how do we solve a problem like Bitcoin?

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

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

Mining accounts for the vast majority of Bitcoin’s energy consumption. Mining is an important part of Bitcoin exchange and is how the currency is created, albeit not the only way to get Bitcoin. Bitcoins cannot be created automatically; creators require effort, or computing power, for this cryptocurrency to be made available.

Bitcoin’s whitepaper describes this as “the process of having hardware do mathematical calculations for the Bitcoin network to confirm transactions and increase security. As a reward for their services, Bitcoin miners can collect transaction fees for the transactions they confirm, along with newly created Bitcoins.” » This is otherwise known as Proof of Work (PoW)

Miners require a complicated computer setup across multiple hard drives, and this is where a large portion of this energy consumption comes from. When you remove that system, you lose a lot of energy consumption. On this topic, Kirsteen Harrison, an environmental advisor on the Zumo board, told Finextra Research that “when the value of Bitcoin is high, it is in the miners’ interest to add more and more computing power that is electricity intensive.”

Not all cryptocurrencies: Maria is a little different

Beyond Bitcoin, cryptocurrencies do not need 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 migrated Ethereum from PoW to proof-of-stake (PoS).

PoW and PoS are both consensus mechanisms used by cryptocurrencies to validate transactions made on the blockchain and add new tokens. An important difference between the two is that PoS uses significantly less power than PoW.

Harrison explained the reason for this: “With PoW, the more computational power you put into solving an algorithm, the more likely you are to mine that Bitcoin or cryptocurrency. The more work you put in, the greater your chances of success. It is in the miners’ interest to use more and more computing power, which requires electricity. PoS uses a completely different model. It looks at the amount of stake, (not take!) you have in a particular cryptocurrency and then allocates on that basis, so it doesn’t incentivize based on electricity used.”

Ethereum, now on the PoS mechanism, has seen a significant decrease in energy usage, and this has been perceived as a success. According to a White House report, before the switch to PoS or The Merge, Ethereum accounted for 20% to 39% of the global electricity consumption of a crypto-asset.

Furthermore, according to the Crypto Carbon Ratings Institute (CCRI), The Merge reduces the power consumption and carbon footprint of the Ethereum network by over 99.988% and 99.992% respectively. Many believe that this low energy consumption makes PoS the future of crypto, with Buterin even writing a book on the subject titled “Proof of Stake: The Making of Ethereum and the Philosophy of Blockchains.”

The effectiveness of PoS in reducing electricity is evident. However, CCAF told Finextra that it is continuing its research into the long-term effectiveness of PoS. This may seem like a simple solution to solving energy problems across all cryptocurrencies, but there are a number of roadblocks that stop PoS from taking off.

For those opposed to PoS, it removes one of the core benefits and philosophy behind blockchain for digital currencies: decentralization. Some have argued that under this PoS mechanism, centralization is inevitable as centralized intermediaries will have to verify transactions. With PoW, anyone can anonymously join the network, which many see as an advantage, but PoS puts this under pressure.

There are some concerns about the security of PoS, but Ethereum claims that it is ultimately more secure. PoW is believed to have a more robust security system due to its prerequisites, while PoS involves security through community control. Ethereum explains how community protection works through an example of a 51% attack which is when a group owns more than 50% of the total hash point or energy usage of a cryptocurrency.

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

However, the main roadblock to moving Bitcoin from PoW to PoS is Bitcoin itself. Bitcoin is not owned by anyone specific. There is no central government to appeal to for changing the system, they don’t have, and we don’t know who Nakamoto is.

Additionally, there doesn’t seem to be much desire to change for the users themselves, especially miners. Harrison stated, “Currently there is no appetite in the Bitcoin mining community to change the consensus mechanism.”

Sustainable future: keeping the hills alive

With everything that has happened within the cryptocurrency market in 2022 – especially in recent weeks with the implosion of FTX – for many, the future of cryptocurrency is unclear. What is clear, however, is that if it is to have a future, it must be sustainable.

It’s worth pointing 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 the impact and have made significant changes in recent years. Harrison shared his experience with this: “When we started our journey a couple of years ago, there was nothing in the way of industry guidance, there were no industry bodies that looked seriously at decarbonisation. Within maybe six months or so of starting our decarbonization journey, there was the Crypto Climate Accord shortly followed by the Bitcoin Mining Council. Recently we have had GBBC; Global Digital Finance, which has set up an ESG working group; The World Economic Forum has also set up a working group. There is all this activity, there is all this guidance that has either been published or is about to be published, which is fantastic.”

Bitcoiners must weigh the reality of the environmental situation and consider whether decentralization is a step in the right direction when considering the climate crisis. According to the Intergovernmental Panel on Climate Change’s Sixth Assessment Report, we only have a budget of 500 gigatons of CO2 to have a 50% chance of limiting warming to 1.5°C. Every group that produces large amounts of carbon must take responsibility for its actions. This includes organizations that use cryptocurrencies.

Harrison concluded: “Ethereum and The Merge have shown us what is possible, but the Bitcoin blockchain and the Ethereum blockchain are very different. There are some nuances that make us consider the fact that we are not dealing with apples and apples .”