When it comes to blockchains and energy usage
Blockchains and energy usage: a reflective primer for those who think seriously about technology and reversing climate change. TL;DR: Does blockchain technology use egregious amounts of energy today? Yes. Does it need to in the future? No. There are more efficient ways to make a blockchain. Can this technology innovation be useful in solving climate change? Not only is a blockchain useful, it allows us to do things that were never before possible.
When I reflect back on 2018 — my first full year as a co-founder of a start-up using blockchain technology as part of our mission to reverse climate change — it’s fair to say that for the blockchain industry, the year was filled with far more speculation and hype than substance. Yet in spite of the technology not yet showing its full value, the promise remains great. As blockchain technology scales across industries, there is an unstoppable paradigm shift behind distributed ledgers that will touch how we treat sensitive data, transact in digital activities, and create new monetary systems. However the blockchain industry of today comes with an inconvenient truth. It consumes a lot of energy. For a technology with promises to change the world, this is not a good look.
First, some terms.
A Blockchain is a shared ledger of digital information that is distributed across many different computers. It records transactions chronologically and makes it costly and difficult to alter transactions, allowing potentially adversarial parties to cooperate.
A Cryptocurrency is a digital currency, like bitcoin or ether in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central authority.
A Node can be any electronic device able to connect to the network. This includes phones, printers, and computers. The Node’s job is at a minimum to support the network by maintaining a copy of the blockchain or by serving as a relay to connect other notes with more information. In some cases they also process transactions.
A Miner is a type of a node who computes transactions to secure the blockchain. They are incentivized by calculating and processing the data in a block, as well as some random bits of data. If the random bits of data they submit along with the computation of the block’s data doesn’t happen to solve the puzzle, then the miner will continue to rapidly submit new bits of random data in an attempt to be the first to find the solution of a blockchain and validate blocks.
So what’s behind the energy consumption?
Proof of Work:
The first working model for blockchains to come to a consensus was established with Bitcoin and is called “Proof of Work” (PoW). PoW secures a blockchain network by creating a random math problem which miners are in a race to solve. The winner is validated by other miners who confirm that the winner had correctly solved the math problem and downloaded the information on the previous block. With bitcoin, PoW is what adds new blocks to the chain, and is what rewards miners for adding and validating the correct blocks with bitcoin. In the beginning of bitcoin, people mining it sold it to speculators for the amount that it increased their electricity bills. Over time, as people found uses for the currency, and realized that because there could ever only be 21 million Bitcoin in existence, the price went up. As the price rose, more miners were incentivized to discover bitcoins and enter the market and to find ways to get an edge through more computing power and economies of scale, leading to warehouses like this:
And generating graphs like this:
If Bitcoin were a country today (on 1/7/19 reference 47 TWh per year), it would come in 53rd in yearly energy consumption; more than Iraq and less than Singapore. When estimating energy usage, it’s important to not just think about bitcoin, but the hundreds of other cryptocurrencies which also use proof of work. This Of the Numbers article does a good job estimating other top cryptocurrency energy usage from PoW which probably puts the total blockchain energy consumption closer to the 80-100 TWh range.
The recent dip in energy consumption is a result of a bitcoin price crash, and miners with less efficient hardware giving up because the energy bills don’t make it worth it. This has led to between 600–800k miners shutting operations since mid-November.
Even with the deactivation of miners and more efficient PoW machines on the horizon, there is still a loud cry from environmentalists who wish to see energy consumption at zero. Dr. Jonathan Foley, executive director of Project Drawdown, is one of the blockchain industry’s loudest environmental critics. In a recent Forbes article he was quoted saying:
“In fact, I think the best thing blockchain can do to help the environment is to simply not exist.”
Because Nori is on a mission to reverse climate change and we are using blockchain technology to establish a new carbon removal marketplace, this critique cuts deep. We often get questions around whether blockchain technology is the most efficient means to achieve our end goal. The short answer is yes. My colleagues have written about why we’re using a blockchain, why we’re building on the Ethereum blockchain, and why we’re using a cryptocurrency.
We’re not using the technology in search of a solution, as Foley laments. We independently realized that our quest could use a new technology platform to solve problems that were previously unsolvable. I appreciate any skepticism, especially from people who are fellow travelers and share our mission to reverse climate change, but along with understanding the origins of blockchains with Bitcoin, there are a few key nuances to grasp when it comes understanding the future energy usage of cryptocurrencies and blockchains.
We discussed many of these nuances on a podcast that we recently recorded with Nori’s principal blockchain architect, Jaycen Horton.
Not all blockchains use proof of work
Just like discovering fire was our first way to make light, PoW is the first consensus algorithm for a blockchain to secure data. There will always be fire, but humankind will discover new and better ways of making light. In the world of blockchain, the quest will be driven by lower energy costs, more decentralization, and greater efficiency.
“Side chains” have emerged on the Bitcoin and Ethereum network using Proof of Authority (PoA). This allows pre-selected nodes to run a chain, using about the equivalent energy of a light bulb, or 78 watts. When blockchains use PoA, they become permissioned, meaning that not just anyone can become a node. Hyperledger is a good example of a permissioned blockchain that uses PoA and has been advanced by companies like IBM. For specific instances where there is sensitive data between several parties involved that requires smart contracts, this is a viable option, but oftentimes, the same value provided by PoA could be provided by a simple database. It’s worth noting that PoA doesn’t provide the benefits of decentralization from public blockchains.
Proof of Stake (PoS) is the best current option for a public blockchain to dramatically reduce its energy usage. Ethereum, which consumes between a 25–50% of the energy Bitcoin does, is currently transitioning from PoW to PoS. PoS works by validators (a type of node) becoming virtual miners without consuming significant energy. The validators will have to lock up some of their coins as stake. After that, they will start validating the blocks. When they discover a block which they think can be added to the chain, they will validate it by placing a bet on it. If the block gets appended, then the randomly selected validators will get a reward proportionate to their bets. If they cheat, or collude, they lose their “bet.”
It’s also important to note that not all cryptocurrencies need to be mined nor need to use their own blockchain. In Nori’s case, we are pre-minting 500 million NORI tokens on the Ethereum network which will record NORI transactions and the retirement of Carbon Removal Certificates.
There are cheaper ways to store data on a blockchain
Energy is also consumed from storing data on the blockchain. If someone wants to transact directly on a blockchain, energy costs can rise quickly. State channels are one example where transaction costs can be kept low. Multiple transactions between parties can occur that are consolidated and recorded and then recorded onto a block. It’s sort of like closing up a bar tab at the end of a night — or week. This is embodied in lightning networks which can enable instant contracts and payments. When it’s time to close the tab, transactions are then added on to the block.
All in all, the value of storing trusted data and creating new incentive structures make the development of blockchain technology—and its use for pro-social or environmental outcomes—worthwhile. Imagine, for a moment, that there is a cryptocurrency that represents the amount that buyers are willing to pay to take carbon dioxide back out of the atmosphere. If you can remove carbon dioxide from the atmosphere, you could earn one of them. Wouldn’t that be a future you’d want to live in? That’s what we do, and that’s why we’re excited about the future of blockchain and the good it can do for the world.