Blockchain File: Cryptocurrencies and Energy Issue

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Coinmonks

10 min readFeb 17, 2022

Introduction

Most of us remember the year of 2008 with the housing bubble in the United States of America in 2007 and spread all over the world a year later, causing the world’s fourth-largest investment bank Lehman Brothers to go bankrupt with a debt of 613 billion dollars, the FED intervened with cheap liquidity and We remember with the great crisis that this liquidity caused inflation. In those years, another event took place, although it was not given much importance. A white paper was published by the person or persons nicknamed Satoshi Nakamoto. In this white paper, Satoshi Nakamoto stated that this financial crisis was caused by the governments that provide liquidity in the world and the banks that distribute this liquidity. The cryptocurrency, which is explained in detail in the white paper, aims to eliminate incompetent governments and greedy banks and to transact with the P2P (peer-to-peer) method through bitcoin. A single cryptocurrency appeared in that white paper that day, but today its number has exceeded ten thousand. When Bitcoin first emerged, the libertarian structure it offered impressed people immensely, but later on, its libertarian and trustworthy structure brought with it high transaction costs and long transaction times. the CEO of Ripple labs. compares Bitcoin and XRP with the analogy of “You can’t buy coffee with Bitcoin because your coffee gets cold until you pay it”. Along with the speed problem, the main problem is the energy need problem, which is the subject of this article, and the high costs and high carbon emissions caused by this problem.

Blockchain Technology and How It Works

Blockchain technology first entered our lives with Bitcoin. Satoshi Nakamoto introduced a decentralized digital currency in the white paper he published that day, behind this currency was blockchain technology. This technology provides the possibility of transfer, experts do not want to qualify the transfer of a value as information transfer in this regard, because blockchain technology provides the opportunity to transfer value in Bitcoin. Information transfer in the digital environment can be done very easily and simply, but the decentralization and reliability feature that highlights the blockchain technology prevents this transfer process from being done as quickly as information transfer in the digital environment. These include some components in the system; block, ledger, hash, nodes, mining, permissionless, consensus, PoW (Proof of Work), PoS (Proof of Stake).

The system, that is the chain is created by miners. Bitcoin miners create a series of numbers every 10 minutes. As the miners perform the mine operation, blocks, and as the information to be created on these blocks are processed, ledgers are formed. We call this ledger creation process hash. We can compare the blockchain to a grocery store’s ledger, miners mine a page every 10 minutes for this ledger, and blocks are formed, then the grocery store fills these pages and hashing takes place, and these filled pages create ledgers. These records are now kept and controlled by the authority that manages the system in the central system. Currently, a bank keeps the transactions of its customers in its own database and manages these transactions through these databases. We can say that the situation is the same in Bitcoin, the ledgers formed by recording data on the blocks that we can call the database, and the blockchain created by these ledgers, the data recorded in this database and which we describe as value, namely cryptocurrencies, and people, not the person who manages this database. This is the most important feature that distinguishes the system from the central system. The system is not managed by a center or central authority, but by scattered people who do not know each other. Two methods come to the fore in terms of management, one of them is PoW and the other is PoS, namely Proof of Stake. PoW, or Proof of Work, is the system currently used in Bitcoin and Ethereum. As the miners mine the system, they get the management of the ledgers. We have defined the database where the data is recorded for. Here, the miners who mine the blocks for the formation of ledgers do this through the nodes. It not only manages the registration process but also manages those records, as well as ledgers, through nodes. What makes Bitcoin secure is not only that the ledgers are multiple and scattered, but also the fact that those who manage them are multiple and scattered. Nodes perform this messy management job. Nodes do this management work in coordination with each other with a consensus mechanism. Because nodes hold and control the ledgers. Since the transaction is carried out by more than one node, the connection between them can be completed with the consensus mechanism after a series of seeing and validation, we call this approval mechanism the consensus stage. The system is in the database and management of more than one node, so you cannot damage the system without hacking all the ledgers of the scattered nodes in the system, or you must take control of 50+ percent of the nodes so that you can break the consensus mechanism. Current technology is not enough to do this.

Another form of management is PoS, that is, Proof of Stake, this system is the type of management that Ethereum promised with the Ethereum 2.0 update in the future. This management style is actually more in line with the philosophy of Bitcoin and blockchain technology. This form completely makes the users of the system manage the system. The PoW form is mostly managed by the system creators, and in this form of management, there is a risk that the management of the chain will come under the control of monopolies with the merging of mining pools. As seen in the chart below, if the 3 mining pools that make the most Bitcoin mining establish a consortium, they can take over the management of the whole system and turn the decentralized system into a centralized model.

https://academy.bit2me.com/en/what-is-cryptocurrency-mining-pool/

Unlike PoW, the PoS method gives the system control to the crypto money holders on the system. In the PoW method, there are a number of management stages, the control of these stages is carried out by the miners, that is, the nodes, but in the PoS method, the crypto money holders, or rather those who store crypto money for management. System management is exactly the same as PoW, with vision, validation, and cross-node consensus. The system gives the authority to see and approve people randomly selected among those who store and lock crypto money in every transaction for management, and the system is managed by performing these transactions with a consensus. Of course, these transactions are carried out by nodes, as in PoW. The difference of the system from PoW is not that the owners of nodes are miners, but the owners of cryptocurrencies, the more mining, the more nodes, instead of more nodes. Another difference arises in the mining phase, there is no mining in chains managed with the PoS system, there are no miners and the system they manage, the system is completely managed by those who have crypto money. There is no high energy need, equipment costs, and long processing times caused by mining and miner management, which I will explain in more detail below.

Transaction Speeds of Cryptocurrencies

I explained the PoW and PoS method in detail above, another method is the management style of the crypto money XRP that Ripple labs use on Ripple net. This system follows a slightly different method. This system only processes transfers to ledgers and therefore each transaction has a single sender and receiver. During the first transfer, a ledger is opened for the receiver and sender, and all subsequent transfers are made over this ledger. 10 XRP is connected to the ledger while the ledger is opening. In addition, the system nodes are scattered individuals determined by Ripple Labs. and the mining process is not available in this system. All cryptocurrencies are initially mined and released by nodes at regular intervals. XRP is not decentralized, unlike other cryptocurrencies. A centralized cryptocurrency controlled by Ripple Labs. Because Ripple did not mine this crypto money to establish a decentralized financial system like others, but only brought a new innovation to payment systems with blockchain technology. But these features have made XRP the fastest and least costly cryptocurrency. If you want to learn more about the payment and transfer network and XRP crypto money established by Ripple Labs, I leave the link of my previously published article here.

Cryptocurrencies and Energy

I tried to explain in detail some specific management methods, the most used method at the moment is PoW and then the PoS method. Mining transactions, then keeping ledger records, consensus mechanisms and other transactions reduce the transaction speed of cryptocurrencies and increase energy costs. Enameling, while the system is running in the PoW stage or enameling before in PoS and their storage and putting them on the market piecemeal, creates an intensive equipment and energy need, and this enamel, storage, and management costs increase the transaction costs on the chain and cause the process to become complicated. extends processing times.

As seen in the chart above, the energy use of Bitcoin is tens of times more than the world’s largest technology companies, even higher than the energy use of some countries. The graph is calculated according to the energy consumption of the countries in 2019 and the energy consumption of Bitcoin in 2021.

The table above compares the annual energy consumption, carbon emissions, and the amount of fossil fuel that needs to be spent for the annual energy needs of 3 specific cryptocurrencies, credit cards, and paper money. It is clearly seen in the table that cryptocurrencies consume the most energy and emit carbon in terms of carbon emissions and energy consumption.

The chart above compares transactions per second by some specific cryptocurrencies and payment systems. As can be seen, the lowest number of transactions is Bitcoin first, followed by Ethereum and Dash, respectively. The maximum transaction capacity in one second belongs to Visa’s credit cards, and then to XRP crypto money owned by Ripple Net due to the different management method.

When we look at the tables above, Bitcoin, which has the largest transaction volume of this ecosystem, consumes more energy than all companies in the finance and technology market, even in many countries. Compared to the finance and technology ecosystem, all cryptocurrencies consume more energy and cause more carbon emissions. Finally, if we compare it in terms of speed, Bitcoin, which has the highest transaction volume in this market, can perform a maximum of 7 transactions per second. Even Visa, which sometimes causes problems in terms of speed, performs 24,000 transactions per second.

Conclusion

Currently, billions of people believe in this technology and the philosophy it promises, otherwise, thousands of cryptocurrencies cannot be traded in the market, but no matter what, it is necessary to be realistic about cryptocurrencies. Despite such high costs and low speeds, the fact that it will replace today’s financial system is nothing more than a dream. But because of these factors, it would be just stupid to turn away from blockchain technology and the innovations it offers, so we need to take the transparency, security, and decentralization of these systems and integrate them into today’s ecosystem. The future, where each of the states is a node, and a single safe and transparent cryptocurrency is valid, not only excites me, I am sure that everyone who has more or less interest in the financial market will have the same feelings I had…

You can visit the link to read the article in Turkish…

References

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Blockchain File: Cryptocurrencies and Energy Issue

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Written by Şaban İbrahim GÖKSAL