportation, steel making, and direct air capture do. We must stay focused on those needs.
Another point often made is that the Lightning Network will address the carbon emissions problem. That’s not an accurate description of the benefits of Lightning. Lightning addresses off-chain flow-through of transactions — it does nothing to reduce the energy needed to secure a PoW ledger. PoW is not a downstream issue — a consumer paying for a coffee in bitcoin doesn’t directly drive additional energy use. The problem is upstream, driven by investor demand that increases crypto prices.
Then there’s the argument that PoW energy needs will decrease as rewards decrease over time. Bitcoin’s PoW code, for example, calls for an approximate halving every four years ending in 2140. Because energy usage is directly correlated with price, Bitcoin’s PoW energy needs will increase when its price appreciates more than 18% per year (which compounded is a doubling every four years and enough to offset its halving rewards). Last year’s price increase was wildly over 18%, rising 4.5x from January to December 2020. JP Morgan’s $130,000 BTC price target suggests further colossal energy needs. And suppose MicroStrategy CEO Michael Saylor’s assertion that bitcoin will continue its 200% annual increase is correct. In that case, we could see PoW in the Gigatons of annual CO2 before the end of the decade.
PoW’s relationship between price and energy use raises a dilemma for companies looking to invest in PoW crypto, while also fighting climate change. Unlike investing in Exxon or Aramco, which doesn’t directly affect their emissions, investing in PoW crypto directly increases energy use (assuming its price increases as the investment is made). Consider Tesla’s recent investment in bitcoin, which resulted in an over $5,000 per bitcoin price increase. Incredibly, this almost certainly wiped out Tesla’s entire fleet’s annual CO2 savings. Not a wise or inspirational move or one that helps the world meet its agreed-upon emissions targets.
As companies begin to understand this troubling connection, they would rightfully have concerns investing. Bitcoin advocates should see this as a significant threat.
Finally, what happens in a world where we do get to carbon-neutral, but oil producers can turn to PoW crypto to monetize their otherwise unwanted hydrocarbons. While you can easily identify and ban data centers that run on dirty energy, because crypto is fungible, there’s no way to filter a clean coin from a dirty one.
Consider Saudi Arabia’s <$9 cost to produce a barrel of oil (including extraction, exploration, other expenses) — the equivalent of 1/2 cent per kWh. This cost is substantially below the future forecast cost for solar, wind, or nuclear globally (some like to say that the current costs for solar and wind are lower than fossil fuels today but that’s strictly in the U.S. at peak load, not worldwide). In a world where oil is otherwise unwanted, oil producers could dominate the PoW industry. The idea that PoW crypto could enable a never-ending use case for hydrocarbons is a nightmare scenario. Fossil fuels need to stay in the ground, not be burned for crypto rewards.
On this Earth Day, the crypto community has much to celebrate. The industry is overwhelmingly motivated by a sense of progress, fairness, and good intentions. There are many advocates — from the Bitcoin community and others — that are vocal about addressing climate change and transitioning to a 100% renewable future. The dream of so many early crypto innovators is within reach — but only if the industry gets serious about crypto that runs on low energy/low carbon technology.
Let’s encourage and work with the people who build and contribute to Bitcoin’s code — the key miners, exchanges, and core developers — to consider a move away from PoW.
Disclaimer: this proposal is my opinion, not that of Ripple or Rippleworks
