A Greener Future for Blockchains
For Crypto, green policies lead to better returns
As coins such as Bitcoin, Ethereum, and others increase in adoption, they are quickly approaching an existential crisis that need to be resolved if cryptocurrencies are to achieve their promise of mainstream adoption.
This existential crisis is the ecological impact of cryptocurrency mining. More and more energy is being used to mine bitcoin and, as climate change becomes an increasingly imminent and political issue, finding an ecologically sustainable solution is not only ethical, it is also necessary.
The impact is already slowing down cryptocurrency adoption. Elon Musk cited “insane” energy consumption when rejecting bitcoin payments. [src] As did China when cracking down on mining. [src] Even bullish news is being tainted with this problem such as when the World Bank refused to help El Salvador accept bitcoin as legal tender because of “the environmental and transparency shortcomings”. [src]
Fortunately, not all blockchains suffer the same problem. Greener pastures lie in other blockchain networks such as the upcoming Ethereum 2, Algorand, Solana, and other modern cryptocurrencies. These blockchains can support the same level of transactions but at a tiny fraction of the energy cost.
What is mining for? Why does it use so much energy
To understand what mining is for, one has to understand what problem it solves. Any distributed system needs to find a way to synchronize state so that there is awareness between all participants of the ‘true’ state of the system. This is known as consensus.
For blockchains, this means that all miners on the network need to be aware of the most recent blocks on the blockchain. Without this awareness, things can go out of sync and the system could end up with two chains branching from a block. This desynchronization is known as forking.
To achieve consensus, the distributed systems has to have a mechanism to decide what data is the “latest” data, and confirm that all the participants in the system received the latest data.
Decentralized systems like cryptocurrencies have the additional problem of having to account for the possibility of ‘bad actors’. These ‘bad actors’ can accidentally or maliciously provide bad data. Decentralized systems need to account for this possibility when trying to achieve consensus among the ‘honest’ participants.
Proof-of-Work (PoW) mechanism, such as bitcoin mining, exists to deal with this problem. It does this by forcing the miners to solve a very difficult math problem. This gives all good actors enough time to receive the latest blocks and reach consensus. It also discourages bad actors from maliciously forking the chain by making it very computationally expensive to mine the ‘wrong’ chain.
Participants are incentivized to solve this math problem (i.e., mine) because the winning participant gets to add the next block and receive all the rewards associated with it. This leads to an arms race for more machines and more powerful hardware to solve this math problem faster than others and has spawned the cryptocurrency energy crisis we have today.
Proof-of-Work: Brute-forcing a block
Older cryptocurrencies such as Bitcoin, Ethereum, Litecoin, Dogecoin, Monero, etc. use the proof-of-work mechanism. Most of these cryptocurrencies have not seen a significant adoption of transactions on their network, but Bitcoin and Ethereum have, and we can measure their environmental impact when used at scale.
Digiconomist tracks the ecological footprint of both these cryptocurrencies and the estimates are quite horrifying. Bitcoin mining consumes 130.78 TWh per year or about as much energy as Argentina. Per transaction, that’s 1,585 kWh of energy used! This is the equivalent of 2 months of energy consumed by an average US Household.
Ethereum consumes less energy but it is still an exorbitant amount. The whole network consumes 59.94 TWh per year or the equivalent of the energy consumed by Portugal. Per transaction, that’s 119 kWh which is about the same as 4 days of energy consumed by the average US household.
It is no wonder that cryptocurrency mining is facing such a backlash. At scale this is a purely unsustainable practice.
Proof-of-Stake : The new guard to the rescue
Newer coins such as Algorand, Polkadot, and Cardano, as well as the upcoming Ethereum 2.0 upgrade (eth2) use a different consensus mechanism called proof-of-stake. Instead of relying on a difficult math problem, proof of stake relies on economic incentives. Each network implements the proof differently, but all of them essentially have a system where participants with more coins get a greater vote.
All of these systems are an order of magnitude better than PoW because they can run relatively simple tasks on normal computers. 200k Eth2 validator nodes can comfortably run on 40k 100W machines. Compared to 60TWh, the new version will only use 0.035 TWh per year. Cardano expects to have a similar amount of validators at maturity and would have similar energy performance.
Polkadot seems to offer a much more energy efficient solution but does so by losing decentralization. Polkadot expects there to be about 1,000 validators at maturity that can run on a standard PC. This estimates to about 0.001 TWh since there are so few machines involved.
How Algorand Stands out
Like Eth2, Algorand uses proof-of-stake and is extremely energy efficient. One thing that makes Algorand stand out from similar competitors is its pure proof of stake mechanism. Pure proof of stake allows all the work to run on a very low energy processor (e.g., a Raspberry Pi). These machines use about 3 watts and so running the same number of validators would only cost 0.007 TWh over a year. That’s 5 times better than Eth2 or Cardano’s consensus mechanism.
Moreover, unlike Polkadot, Algorand can have much more decentralization, since voting is distributed over hundreds of thousands of validators instead of a thousand well known ones.
In short, although bitcoin may be approaching an ecological crisis, the latest cryptocurrencies such as Algorand are paving a path to a more environmental sustainable future.
Disclaimer:
I am not a financial advisor and views expressed in this article are not financial advice. Cryptocurrencies and smart contracts are complex instruments and come with high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money. I encourage you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.
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