Solving Blockchain’s Ecological Problem: What Works and What’s at Stake
The ecological footprint of Bitcoin is a favorite stick with which to beat cryptocurrencies. When most people do it, it doesn’t wipe 30% off the market cap, but it is a persistent bugbear — mostly because it’s a real problem, and there isn’t a simple solution.
At least, there isn’t a simple solution for the Bitcoin blockchain. But if the idea of needing the energy equivalent of a midsize country to run your blockchain seems like an issue, there is an answer: Don’t use Proof-of-Work.
What is PoW?
Proof of Work (PoW) is the consensus algorithm Bitcoin and Ethereum use to mint new blocks. Computers race to be the first to solve complex mathematical puzzles, and the proof that they have done so is their certificate of the right to mint the block and claim the reward.
When a block is minted on the Bitcoin blockchain, pending batches of transactions on the network are OK’d by the network and added to the blockchain. Bitcoin miners receive 12.5 BTC each time they validate a block — small change in Bitcoin’s early days but US $463,361 at the time of writing. This is how new Bitcoins are made, and why block validation is called mining.
What’s wrong with PoW?
Unfortunately, these puzzles really are very complex. They require huge computer resources to solve quickly. In the early days, Bitcoin was envisaged as a tool for totally anonymous trading: true digital cash. Its inventor or inventors (whoever they are, they’re currently among the richest people alive) doesn’t seem to have foreseen that mining would become an industry of its own, but it has. Blocks aren’t minted on networks of laptops but in giant server centers that threaten the global supply of graphics cards and suck up mostly dirty electricity in China and elsewhere.
Because of the enormous energy costs associated with solving hashes for mining, Bitcoin is ecologically problematic: a single transaction over the Bitcoin blockchain consumes as much energy as 680,000 Visa transactions.
Michael Saylor, CEO of MicroStrategy, which uses Bitcoin for its corporate treasury reserve, tweeted recently that ‘Execs from [miners] Argo, BlockCap, Core, Galaxy, Hive, Hut8, Marathon and Riot Blockchain’ had agreed to form the Bitcoin Mining Council to promote energy usage transparency & accelerate sustainability initiatives worldwide.’ But any changes resulting from that lie in the future.
And as bad for the environment as PoW is (and it really is), it’s not great for blockchains either. PoW consensus takes the problem of decentralization and shifts it off the blockchain, but doesn’t fully solve it. Bitcoin is internally completely decentralized, but the majority of mining is done by just a few companies, mostly operating in China.
Until very recently the major problem with this was its environmental impact — China is popular with miners because its electricity is both cheap and reliable:
But it’s also concerning because when only a few companies control the majority of mining, which is what’s happening…
…the whole network could be at risk. Bitcoin, like other blockchains, depends on everyone checking everyone else’s sums. To commit theft or other crimes on the Bitcoin blockchain you’d need to have more than 51% of block verifiers agree to go along with you. But look at the graphic above: you could have 55% with just three companies. (It looks like four, but AntPool and BTC.com are both owned by the same company, Bitmain.)
Now, China has barred Bitcoin mining from its Inner Mongolia province, as part of a wider move to restrict any crypto but its own nascent digital Yuan. The need for what is essentially an industrial base makes PoW networks vulnerable to state action as well.
Alternatives to PoW
So if PoW is the problem, what’s the solution? Other consensus algorithms exist. One of the most popular is Proof-of-Stake, with most of the others being preferred for specialist applications.
Proof-of-Stake
Proof-of-Stake (PoS) blockchains don’t depend on mining. Instead they allocate the right to mint new blocks in proportion to the quantity of the blockchain’s tokens you own.
Ethereum is planning to move from its current PoW consensus algorithm, which currently consumes as much electricity as Portugal, to PoS as part of the transition to Eth2.
When it does so, Ethereum will require users to stake 32 ETH to be eligible to become validators. Once in the validator pool they will be chosen at random to create and validate blocks. Validators can lose a portion of their stake for failure to validate a legitimate block, or all of it for validating an illegitimate one — a partial solution to the ‘nothing-at-stake’ problem, where PoS validators have everything to gain from OK’ing a block and nothing to lose for signing off on a bad one.
Other consensus algorithms
Other consensus algorithms are sometimes used, but they’re less common and more specialized. PoET (Proof of Elapsed Time) uses a randomly-generated elapsed time to assign validator status, and is currently the consensus model for Intel- and Linux-backed Sawtooth Hyperledger. PoA (Proof-of-Authority) is usually used in private, permissioned blockchains. If you’d like the lowdown on the whole consensus-algorithm smörgasbord, here’s a Hackernoon post.
The main advantage PoS has over PoW is that it’s energy-efficient, though it’s also arguably more decentralized too and protects against 51% attacks.
Enter Polkadot
The creation of Ethereum co-founder and former Chief Technology Officer Gavin Woods, along with Thiel Fellow Robert Habermeier, Peter Czaban and others, Polkadot is a ‘heterogeneous blockchain architecture’ built to allow side chains to connect with public blockchains and with each other. Let’s go back a little to go forwards.
Ethereum (we are going to Polkadot, bear with me) isn’t just a currency. It’s a general-purpose blockchain. You can build other tokens on Ethereum smart contracts like the ERC-20 token protocol. They’re different tokens but they’re on the same chain.
Sharding
Some blockchains — Ethereum will be one soon — allow sharding; creating whole new chains that run as shards, or fragments, of the main chain. It mostly exists to reduce latency and reduce the negative effects of higher user numbers. Shards are mostly the same chain, split into sections that run alongside each other.
Interoperability, sharding and parachains
Polkadot is a network of shards and custom parachains, in which separate chains can communicate with each other while remaining secure so you can move a property or contract from one chain to another. That’s good because not all chains are good for everything. As the Polkadot Lightpaper has it:
All blockchains make different tradeoffs to support specific features and use cases, and as chain specialization increases, the need to transact between them will only increase over time.
Heterogeneous chains are customizable and interoperable. Each chain can have its own unique properties, making it better suited for its particular purpose, yet be fully interoperable. If Ethereum is a blockchain for decentralized applications, Polkadot is a blockchain for blockchains.
Nominated Proof-of-Stake
Polkadot is built to split up the function of creating new blocks and permanently validating them, which ‘allows for blocks to be rapidly produced, and the slower finality mechanism to run in a separate process to finalize blocks without risking slower transaction processing or stalling [being unable to produce new blocks].’
This is Nominated Proof-of-Stake, a specific type of Proof-of-Stake consensus designed to shrink the number of required validators without developing a centralization problem (something similar, Delegated Proof-of-Stake, is being used in the BitShares blockchain).
Substrate and the Relay chain
Polkadot’s Relay chain is built on Substrate, the appropriately-named tool for building custom chains offered by Parity.
Dr. Gavin Wood conceived the original idea for Polkadot in 2016 while waiting for a new Ethereum specification that would include sharding. Already back then, it was clearly necessary for a main beacon/relay chain to link the shards and coordinate message passing. (Parity Technologies)
In other words, Polkadot’s Relay chain is like Ethereum’s Beacon chain: it’s there to relay messages between different parachains.
Kusama, the Polkadot ‘canary’ network (like Chrome Canary, a testbed for experimental applications and features) has a Relay chain of its own, letting companies test before they deploy.
For Loom Network, that means there’s a simple way to suture our interoperable multichain platform into Polkadot’s. But there’s also one stumbling-block: Kusama has only a certain number of slots for parachains, and it leases them by automated decentralized ‘candle’ auctions whose exact end isn’t known, to prevent sniping.
Our plan is first to secure a lease for Loom Network’s mainnet — Basechain, as a parachain on the Kusama network, with a view to then doing the same thing on Polkadot. To do this, we’re raising capital to secure a slot on Kusama by buying a sufficient number of KSM tokens to ensure we win an auction. The KSM tokens of winning bids are locked for the duration of the parachain slot lease and yield no interest while locked. Once the lease period ends the tokens can be unlocked and used for further Kusama purchases or redeemed. We may have to participate in several auctions as we fine-tune this strategy.
When we move to Polkadot, we’ll be doing something very similar, competing for one of the relatively scarce parachain slots through the same auction mechanism, so our Kusama deployment will be a dry run for both interchain functionality and auction strategy.
To raise the tokens for the auction we’re considering a crowdfunding initiative offering LOOM in exchange for KSM tokens, and with a special bonus rate for staking LOOM on the Basechain, only available to those who contribute KSM tokens for the parachain auctions.
Loom Network is building an ecosystem of blockchains for the next generation of DeFi protocols, NFTs, and high-performance multi-chain dapps. At the core of this ecosystem is our Basechain network — already live in production, audited, and battle-tested.
New to Loom? Start here.
Want to stake your LOOM tokens so you can earn rewards while helping secure Basechain? Find out how.
Got experience running Linux servers, and interested in running a Basechain validator node? Reach out to us in our Telegram channel and we’ll tell you all about the current requirements.
