Proof-Of-Work Paradox: Why the Energy Consumption Problem of Bitcoin is Unsurprising
Bitcoin reached an all-time high in October’21. This growth, however, comes at a major environmental cost. Globally, cryptocurrency mining is reported to consume around 117 terawatt-hours (TWh) of electricity a year. That’s higher than the consumption of countries like the Netherlands and Pakistan. Bitcoin mining uses a proof-of-work (POW) consensus that only gets more electricity-hungry with time. There are more energy-efficient cryptocurrencies, yet Bitcoin remains most popular by market cap. This article explains what makes POW the most popular validation mechanism despite several other substantially more power-efficient and inexpensive options. It then speculates whether the popularity of POW reflects the notion of freedom and labor fundamental to capitalist societies.
Why is a consensus protocol important?
A currency is built on trust. Every X rupee banknote in India has the following declaration by the Chairman of the Reserve Bank of India: “I Promise to pay the bearer sum of X Rupees”. We believe in this promise and build our lives around these pieces of paper because we trust the RBI. Similarly, on a US dollar bill, the Treasurer of the United States promises us that “this note is legal tender for all debts, public and private”. For an exchange ecosystem to be based on a ledger (like banknotes), the user in that ecosystem needs to trust the validity of that ledger. Traditionally, this trust has been controlled by centralized institutions with authority. One of the many reasons which make cryptocurrency revolutionary is that it can develop the same trust in a decentralized ecosystem through ‘a consensus protocol’.
What makes RBI powerful, is I can trust that the banknote is valid. In cryptocurrency, the transaction data in every new block needs to be validated before it is added to a blockchain. There is a reward for this validation to give people incentive into becoming ‘validators’. These validators are crucial for the cryptocurrency ecosystem to function as they make the transfer of information possible. They are also known as cryptocurrency miners. Proof-of-work is how the validator is selected. All the miners compete to solve a mathematical riddle and have the solution accepted by the majority of miners on the chain -a consensus. This person who wins the trust by solving the riddle can validate the block and claim the reward. Nakamoto knew restricted supply is crucial to retain a currency value as more people adopt it. So, the reward for validating is reducing and the riddles are getting more difficult to solve as the chain grows.
The Energy Problem of the Proof-Of-Work
These math riddles are solved by computers and ones with high computing power can solve them faster than others. The computers of high compute power tend usually tend to consume a lot of electricity. As bitcoin gains popularity and its value increases, high-performance computers have become a lucrative investment for miners despite the high expense of parts and electricity. There are miner pools that combine the computing power of idle home computers and all the members split the reward based on their computing contribution.
It’s simple: Bitcoin has made electricity consumption profitable. As mentioned above, the riddles keep getting more difficult and these miners need to keep increasing their compute power just to stay at the status quo. Not to mention, the pressure from the competition of other miners trying to build more powerful computers. So even if Bitcoin were to have no new miners or users, its electricity consumption would still increase. The obvious question here is: Are there any alternatives to proof-of-work that don’t lead to as much electricity consumption as entire nation-states?
Alternative Consensus Protocols
Turns out, there are other ways to decide the validator without the need for strong compute muscle. I will discuss two of the several alternative consensus protocols that are being currently used or developed:
- Proof-of-Stake
In proof-of-stake, the chances of you getting to validate the next block are proportional to the number of coins that you already hold. The holding or currency is called ‘staking’ and those with a high stake in the ecosystem have a high chance of being selected validators. No puzzle demands computational prowess. One simply requires high initial capital. The obvious criticism of this protocol is it simply favors the wealthy. Those who can buy several coins upfront control the ecosystem. The second-largest cryptocurrency by market cap, Ethereum will soon switch from proof-of-work to proof-of-stake. It claims that those who bought ETH for cheap during the early stages have already distributed the coins back into the ecosystem. This, however, gives the advantage to more wealthy members of the chain as they can stake more initially.
2. Proof-of-Elapsed Time
PoET is a relatively unpopular consensus protocol. It addresses the energy problem of proof-of-work and the equity problem of proof-of-stake by deciding validators through a lottery system. At the center of a PoET blockchain ecosystem is a randomized node selection algorithm that all the members agree to be fair. It generates an arbitrate ‘time elapsed’ number the first node to wait that long wins the chance to validate the new block. Essentially, one just needs to be lucky to succeed in this ecosystem. So far, it’s mostly used in permissioned or private blockchains networks. The Linux Foundation conceived this consensus protocol to create business applications through their Hyperledger Sawtooth framework.
The Cost of Freedom
We are all born into an unequal society and have no control over what section of this unequal society we enter — our identity. Natural and social inequalities are one of the biggest challenges that an economy has to overcome if it has to be equitable. Arguably one of the most popular models attempting to achieve this has been the ‘American Dream’: it doesn't matter who you are, you can ‘work your way into freedom’.
So, there are two most popular types of economic growth. One where economic mobility is strapped by social inequality, where the born rich are freer than others and have more opportunities to increase that freedom. This favors the few on the top. The second is where labor can be exchanged with freedom in form of money. This favors most of us who are not on the top. While the first type of society is still strongly prevalent, globally we are moving towards free economies that function on the second type. When contrasted with the cryptocurrency landscape discussed above, the similarity is uncanny. The two most popular consensus mechanisms mirror the two most popular types of societies/economies. Moreover, among them, the most popular is the one where work is supposedly correlated to success. Essentially if we are to create an economy with fair economic mobility, we need a function of labor.
This is the paradox of the proof-of-work. So far, it is the only attempt to create an equitable cryptocurrency economy. However, that free and fair economy comes with a major cost to the environment. Labour in this context refers to the computations performed by the mining computers. No one is willing to be in a society where people made money by sheer luck — and they shouldn’t but has the American dream been successful in real life? The #BLM and the increasing gap between rich and poor is forcing the world to question whether the ‘American Dream’ has failed. The conclusion urges the need to reconsider our approach as we try to replace POW with more sustainable protocols. Equitable opportunity for growth will be a key tenet in achieving the same.
