You’ve probably heard of cryptocurrencies. You’ve almost certainly heard of Bitcoin. You may even know that there are multiple cryptocurriencies out there, all vying for dominance. Perhaps you’ve heard of some of the larger competitors, like Dogecoin, Etherium, Binance Coin, Litecoin, Tether, Ripple, Cardano and Polkadot. But are you aware that there’s not just a war going on between different cryptocurrencies, but also between different cryptocurrency technologies? And that the different technologies make a huge difference to how much energy each cryptocurrency consumes?
Bitcoin and Proof of Work
On Wednesday, 12th May, 2021, Elon Musk announced in a tweet that his company, Tesla, would no longer be accepting Bitcoin as payment for Tesla cars, over environmental concerns. So what are the environmental concerns about Bitcoin? According to an analysis by Cambridge University, Bitcoin is estimated to consume around 121 TWh of electricity per year. To put that in perspective, it is approximately the energy consumption of a moderately-sized country, like Argentina or Norway.
Why does Bitcoin consume so much energy? This is down to the underlying technology that Bitcoin uses to make and verify transactions. This technology is known as ‘Proof of Work’ (PoW), and it involves computers performing complex calculations in order to win the right to create new ‘blocks’ in the ‘blockchain’.
The ‘blockchain’ is a ledger of all previous transactions, and a ‘block’ represents a fixed number of transactions. You can think of the blockchain like your bank statement, if your bank statement included everyone else’s incoming and outgoing payments too. The blockchain (ledger) is not stored in only one place, but distributed across the network. It is secured by many computers coming to a consensus on what the next ‘block’ in the chain should be.
For every new block that is added, there will be a Bitcoin target ‘hash’ (an encrypted string of numbers and letters) that the computers (also called miners) participating in the blockchain system will need to try to generate. This is where the processing power is needed — attempting to generate that hash value using complex calculations. If a miner is successful in producing a valid hash, the miner’s block is added to the chain, the new block is verified with and broadcast to the network, and the ‘miner’ is rewarded with new Bitcoin.
Any attempt to tamper with the blockchain (ledger) is instantly noticeable, as the tampered block will not match the others stored by other computers in the network, and it will be rejected. As the work required to get to the point where a miner can submit a block to the chain is so great, and if a block is rejected, the miner is not rewarded, the miners are motivated to produce accurate blocks.
Because of the complex calculations involved, it takes a lot of computing power to run, update and secure the blockchain. The more transactions are needed, the more work is needed to perform those transactions. The upshot is Bitcoin’s extremely high energy consumption.
Bitcoin is not alone. Other cryptocurrencies, such as Dogecoin, Etherium, Litecoin and Tether also use ‘Proof of Work’ to secure and manage their transactions, and therefore also consume large amounts of energy.
Alternatives
But there are alternatives to ‘Proof of Work’, which use far less energy.
One such alternative technology is ‘Proof of Stake’ (PoS). In ‘Proof of Work’, the ability to mine (validate transactions) is determined by how much computing power you have. With ‘Proof of Stake’, the ability to mine (although with PoS, you don’t mine, you forge) is determined by how much of the cryptocurrency you have. If a forger owns 5% of a PoS cryptocurrency, they can validate only 5% of the blocks in the blockchain.
For every block, a node (a computer, or group of computers in the network, which hold an amount of the cryptocurrency, called a stake) is chosen using an algorithm that looks at how much of a stake the node has, how long the stake has been held, and whether the node has recently validated a block. The chosen node then validates the block and is given a transaction fee as a reward. The forger node is motivated to validate the block honestly, without tampering, because if the block is found to be invalid, the forger node will lose not only the reward, but its status as a node and some of its stake. Because the transaction fees are generally much smaller than the stake held by the forger node, there is no advantage to attempting to add fraudulent blocks.
There is no need for complex calculations, so the computing power required, and therefore energy consumption, is far less. The network is kept secure because those with a larger stake have a greater incentive to keep the network secure. The blockchain is still distributed, so any tampering is still noticeable and would be rejected by consensus.
Cryptocurrencies such as Ripple, Cardano and Polkadot use ‘Proof of Stake’. Etherium will also soon be migrating to ‘Proof of Stake’.
Other alternatives include ‘Proof of Space’ (also called ‘Proof of Capacity’) and ‘Proof of Burn’. ‘Proof of Space’ works similarly to ‘Proof of Work’, but instead of allocating computing power to solve a problem and validate a block in the chain, a certain amount of hard-drive space is allocated. This reduces energy consumption, but does require resources (i.e. computer hard-drives) instead.
‘Proof of Burn’ gives miners the right to mine blocks according to how much cryptocurrency they ‘burn’ (spend) on paying for that right. The coins that are ‘burned’ are permanently removed from cryptocurrency circulation. Similarly to ‘Proof of Stake’, you need to own cryptocurrency to make cryptocurrency, but the difference is you don’t get to keep both the coins you staked and the coins that you forged — only the coins you forged. It can be more energy efficient than ‘Proof of Work’ because instead of allocating computing power, other cryptocurrency coins are allocated. However, it depends on how the original cryptocurrency was mined.
Cryptocurrencies that use ‘Proof of Space’ include Chia and Burstcoin. Cryptocurrencies that use ‘Proof of Burn’ include Slimcoin and Satoz.
There are also many other variations of these, including more efficient Proof of Work systems as well as some systems that use a combination of methods.
Which technology will win out? Will Proof of Work’s huge energy consumption be its undoing? Are there other, yet-to-be-invented crypto-technologies that will prove to be even better than the ones we have today? Only time will tell.
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