Is there an environmentally friendly cryptocurrency?
Bitcoin is under fire for its energy consumption, but is there any green cryptocurrency?
- Bitcoin energy consumption
- Origins of bitcoin
- Blockchain technology
- Why so much energy is used
- Real-world anchor
- Is there an environmentally friendly way to mine crypto?
- Why using PoS in crypto mining is greener
- Delegated proof-of-stake
- Effectiveness of the PoS model
- Vulnerability to attacks
- Final thoughts
With the shocking environmental cost – in terms of energy usage – of mining for bitcoin and ether increasingly exposed, alternative coins such as Cardano and Sol, which purport to be environmentally sustainable, have emerged.
These coins, by replacing proof-of-work (PoW) models with proof-of-stake (PoS) models, claim to cut the amount of electricity consumption used in their creation by more than 99%. The Ethereum blockchain protocol that produces ether (ETH) – the second-highest-valued crypto after bitcoin (BTC) – has been facing increased pressure to clean up its energy problem, and has pledged to adapt to a PoS model by 2022 at the latest.
But do environmentally friendly cryptocurrencies actually work? Can ether sever itself from its PoW structure and retain its value? Can crypto coins replicate the function or value of bitcoin while removing the environmental costliness? Does the value of blockchain technology lie at odds with true sustainability?
Before we start to answer some of the questions, let us look at why traditional crypto models are so environmentally costly.
Bitcoin energy consumption
First things first: How much energy does bitcoin use?
According to recent research undertaken by Cambridge University, bitcoin consumes around 133.68 terawatt hours (TWh) a year of electricity, accounting for 0.5% of all the electricity consumed in the world. To put this into perspective, bitcoin uses more electricity than Sweden, and slightly less than the entire country of Malaysia.
Academics, environmentalists and charities have come out in droves to criticise bitcoin’s colossal carbon footprint.
Dr Larisa Yarovaya, associate professor of finance and deputy head of the Centre for Digital Finance at Southampton University, said: “Bitcoin could be the first inefficient version of a disruptive technology. It should die for the common good of the planet and be replaced by a new model. It consumes more electricity than a country. All the rest is detail.”
Professor Brian Lucey, chair of international finance and commodities at Trinity College Dublin, reflected such sentiments: “This is a stunning amount of electricity. It’s a dirty business. It’s a dirty currency.”
“Bitcoin should die for the common good of the planet and be replaced by a new model.”
US Treasury Secretary Janet Yellen spoke in a similarly critical vein about cryptocurrencies’ energy problem: “It’s an extremely inefficient way of conducting transactions. And the amount of energy that’s consumed in processing those transactions is staggering.”
Bitcoin, however, is not the only cryptocurrency coin with an energy problem. A study from March 2020 by Joule, a science journal, found that white bitcoin accounted for 80% of the market cap of “proof-of-work” coins and two-thirds of the energy, there are literally hundreds of other lesser-known coins currently using PoW models. The most well-known include Litecoin (LTC) and ETH.
ETH, the second-largest crypto network after BTC, uses a gigantic 5.13 gigawatts (GW) of power, approximately the entire consumption of Peru. Each non-fungible token (NFT) on the Ethereum network has a carbon footprint equivalent to 140,893 Visa credit-card transactions.
But how can bitcoin – a quasi-asset, quasi-social movement and quasi-currency – have evolved from a digital abstraction to a very real environmental threat? How, if the process produces nothing tangible and nothing physical, can it be so incredibly damaging?
Before we get onto environmentally friendly crypto alternatives, let us first look at how and why bitcoin mining’s power consumption is so high, and why PoW is so unsustainable.
Origins of bitcoin
In order for a currency to exist, people need to trust it. Fiat currency, such as the US dollar and the euro, is backed by central banks, which are in turn backed by their countries’ central governments. In stable economies, individuals have sufficient trust in the system that their money will retain its value, that their money will be kept safe and that if they are the victim of fraud, they will be entitled to compensation.
People use the fiat currency system because they trust it. They trust it because it is backed up by trusted third parties. As anthropologist David Graeber said, “the value of a unit of currency is not the measure of the value of an object, but the measure of one’s trust in other human beings”.
Bitcoin, as a decentralised currency that operates via a peer-to-peer network, is not backed up by a central system. Therefore, its success after its founding in 2008 rests on proving itself as a trustworthy alternative via other means. This is where blockchain technology comes in.
Blockchain technology acts as a public record of transactions, or a “distributed ledger” technology that is almost impossible to defraud. Since its inception, this technology has proved itself to be immune to corruption. However, it is precisely the process by which new blocks are added to the chain that renders it so environmentally unsustainable, and why bitcoin mining’s energy consumption is so astronomical.
Let us take a closer look at blockchain technology.
Blockchain technology is the distributed ledger of transactions. The function of blockchain is to allow digital information to be recorded and distributed, but not edited. That basically means that while I can see new transactions, I cannot change them.
Bitcoin “miners” on the network are responsible for managing this sprawling public record and adding new blocks to the ledger. They are remunerated for managing the bitcoin network with bitcoins. Adding new blocks to the system, however, is not the electricity-guzzling part. It is the fight to be the “miner” who adds the block to the system that is what consumes so much energy.
Bitcoin was not always so electricity-guzzling. Back in 2009, when the value of bitcoin was next to nothing, someone could use just a couple of seconds of electricity and mine a coin from one basic computer. Fast-forward to now, when each bitcoin costs in the region of $40,000 and requires costly electricity-guzzling computers, draining the equivalent of nine years’ worth of household electricity.
Every transaction that is made has to be verified by the Bitcoin network. Globally, miners, who used to be individuals but are now invariably companies, compete to validate a block of transactions and enter them into the public ledger.
In order to validate the block of transactions, high-powered computers are used to solve puzzles. The first to solve the puzzle is rewarded. It is comparable to rolling a dice with billions and billions of sides – the first miner to, say, roll the number ‘2’ wins.
Why so much energy is used
Of course, human ability to solve the puzzles cannot do this speedily enough, which is high-speed computers are required and why so much energy gets used to do the mining.
The network is designed in such a way to make the puzzle ever more difficult to crack, again increasing the need for power-hungry computers. Indeed, the puzzles are designed to be adequately complex so that it takes on average 10 minutes for a miner to win.
Once a miner has won the puzzle, he or she then verifies the “block” of transactions, which is added to the existing chain of previous blocks. The miner is then rewarded with 6.25 bitcoins. They can then keep these as an investment, or transfer them into hundreds of thousands of dollars in fiat currency.
Once the equation has been solved, the remainder of the network then verifies whether it is correct or not. When a block is finalised, it cannot be altered, since a fraudulent version would quickly be spotted and rejected by the network’s users.
Furthermore, the more pricey bitcoin becomes, the more individuals enter the game, which in turn cranks up the competition. This in turn increases the demand for the newest and fastest computers. Put simply, the higher the BTC price goes, the more bitcoin mining costs rise, and the more energy is expended in mining bitcoin.
Why then – given how much energy is taken in the process, and how high the bitcoin mining cost is for the miners and the planet – is the PoW model employed?
Firstly, the proof-of-work model allows for miners to be allocated randomly. As long as your computers are up to scratch, the process of who guesses the puzzle the quickest is fairly random. So while its expensive to buy the equipment in the first place, once its bought, its an equal playing field. This helps keep the network decentralised.
The high-powered computers required to compete and the complexity of solving these puzzles also helps keep financial transactions in the blockchain secure. Put simply, it becomes too expensive to corrupt the system.
The complexity of the puzzles and the cost required to solve them renders the chance of a 51% attack – a hypothetical situation whereby a group of miners controlled over 50% of the network’s computing power – very unlikely.
According to statistics, it would cost $2,240,771 to wage a 51% attack on the network for an hour.
Furthermore, as mentioned previously, the network is set up so that a new “block” can only be added to the chain every 10 minutes. This increases the scarcity of the coins, thus making them more valuable. It also becomes physical evidence that the majority of computing power contributed to building that block.
A frequently overlooked, but incredibly critical, factor in all this is that mining provides an anchor for the asset in the real world.
Bob McElrath, a Washington, DC-based blockchain consultant, said: “Mining provides a value anchor for the cryptographic asset in terms of real-world expenditures. Mining costs a certain amount of money, and the calculus going on in the heads and balance sheets of those performing mining is: How much does mining hardware cost, how much does electricity cost and what is the price of bitcoin?”
The value of bitcoin is inextricably tied up with the cost of input. Money and time in the real world is invested into competing to solve these algorithms. Just like the cost of real gold is intangibly enmeshed with the difficulty and expense of mining and refining it, bitcoin’s value is not separate from such a cost.
Furthermore, through mining, PoW supplies an economic solution to a distributed-systems challenge by introducing a real cost as a disincentive to unwanted behaviour, as well as involving a reward system. The real-world dimension of PoW – precisely the part that is so energy-guzzling – is, according to advocates of PoW, what provides it with gravity and ensures its security.
But what does this have to do with green crypto?
Is there an environmentally friendly way to mine crypto?
Proof-of-work, while deeply environmentally damaging, has succeeded in creating a system that, in its own vaguely solipsistic universe, functions effectively as an asset that people value. It also functions as a virtually unfraudable ledger by which to hold the asset.
The question then becomes: Can methods that are more energy-efficient replace PoW while still retaining its value? Is there a greener alternative?
Coins including Peercoin (PPC), Next (NEXT), BlackCoin (BLK) and ShadowCoin (SHDW) use the new, far-greener model of PoS as an alternative by which to create consensus on the peer-to-peer network. As mentioned earlier, the Ethereum network is looking to launch Ethereum 2.0 using a PoS model by 2022.
But what is proof-of-stake, and how does it work? Is it really more environmentally friendly? Let's take a look.
Introduced in 2012, the PoS consensus algorithm is based on the idea that an individual can validate block transactions based on how many coins they hold.
To participate, users create a node. A node can be thought of as a computer that is run by one or more people. The more coins a node holds, the more coins they can mine. The frozen coins are used as collateral. For example, a miner who owns 4% of coins available can only mine 4% of blocks.
A researcher at the Ethereum Foundation, discussing proof-of-stake, said: “Instead of buying a bunch of hardware and burning a bunch of energy, I can instead take that asset and lock it in kind of like a security bond.”
The PoS algorithm elects a node or miner to validate the next block. Unlike PoW, PoS miners are rewarded in transaction fees rather than in newly minted cryptocurrency. The node is chosen based on a combination of factors, including how many coins the node has, how long the coins have been staked and other randomised-block selection methods.
Different coins use different methods of node selection. The coin-age selection method chooses nodes based on how long the tokens have been staked for. If a node is chosen to forge a block, the coin age is reset to zero, meaning they have to wait before being able to strike another one. This allegedly prevents large nodes from dominating the process.
When a node is elected to forge the new block, it will check the validity of the block’s transactions, sign the block and add it to the existing blockchain. Once a node no longer wants to participate in forging for blockchain, rewards – along with collateral sums – will be released after the network checks that no malicious or fraudulent blocks have been added.
If a fraudulent transaction is made, the node will lose its stake. This, being higher than the reward, is perceived to be enough of an incentive not to act maliciously.
Why using PoS in crypto mining is greener
Unlike PoW, which requires the use of highly powerful energy-guzzling computers, the PoS block-forging methodology can be done by any individual with a normal computer.
This means that PoS is much more more scalable and sustainable. Indeed, analysts suggest that energy consumption for PoS is at least 99% lower than for PoW.
It also means the forging process can be accessible to more individuals, thus making it the more ‘democratic’ of the two mining methodologies.
Delegated proof-of-stake, developed in 2014, is another iteration of PoS. It is used by a number of blockchains, including Cardano (ADA), EOS.IO (EON) and TRON (TRX).
In this blockchain process, users of the network vote and elect delegates to forge the new block. This process is considered even more democratic as individuals are chosen with a good reputation rather than due to their overall wealth.
ADA, as the fourth-largest crypto, with a market cap of over $70bn (£51.4bn, €60.5bn), clearly demonstrates that such a model can be dramatically greener.
However, certain critics believe PoS undermines the original reason why cryptocurrency was created, and in fact renders it mot crypto.
Let’s take a look.
Effectiveness of the PoS model
Before looking at other issues, let’s remind ourselves of the fact that cryptos were intended to be:
a form of decentralised currency whereby
blockchain technology creates an immutable ledger.
Bitcoin was designed to be decentralised so that the work and authority of it could be divided. Decentralisation means there is no single point of failure and no single point of authority. Centralisation, however, is the opposite.
In PoS, it is the amount of staked tokens that secures the network, while in PoW it is the computing power.
Extensive criticism has been railed against PoS because it favours entities with a higher amount of tokens, meaning stakeholders with existing wealth have higher profit margins, thus gaining a greater ability to accumulate more. As larger stakeholders’ wealth grows faster and they take a greater portion of the lion’s share, smaller stakeholders will drop out, leading to centralisation.
The ICON network uses a delegated Proof-of Contribution (PoC) model. Back in 2020, the top 10 validators – the people responsible for verifying transactions on the blockchain – had a total vote percentage of 59.8%. This clearly demonstrates how easily centralisation can occur. The results of such centralisation could result in the systems replicating traditional systems, excluding certain participants due to their identity, nationality or other conditions.
However, Tim Beiko, the coordinator for Ethereum’s protocol developers, has addressed the potential threat to decentralisation in PoS. He told CNBC: “We knew that there would be a lot of technical work to address things like the increased centralisation that we see in other proof-of-stake systems... We’ve achieved that with the Beacon chain, where there’s one or two orders of magnitude more validators ... than any other proof-of-stake networks.”
Some crypto analysts are far from enthusiastic about Ethereum 2.0, with blockchain consultant Bob McElrath suggesting that “Ethereum’s determination to move to proof of stake is ill-conceived, and will result in an inflationary destruction of the currency”.
Vulnerability to attacks
Critics have also suggested that the PoS system is much more likely to be attacked and much less secure for a number of reasons. One of these includes the fact that PoW blockchains are done block by block. This stops dishonest nodes from tampering with the latest blocks, but also makes it difficult to change one's buried further back in the chain. In PoS, however, the chain is trivial in terms of work, so it can be done in a few minutes.
Another is that the nodes are incentivised, should a fork be created, to reconcile back into one single unified blockchain. In PoS models, there is no disincentive to validating blocks on multiple forks, thus reducing integrity within the system.
Lastly, PoS models are vulnerable to low-cost bribe attacks, which cost approximately 50 times less than executing the same attack on a PoW network.
Some critics have suggested there is no real difference between a PoS and a community fiat system, suggesting that the model for banks is basically the same system as a PoS model.
Donald McIntyre, journalist and founder of Etherplan, commented: “Participating banks have to make security deposits, have minimal capital requirements, and follow the rules to be licensed to accept and process transactions, maintaining the account balances of their customers. PoS is no different.”
So how does all of this tie in with green crypto?
If PoS cannot prove itself either capable of remaining decentralised or having any more security than any other distributed database in the long term, then it can no longer technically be defined as a cryptocurrency, even if it is green.
If, however, the system is found to have integrity and investors perceive it as still having value, then cryptocurrency can continue to exist, just in a much more energy-efficient way.
The PoS model, however, is still at a fairly nascent stage, and the price of the entire crypto market is no doubt being bolstered by coins such as BTC and ETH, which still use PoW. Transferring to a new system takes consensus from the whole network. Forcing miners who have spent huge amounts of money on computers that would be rendered useless is not an easy task.
Put simply, there is already a lot of skin in the game and an established ethos, which newer coins that have adopted PoS from the start simply do not have to contend with.
Furthermore, looking at the issue of “work” and “cost” in more abstract terms, significant value rarely emerges over the long term from a process where the input is easy, basically free and requires negligible effort. While it is easy to get bogged down in the technicalities, in much more simple terms, the effort and input-cost value is related to the output value. Zero input cannot, over the long term, create excess output.
This was articulated eloquently by Pavan Sukhdev, CEO of Gist and founding director of Corporation 2020, who said during a symposium on capitalism and climate change that: “Negative externalities are basically the public costs that come from the pursuit of private profit.”
The shocking carbon footprint of cryptocurrencies is a negative externality and a public cost driven largely, at this point, by the pursuit of private profit.
While PoS advocates are keen to have their cake and eat it too, the question remains in what new manifestation might that “cost” come.
The legality of bitcoin mining depends on where you live. In some countries, bitcoin mining is perfectly legal, in others, however it is not.
Bitcoin and bitcoin mining are prohibited in countries like Bangladesh, Bolivia, Denmark, Ecuador, India, Iran, Kyrgyzstan, Nepal, Thailand and, most recently, China.
Outisde of these countries, mining is legal.
Bitcoin mining has become an expensive business. You need a huge amount of access to electricity and very expensive equipment. Long gone are the days when you could mine from your bedroom.
Furthermore, with each halving that occurs, bitcoin mining becomes less profitable, meaning that one day, when there are no more coins left to mine, miners will have to rely completely on transaction fees.
Whether it is worth mining bitcoin depends on your location, your access to electricity, your knowledge base and your access to the necessary resources.
All coins that use proof-of-stake are the most environmentally friendly. Some of these coins, such as Cardano, you may have heard of, while others, such as Ark, may be less familiar.
Some of the greener cryptocurrencies that also have the largest market cap are Alogrand (ALGO), Cosmos (ATOM), TRON, EON, Tezos (XTZ) and Icon (ICX).