Navigating the Energy Demands of Blockchain in a Climate-Constrained Future
In recent weeks, Bitcoin’s value has reached new heights, digital artworks have sold for millions of dollars, and the internet is once again abuzz with discussion about the future of blockchains. This time around, discussion is focused primarily on energy demands and climate impacts with the Bitcoin network now famously estimated to consume more electricity than Argentina – about 120 TWh per year. During the last major spike in interest around blockchain protocols three years ago, I authored a policy digest that explored their energy implications. Although this digest discussed energy demand, it primarily focused on many of the ways I saw blockchains potentially being incredibly valuable assets in the global energy transition. I continue to believe that the energy demands of blockchains, while justifiably alarming, are ultimately solvable with coordinated regulation, and that blockchains have the potential to serve an ultimately beneficial role in decarbonization efforts.
Blockchain protocols aren’t going anywhere. They are the best solution we have to assigning ownership of digital assets and they will continue to be an increasingly valuable economic tool as our world becomes more and more digitized. VISA, Walmart, Ford, Shell, Delta, Pfizer, Unilever, and dozens of other companies have already started deploying blockchains in various parts of their businesses. I have argued that decentralized blockchains could be a useful tool in managing cap and trade systems, ‘prosumer’ electricity sales, carbon offsets, and other transition-relevant market structures. This is no longer a fringe technology utilized by a handful of cryptocurrencies; it is a digital tool that will soon become ubiquitous. The verification methods used by these networks, and the energy demands of those verification methods, matter a great deal.
Both Bitcoin and Ethereum, the two most heavily utilized distributed blockchain protocols in the world both use a verification method called ‘proof-of-work’. It is this proof-of-work verification that has caused the present alarm over energy demands and carbon emissions. The “work” named in “proof-of-work” is specifically referring to the computing work of specialized ‘mining’ machines. Owners of these high-powered computers compete with each other to be the first to solve a complicated computational puzzle, and by doing so verify a ‘block’ – essentially a written record of transactions within a network up to a predetermined size (1 MB in the case of Bitcoin). Whoever wins this race is rewarded, all of the loosing miners confirm that the winning solution is correct, and then that block is added to the blockchain (a permanent record of all transactions). Simply put, the more powerful your computers (and the more energy you consume) the more likely you are to ‘win’ any given block.
Already, you can begin to see the computational – and therefore – energy inefficiency of this system, but the real kicker is that the difficulty of the puzzles scale with computing power to ensure that the time it takes to verify a block remains relatively consistent. This ensures that miners aren’t wasting too much time and energy trying to verify transactions that have already been verified. In other words, without a change in its protocol, the Bitcoin network isn’t going to get any more efficient as computing technology improves. The opposite will be true.
Proof-of-stake verification is an alternative method that seeks to avoid these issues. Rather than competing to verify blocks using computing power, validators compete using their share of the tradeable asset. The more of the asset you own, the more likely you are to be selected to verify a block, with the understanding that you have a vested interested in maintaining the security of the network – no problem-solving necessary. This block can then be confirmed by other agents on the network before being immortalized on the blockchain.
There are security risks to proof-of-stake. Because verifying a block has little cost to the verifier (unlike the cost of electricity for a proof-of-work miner) there is arguably less to deter a malicious actor from trying to sneak in a false block to the blockchain. There are hundreds, if not thousands, of proof-of-stake protocols that have various ways of addressing this challenge, but there is some disagreement over the ultimate security of these networks.
A global research initiative into determining both the security of proof-of-stake protocols and the scalability of proof-of-work protocols is desperately needed. Other fringe verification techniques such as Directed Acyclic Graph and proof-of-burn protocols also need to be further explored to see if a climate-friendly and secure verification methodology can be confirmed. As these methods are being analyzed, restrictions should be placed on blockchains such as Bitcoin that are clearly unsustainable.
Decentralized networks like Bitcoin or Ethereum are not managed by anyone. The code is open source and the only thing maintaining a unified network is consensus around a specific protocol. Steering these networks away from unsustainable energy use will likely require governments to impose rules related to proof-of-work blockchain verification protocols such as setting a minimum block size, maximum difficulty, or simply a watts/byte ceiling above which the trading of digital assets would be restricted. This is a far more nuanced approach than the proposed banning of cryptocurrencies that was introduced last week by the Indian government. The goal should not be to put an end to blockchains – they are extremely valuable tools – but rather to set the ground rules for how they should perform and to promote network innovation.