The electricity consumption and environmental footprint of blockchains

How blockchains work

A blockchain is a distributed ledger, using cryptography to secure an evolving consensus about tokens (digital assets) with economic value.

Why blockchains consume energy

You can think of Ethereum kind of like a train engine throttled to the same speed all day, kept running by miners securing the network in exchange for ETH. In this analogy, transactions submitted to the network would be seats on the train. Due to the design of Ethereum, the train will keep running at the same speed and with the same energy consumption whether or not there are any seats filled [1].

A clever economic incentive design that promotes honesty over cheating underpins Bitcoin’s consensus process. Miners voluntarily incur financial costs ex ante in the expectation of a potential future reward. The threat of sunk costs (i.e. not receiving the block reward because of dishonest behaviour but having already paid for the performed work) — creates the financial incentive for miners to play by the rules. Assuming miners are profit-maximising economic agents, honesty is the most rational strategy. As a result, Bitcoin may be considered less a technical innovation and more a carefully calibrated socio-economic system that relies on a complex combination of economic incentives, game theory, and a solid technical foundation. [3]

How much energy blockchains consume

The main driver of Bitcoin’s electricity consumption is expected mining profitability (i.e. forecasted revenues minus costs). This determines whether machines are running or sitting idle. [3]

Electricity consumption of the mining of physical gold and digital gold (Bitcoin). Source: CBECI

Environmental implications

It is essential to distinguish between electricity consumption and environmental footprint. The first concerns the total amount of electricity used by the Bitcoin mining process. The latter concerns the environmental implications of Bitcoin mining. What ultimately matters for the environment is not the level of electricity consumption per se, but the carbon intensity of the energy sources used to generate that electricity.

For instance, one kilowatt-hour (kWh) of electricity generated by a coal-fired power station has a substantially worse environmental footprint than one kWh of electricity produced by a wind farm. As a result, rising (or falling) power demand does not automatically lead to a proportional increase (or decrease) in carbon dioxide and other greenhouse gas emissions. [3]

A share of 76% of the miners claim to use renewable energies as part of their mix, and 39% of mining’s total energy consumption comes from renewables.

Miners are energy nomads, attracted by renewable and waste energy that cannot be distributed or used in a cost-effective manner.

Alternatives to proof-of-work

In proof-of-stake, electricity is replaced as the proving resource with staked capital in the form of locked-up cryptocurrency. Hence, instead of proving we have done some work (spending in hardware and electricity, therefore investing an amount of money), we simply prove we have staked that amount of money in the blockchain protocol, without computing anything.

However, it is unclear to date whether alternative consensus algorithms like proof-of-stake can replicate the same security assurances as proof-of-work without engaging in substantial trade-offs.

It is a fact that the major proof-of-work blockchains (Bitcoin and Ethereum) have never been successfully attacked so far (Bitcoin started in January 2009, Ethereum in July 2015).

Good practices

Key takeaways

Conclusions

References

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data scientist generative artist blockchain enthusiast crypto art evangelist — linktr.ee/hex6c

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