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MAKING CRYPTOCURRENCY MORE ENVIRONMENTALLY SUSTAINABLE
by Marc Blinder
Blockchain has the power to change our world for the better in so many ways. It can provide unbanked people with digital wallets, prevent fraud, and replace outdated systems with more efficient ones. But we still need this new and improved world to be one that we want to live in. The largest cryptocurrencies—Bitcoin, Bitcoin Cash, and Ethereum—require vast amounts of energy consumption to function. In 2017, blockchain used more power than 159 individual nations, including Uruguay, Nigeria, and Ireland.1 Unsurprisingly, this is creating a huge environmental problem that poses a threat to the Paris climate-change accord.
It’s a brutal, if unintended, consequence for such a promising technology, and “mining” is at the heart of the problem. When Bitcoin was first conceived nearly a decade ago, it was a niche fascination for a few hundred hobbyists, or “miners.” Because Bitcoin has no bank to regulate it, miners used their computers to verify transactions by solving cryptographic problems, similar to complex math problems. Then, they combined the verified transactions into “blocks” and added them to the blockchain (a public record of all the transactions) to document them—all this, in return for a small sum of Bitcoin. But where a single Bitcoin once sold for less than a penny on the open market, it now sells for nearly $7,000, and around 200,000 Bitcoin transactions occur every day. With these numbers increasing, so has the incentive to create cryptocurrency “mines”—server farms now spread across the world, often massive. Imagine the amount of energy consumed by 25,000 machines calculating math problems 24 hours a day.
Beyond the environmental concerns, this inefficiency threatens blockchain as a meaningful platform for enterprise. The high energy costs are baked into the system, and, because the cost of running the network is passed on in transaction fees, users of these networks end up paying for them. Initially, companies that use Bitcoin may not see the financial consequences, but as they scale, the costs could become fatal.
The good news: There are various alternatives available that can help organizations cut massive energy costs. Right now, they aren’t being adopted quickly enough. Companies that want to keep their heads above water—along with everyone else’s—need to educate themselves. Below are two areas that are a good place to start.
Green Energy Blockchain Mining
An immediate fix is mining with solar power and other green energy sources. Each day, Texas alone receives more solar power than we need to replace every nonsolar power plant in the world. There are numerous commercial services for powering cryptomining on server farms that only use clean, renewable energy. Genesis Mining, for instance, enables mining for Bitcoin and Ethereum in the cloud. The Iceland-based company uses 100% renewable energy and is now among the largest miners in the world.
We need to incentivize green energy for future blockchains, too. Every company that uses blockchain also defines its own system for miner compensation. New blockchains could easily offer miners better incentives, like more cryptocurrency, for using green energy—eventually forcing out polluting miners. They could also require all miners to prove that they use green energy and deny payment to those who don’t.
Energy-Efficient Blockchain Systems
While Bitcoin, Bitcoin Cash, and Ethereum all depend on energy-inefficient cryptographic problem solving known as “proof-of-work” systems to operate, many newer blockchains use “proof-of-stake” (PoS) systems that rely on market incentives. Server owners on PoS systems are called “validators”—not “miners.” They put down a deposit, or “stake” a large amount of cryptocurrency, in exchange for the right to add blocks to the blockchain. In proof-of-work systems, miners compete with each other to see who can problem solve the fastest in exchange for a reward, taking up a large amount of energy. But in PoS systems, validators are chosen by an algorithm that takes their “stake” into account. Removing the element of competition saves energy and allows each machine in a PoS system to work on one problem at a time, as opposed to a proof-of-work system, in which a plethora of machines are rushing to solve the same problem. Additionally, if a validator fails to behave honestly, they may be removed from the network—which helps keep PoS systems accurate.
Particularly promising is the delegated proof-of-stake (DPoS) system, which operates somewhat like a representative democracy. In DPoS systems, everyone who has cryptocurrency tokens can vote on which servers become block producers and manage the blockchain as a whole. However, there is a downside. DPoS is somewhat less censorship resistant than proof-of-work systems. Because it has only 21 block producers, in theory, the network could be brought to a stop by simultaneous subpoenas or cease and desist orders, making it more vulnerable to the thousands upon thousands of nodes on Ethereum. But DPoS has proven to be vastly faster at processing transactions while using less energy, and that’s a trade-off we in the industry should be willing to make.
Among the largest cryptocurrencies, Ethereum is already working on a transition to proof-of-stake, and we should take more collective action to hasten this movement. Developers need to think long and hard before creating new proof-of-work blockchains because the more successful they become, the worse ecological impact they may have. Imagine if car companies had been wise enough several decades ago to come together and set emission standards for themselves. It would have helped cultivate a healthier planet—and preempted billions of dollars in costs when those standards were finally imposed on them. The blockchain industry is now at a similar inflection point. The question is whether we’ll be wiser than the world-changing industries that came before us.
TAKEAWAYS
The largest cryptocurrencies require vast amounts of energy consumption to function. In 2017, blockchain used more power than 159 individual nations, including Uruguay, Nigeria, and Ireland. This is creating a huge environmental problem that poses a threat to the Paris Agreement.
- With the value of cryptocurrency increasing, so has the incentive to create “mines”—massive server farms spread across the world, calculating math problems 24 hours a day.
- A variety of alternatives are available that can help organizations cut massive energy costs associated with blockchain, but they aren’t being adopted quickly enough.
- An immediate fix is mining with solar power and other green energy sources. Every company that uses blockchain also defines its own system for miner compensation. New blockchains could easily offer miners better incentives for using green energy.
- Blockchains that use a proof-of-stake system rather than a proof-of-work system are less energy intensive. If the blockchain industry can make the hard choice to adopt greener decisions now, it may avoid having green standards forced upon it in the future.
NOTE
1. “Bitcoin Energy Consumption Index,” Digiconomist, https://
digiconomist ..net /bitcoin -energy -consumption
Adapted from content posted on hbr.org, November 27, 2018 (product #H04O38).