Environmental impact of Blockchain

The blockchain, also referred to as Distributed Ledger Technology (DLT) refers to a decentralized, digital, distributed ledger on which transactions can be concurrently accessed, validated, and updated in an immutable (unchanged) manner, while being hosted across vast networks of computer systems and is openly accessible to the public at any time. The blockchain does not have a centralized party that validates the cryptographic information it carries, yet they are considered validated and trustworthy, due to the protocol that helps to reach a consensus on the validity of every single cryptographic entry stored on the blockchain.

A consensus protocol is a procedure that enables nodes (computer systems) hosting the blockchain network to reach a common agreement about the present state of the distributed ledger, thereby validating the information hosted on the network. Essentially ensuring that every new “block” (data) is the one and only verified version that is agreed upon by every node hosting the blockchain. This system ensures that the information on the blockchain chain remains immutable.

It’s tricky to reach consensus in decentralized systems and had been a scientific problem for centuries until the 80’s. Utilizing the invention of digital communication (computer networks) the first theoretical(!) consensus algorithm — the byzantine fault tolerance algorithm — was invented.

In 2008 Satoshi Nakamoto invented the second consensus algorithm which even worked in reality(!). We are talking about Bitcoin’s consensus algorithm which consists of the three core mechanics, the blockchain, the longest chain principle and Proof of Work.

Proof of Work comes with several disadvantages and people kept researching for better consensus mechanisms and in 2012 with Peercoin the first one went live. Peercoin such as the many which followed were called Proof of Stake blockchains or coins, because for the consensus mechanism Proof of Stake was used instead of Proof of Work. They all rely on blockchain technology but they used variations of the historical Byzantine Fault Tolerance Algorithm from the 80’s — but this time it worked practically(!).

In 2019 the third consensus algorithm for decentralized networks was introduced: Avalanche, which went live as part of the equally named blockchain. The avalanche consensus mechanics are based on blockchain, Proof of Stake and the Avalanche consensus algorithm.

Examples of protocols that help the blockchain reach consensus are the Proof of Work (PoW), Proof of Stake (PoS), the former being used by Bitcoin, the world’s first cryptocurrency, and the later used by the Ethereum network. Other consensus algorithms such as Proof of Byzantine Fault (PoBF), Proof of Burn(PoB) etc. also exist , however we’ll be focusing mostly on PoW and PoS, as they are the largest and have a much larger effect on our environment.

Today, the usage of either PoW or PoS is essential to achieve consensus on blockchains, because they solve inherent issues of digital communication, such as spamming of information, providing false information and other ways to act maliciously with very little effort to be invested.

PoW incentives the actors to play by the rules by giving them the chance to win a reward if they invested in computer power (hardware costs & electricity costs). Computer power can’t be multiplied and energy spent on bad actions is lost forever. This creates a game in which good actors would earn much more than bad actors and therefore the network acts as a good actor and trustworthy consensus is found.

PoS incentivizes good behavior by punishing bad behavior. In order to earn a reward a validator needs to deposit, i.e. stake valuable cryptocurrencies. Bad behavior will lead to a partial or full loss of the stake, whereas good behavior will earn a percentage of the stake. The game rules are set in a way that acting good pays out and again trustworthy consensus is found.

PoW and PoS are algorithms that allow for consensus to be reached on the blockchain, however they both use different procedures to achieve this consensus:

Proof of Work was invented in 1993 however its implementation by Satoshi Nakamoto during the creation of Bitcoin as a procedure for obtaining consensus brought a lot of attention to the validity of the procedure. PoW is a system where a mining node (computing systems) competes with other nodes to solve complex mathematical puzzles, the mining node that solves the puzzle the fastest gets to mine the next block while getting rewarded with Bitcoin for solving the mathematical problem. Solving this mathematical computation requires a special mining (computing) system, which consume lot of energy consumption trying to solve puzzles by running trillions of computations, this serves as a deterrent against trying to “game” the system by producing fake blocks, it would require having access to at least 51% (commonly referred to as the 51% attack) or more of the nodes hosting the network to validate a false block which is expensive, time consuming and almost impossible to carry out, contributing to the immutability of the data sequentially stored on the blockchain.

Proof of Stake, an alternative to the time, energy, and resources consuming PoW algorithm, albeit using a different procedure provide consensus for blockchain validation, as the name suggests PoS required that network members here known as Validators with a stake in the network are randomly selected to validate new transactions (blocks). The validators vote to approve legitimate transactions with tokens staked and acting as collateral to validate these blocks. Commensurate efforts are incentivized by the payment of tokens to stakers (Validators). Validators which have a larger holding and consequently have more at stake have a higher chance of validating transactions, this method incentivizes the validators in maintaining the immutability of the blockchain. PoS would require a Validator to stake at least 51% of cryptocurrency, and an attempt to validate a false block using a 51% attack will result in the loss of the staked tokens, and whatever financial resources was put into the act, thus securing the network.

TL;DR:

  • PoW and PoS are algorithms that enable blockchain networks to reach consensus, both are secure and validated data(blocks) are immutable.
  • PoW requires solving complex mathematical puzzles using special computing systems, PoS allows for random validators to validate blocks using their stake in the network as collateral.
  • PoW has a high cost of participation factoring in cost of computing hardware, high energy consumption etc, all adding to the security of the network, PoS is far more energy efficient and uses considerably less energy with a lower cost of participation ( value of staked tokens).
  • PoS is energy efficient making it more ESG compliant while allowing for higher scalability, PoW is energy intensive and has raised concerns about its environmental impact

Although the Blockchain is considered one of the most innovative innovations of the twentieth century, its environmental impact has generated questions about its utility and effect on the environment. As previously stated, blockchain requires a consensus system that allows its data to remain consistent and immutable. Proof of Work, the consensus algorithm used by the world’s first and largest cryptocurrency, Bitcoin, has been shown to consume enormous amounts of energy to solve the mathematical computation required to validate blocks and earn mining rewards.

The process of “mining” consumes a tremendous amount of energy. While Bitcoin mining began with ordinary computers (CPU), the consensus method was designed to gradually develop more complicated mathematical problems that would become increasingly harder to answer as Bitcoin mining became more competitive. As the price of Bitcoin has risen over the previous decade, so has its mining profit, resulting in progressively more difficult mathematical computations that now necessitate the use of specialized computing equipment to carry out mining operations. Miners now require specialized computing systems known as ASIC computing systems, which consume a lot of electricity because they are constantly working and executing billions of calculations per second. Bitcoin mining, according to studies, consumes more energy than Argentina. Bitcoin, if it were a country, would be among the top 30 energy consumers in the world, accounting for 0.6 percent of global energy consumption..

Electronic waste, a byproduct of PoW blockchain networks such as Bitcoin, has sparked reasonable concerns about the network’s resource use. As mathematical riddles become increasingly difficult to solve, makers of computing systems such as ASIC systems have been forced to constantly design better and more efficient systems, rendering previous versions obsolete and eventually ending up as electronic waste. PoW mining systems which are required to run at full capacity consistently may be subject to conditions like humidity, high temperatures and inadequate ventilation impact mining facilities and shorten equipment lifespan.

Proof of Stake has been found to reduce energy consumption and electronic waste by 99 percent. PoS does not necessitate specialized computing equipment, and while some proof of stake blockchains may necessitate some enhanced hardware, the e-waste produced is tiny when compared to Bitcoin. PoS is generally regarded as more ESG compliant, as transactions require less energy consumption. PoW has benefits as well, when considering factors such as decentralization and increased operations costs equating to a more secure blockchain, but these benefits are not regarded as commensurate with its impact on the environment by many.

Green here refers to being ecologically sustainable. The key parameters of a blockchain is the energy consumption, the electronic waste creation and the technical sustainability of the blockchain itself.

When deciding for a green blockchain it is important, maybe even most important, to think about the longevity of this blockchain. That means will this blockchain be around, e.g. actively used, for as long as I need it to be? …

The latter needs a little more explanation. A blockchain can be technically outdated, have a critically high degree of centralization or lose for other reasons its users and consequently the network nodes. Many blockchains went offline, because of either one or more of these reasons. If a blockchain goes offline and all assets stored on it are practically lost, making the entire usage of this blockchain unsustainable. For this metric we look at Market Cap and Decentralization Degrees.

Newer blockchain networks have attempted to innovate the existing system by improving on existing consensus algorithms, this innovation has been thus far successful, as blockchain networks now use less than 1 watt per hour for a transaction, setting a remarkable benchmark for blockchain technology, and its journey towards being more sustainable and environmentally friendly.

When compared to the listed Blockchain networks, an average Bitcoin transaction uses 1,173,000 Watts to carry out a single transaction, while emitting around 30.7 Kilotons of electronic waste. There are some who believe that Proof of Stake is mainly unproven in its capability because it hasn’t been tried on a large enough scale, however with the success of PoS Blockchains such as Solana, Binance Smart Chain, and Avalanche, that fear may be put to rest someday.

Blockchain technology is poised to play an important part in our society in the future, with key global organizations such as the UNFCCC hailing it as a possible answer to the accountability and transparency challenges plaguing today’s climate action.