Crypto Critic: Building the blockchain of the future
Crypto Critic: Building the blockchain of the future Crypto Critic: Building the blockchain of the future

A lighter, smarter blockchain would certainly have less environmental impact. With the increasing adoption of cryptocurrencies, we can be sure that ecology will be one of the goals of regulators.

The eternal question

As the spotlight returns to Bitcoin, the fierce debate over its energy consumption is heating up again. Most of the discussion revolves around one seemingly clear-cut question: is Bitcoin using too much energy?

The basic outlines of the issue are clear. Bitcoin protects its network from hostile takeover using proof of work ( PoW), a process that consumes significant amounts of electricity due to the computing power required. Every time we have this discussion, the same arguments are given. Critics argue that Bitcoin’s power consumption simply cannot be justified. At various stages in recent years, reports have estimated that the network consumes as much electricity as entire countries.

On the other side, Bitcoin supporters argue that the network could spur greater use of renewable energy sources. Furthermore, they point out that we do not consider energy consumption in the context of opportunity cost. We cannot assess the relative efficiency of Bitcoin as a means of securing and exchanging value unless we compare it to the total energy consumption of the traditional banking system. Just as we should move beyond a narrow measure of emissions to measure the environmental impact of vehicles, Bitcoin proponents argue that we need a comprehensive audit of the environmental impact of traditional finance, including all the infrastructure, the cement and steel buildings, the travel of millions of workers, and the equipment that supports it. Moreover, other alternatives lurk in the background – what about consensus mechanisms such as proof of stake ( PoS), the approach Ethereum is aiming for?

Lots of power, few transactions?

It is a fact, and not controversial, that consensus technology for blockchain consumes huge amounts of power. This is especially evident when comparing the cost of producing and circulating the currency. However, there are claims that miners will eventually turn to where energy costs are lowest or become buyers of green energy as a last resort. Whether this argument is borne out in the long run remains to be seen, given the degree of regulation of energy markets, the physical costs of relocation, and the potential grid security implications of concentrating miners.

Of all these arguments, comparing the energy consumption of cryptocurrencies to the traditional banking sector – in particular <a href=””>fiat – is relatively new. Comparisons with older payment systems, however, overlook the difference in transaction volume: while Visa’s network processed over 185 billion transactions in 2019 alone, Bitcoin has only processed 643 million since its inception (12 years). Moreover, commercial entities such as Visa are well integrated into energy markets, which are tightly regulated in many countries.

Leaving aside the non-trivial, highly complicated implications of energy consumption for blockchain security, the idea that miners will follow lower electricity prices does not necessarily mean cleaner energy, since cheaper energy is often dirtier. But more importantly, the idea that miners will eventually just switch to renewables ignores the opportunity cost of energy.

What will be best for us?

In terms of a solution, the public may not be convinced that cryptocurrencies (and non-exchangeable tokens built on technologies like Ethereum) have a sustainable answer to the question: what will be best for society?

While the debate about the efficacy of cryptocurrencies is dominated by the discussion of digging, less attention is paid to the alternatives. PoS protocols circumvent the need for digging by changing what bad actors can lose if they try to rig transactions. While with PoW such users could potentially lose their invested energy, in a PoS network they would lose their frozen cryptocurrency. But this solution also comes with debatable energy issues.

The design of the future

In addition to the salient issues on power consumption, network design is also important. Future blockchain architecture will need to be multi-chain and flexible, providing a set of parameters that can be adjusted according to specific requirements such as speed, transaction throughput or security. A lighter, “smarter” blockchain would certainly have a smaller environmental footprint, but it would also be easier to adopt.

Blockchain technology has always been a promising way to perform, verify and record P2P energy transactions, allowing anyone on a local microgrid to become a producer or buyer of electricity. However, we haven’t seen real-world use cases of it until now. For the market to work well, units of energy worth just a few kilowatts would need to be traded, which would equate to a monetary value of just a few cents. Such transactions are not feasible with blockchain’s current transaction fees. However, when transaction costs are fractions of a cent, this hurdle would be eliminated. This, in turn, would allow blockchain to serve as the technological foundation for smart cities, enabling millions of Internet of Things devices, such as smart meters or solar panels, to seamlessly interact and communicate with digital wallets, often without human intervention.

Energy Verifier

In addition, blockchain-based applications – decentralized applications or DApps – can be created to provide traceability of clean energy. In this way, when buying electricity, you can check via an app whether it comes from a renewable source. Empowering the consumer to make these decisions is only possible with decentralized technology; otherwise, intermediaries will be able to distort markets to their liking. As global environmental awareness increases, traceability can become a key tool to encourage renewable energy production.

In addition to looking holistically at the relative energy consumption of blockchain versus traditional finance, we should begin a broader discussion of the positives and negatives of this technology for society. For blockchain to realize its transformative potential, to support smart cities and low-carbon economies, we need to focus on developing a smarter, more affordable blockchain architecture. Power consumption is an important topic, but it must not blind us from what is really important.

Financial Critic