how to solve a problem like bitcoin?

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Bitcoin uses significant amounts of energy, more than any other cryptocurrency. If cryptocurrencies are to be taken seriously in the broader financial world, it’s important that Bitcoin’s power consumption is not confused with all cryptocurrencies.

Although estimates on this vary, the Cambridge Center for Alternative Finance (CCAF) found that approximately 199.65 million tonnes of carbon dioxide equivalent (MtCO2e) can be attributed to the Bitcoin network since its inception, of which 92 % have been emitted since 2018. CCAF reports that this level of greenhouse gas emissions is estimated at 0.10% of global emissions, and equivalent to the total emissions of Nepal (48.37 MtCO2e) or the Republic Central African Republic (46.58 MtCO2e).

Mining accounts for the vast majority of bitcoin energy consumption. Mining is an essential part of the Bitcoin exchange and is how currency is made, although it is not the only way to obtain Bitcoin. Bitcoins cannot be created automatically; creators need effort, or computer power, to make this cryptocurrency available.

The Bitcoins whitepaper describes this as the process of having computer hardware perform mathematical calculations for the Bitcoin network to confirm transactions and increase security. As a reward for their services, Bitcoin miners may collect transaction fees for transactions they confirm, as well as newly minted Bitcoins. This is otherwise known as Proof of Work (PoW)

Miners need a complicated computing setup across multiple hard drives, which is where a lot of that power consumption comes from. By removing this system, you lose a large part of the energy consumption. On this subject, Kirsteen Harrison, environmental advisor on the board of Zumo, told Finextra Research that when the value of Bitcoin is high, it is in the interests of miners to put more and more computing power in which is electricity intensive.

Not all cryptocurrencies: Maria is a little different

Beyond Bitcoin, cryptocurrencies don’t have to operate on a PoW model. At the Singapore Fintech Festival 2022, Ethereum co-founder Vitalik Buterin took to the main stage to highlight the successes of The Merge, which moved Ethereum from PoW to Proof-of-Stake (PoS).

Both PoW and PoS are consensus mechanisms used by cryptocurrencies to validate transactions made on the blockchain and add new tokens. A key difference between the two is that PoS uses much less electricity than PoW.

Harrison explained the reason: with PoW, the more computing power you put into solving an algorithm, the more likely you are to mine that Bitcoin or cryptocurrency. The harder you work, the better your chances of success. It is in the interests of miners to use more and more computing power, which consumes a lot of electricity. PoS uses a completely different model. It looks at how much stake, (don’t take!) you have in a particular cryptocurrency, then allocates it based on that, so it doesn’t incentivize based on the electricity used.

Ethereum, now on the PoS mechanism, saw a significant decrease in power consumption, and it was seen as a success. According to a report from the White House, before their move to PoS or The Merge, Ethereum accounted for 20% to 39% of the global electricity consumption by a crypto asset.

Additionally, according to the Crypto Carbon Ratings Institute (CCRI), The Merge reduces the electricity consumption and carbon footprint of the Ethereum network by over 99.988% and 99.992%, respectively. Many believe that this low power consumption makes PoS the future of crypto, with Buterin even going so far as to write a book on the subject called Proof of Stake: The Making of Ethereum and the Philosophy of Blockchains.

The effectiveness of PoS in reducing electricity is clear. However, the CCAF told Finextra that it continues to research the long-term effectiveness of PoS. This may seem like a simple solution to solving power issues in all cryptocurrencies, but there are a number of obstacles preventing PoS from gaining momentum.

For those against PoS, this removes one of the main benefits and philosophy of blockchain for digital currencies: decentralization. Some have argued that under this PoS mechanism, centralization is inevitable as centralized intermediaries will need to verify transactions. With PoW, anyone can join the network anonymously, which many see as a benefit, but PoS puts a strain on that.

There are some concerns about the security of PoS, however, Ethereum claims it is ultimately more secure. PoW is believed to have a more robust security system due to its initial requirements, while PoS involves security through community control. Ethereum explains how community protections work through an example of a 51% attack, i.e. when a group owns more than 50% of the total hash points or energy consumption of a cryptocurrency.

The Ethereums blog post explains: An attacker would need 51% of the staked ETH. They could then use their own attestations to ensure that their preferred fork was the one with the most accumulated attestations. The “weight” of accumulated attestations is what consensus clients use to determine the correct string, so this attacker could fork the canonical. However, one strength of proof-of-stake over proof-of-work is that the community has the flexibility to mount a counterattack. For example, honest validators might decide to continue to rely on the minority chain and ignore the attacker’s fork while encouraging apps, exchanges, and pools to do the same. They could also decide to forcibly remove the attacker from the network and destroy their staked ETH.

However, the main obstacle to moving Bitcoin from PoW to PoS is Bitcoin itself. Bitcoin does not belong to anyone in particular. There is no central council to call upon for change in the system, they don’t have one and we don’t know who Nakamoto is.

Also, there doesn’t seem to be much of a change for users themselves, especially minors. Harrison said: At the moment there is no appetite within the Bitcoin mining community to change the consensus mechanism.

Sustainable future: keeping the hills alive

With all that has happened in the cryptocurrency market in 2022 – especially in the last few weeks with the implosion of FTX – for many, the future of cryptocurrency is unclear. However, what is clear is that to have a future, it must be sustainable.

It should be pointed out that while Bitcoin is the biggest user of PoW, other cryptocurrencies also use it, including Dogecoin, Litecoin, and Monero.

Many of those involved in cryptocurrency are aware of its impact and have made significant changes over the past few years. Harrison shared his experience on this: When we started our journey a few years ago, there was nothing in the way of industry councils, there was no industry body considering seriously decarbonization. Within about six months of starting our decarbonization journey, there was the Crypto Climate Accord followed soon after by the Bitcoin Mining Council. More recently we had GBBC; Global Digital Finance, which has set up an ESG working group; the World Economic Forum has also created a working group. There’s all this activity, there’s all this advice that’s been published or is in the process of being published, which is fantastic.

Bitcoiners need to weigh the reality of the environmental situation and determine if decentralization is a step in the right direction given the climate crisis. According to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change, we only have a budget of 500 gigatonnes of CO2 to have a 50% chance of limiting warming to 1.5°C. Every high carbon producing group must take responsibility for their actions. This includes organizations using cryptocurrencies.

Harrison concluded: Ethereum and The Merge showed us what is possible, but the Bitcoin blockchain and the Ethereum blockchain are very different. Some nuances mean that we must take into account that we are not dealing with apples and apples.

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