Chain drain on the environment

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Blockchain 101 & its consumption of energy

June is sustainability month, in this month’s 101, we thought we'd breakdown the fundamentals for why some blockchains require such enormous amounts of energy. To help illustrate this, it is only fitting to use Bitcoin, BTC, as an example. Bitcoin is one of the most popular and highly secure blockchains, it is also one of the most energy-intensive blockchains to build.

First, let's cover some fundamentals:

• 🗄️ A blockchain is a chain of blocks that contain information like a filing cabinet. Bitcoin, BTC, is a digital decentralised ledger that holds all the historical data of every BTC transaction ever made to date for all to see.

• 📁 Each block holds packets of data (like filing folders within the filing cabinet or cells in a spreadsheet). Each block, like the cell in a spreadsheet, holds specific information, and multiple blocks linked (linked by a unique identifier called a hash) together to form a chain - aka the blockchain. When a transaction is made (hint: a new Bitcoin is mined or you mint an NFT), a new block is formed and added to the chain. The longer the chain becomes, the stronger it becomes and the more difficult it is to tamper with.

• ⛓️ Multiple copies of the same blockchain live on many computers located all over the world, each of these computers is referred to as a node. All of the nodes within the network communicate with one another, validating transactions on the blockchain and updating each of their respective copy of the blockchain.

• ⛏️ Creating and adding new blocks to the blockchain depends on the type of protocol or consensus algorithm being used. It is an agreed-upon method of interaction between the computers, aka the nodes and the miners. It is a way to ensure all the data recorded on the blockchain is true and honest. The BTC blockchain uses a protocol called Proof of Work. Other chains use Proof of Stake (PoS) - more below on both of these.

The energy debate: PoW vs PoS

We have heard the stats, how BTC uses as much energy (if not more) than some countries use in a year. This is mainly due to the consensus mechanism used to mine BTC. Intentionally designed and implemented by Satoshi Nakamoto, the creator of BTC, believed PoW to be the only way to build a peer-to-peer digital currency that is truly trustless, decentralised and secure. The drawbacks of PoW are the high energy consumption (and as a result the environmental impact) and hardware requirements. Where as the drawbacks of PoS, while more energy efficient, can have governance problems (i.e due to how validators are selected could lead to influence and control by validators who hold the most tokens..more on this below) and thus making it more vulnerable to attacks. 

Most crypto uses Proof of Work (PoW) to validate and verify new transactions. Basically, a bunch of computers compete to solve an equation, the first miner to solve the puzzle adds a new transaction to the record of all transactions (the blockchain), and the winner is rewarded with a nice bounty of cryptocurrency - more coins (eg. BTC). As the chain grow, the cryptographic (mathematical) puzzles become more difficult, which means more computing power to solve them (aka a ton of energy). This system asks people to use hardware and electricity to help the network process transactions and keep the chain secure. For BTC miners, the reward at the time of writing is 6.25 bitcoin.

Proof of Stake (PoS) on the other hand, is more like a lottery than a competition. Users stake their crypto (like a lottery ticket) to become validators, the more they stake, the higher the chance they have at ‘winning.’ Validators are similar to miners in that they verify transactions and ensure the network is secure and there are no dodgy transactions. PoS uses as little as 0.01 percent because instead of crunching complicated equations, miners are randomly selected by an algorithm. Where PoW miners use hardware resources (large, expensive computers) to secure the network, PoS “validators” dedicate their cryptocurrency. Because it uses much less energy, PoS has become very popular. It’s a running joke that Ethereum (ETH) has been trying to make ‘the switch’ for over six years. However, it looks like this might finally be happening this fall.

Now you get why the debate, the thing that makes BTC secure is energy but it is just not sustainable.

Links to learn more about alternatives to becoming more sustainable:

• Here are some other forms of consensus mechanisms looking to less energy-intensive consensus mechanisms.

• How renewables could be used instead of fossil fuels as a source of energy to operate the mining rigs that mine blockchain or cryptocurrencies

More from our UNTAM3D team

Alchemy Pay, crypto payments solution provider, invited Founding Member, Evelina Lye, to share her thoughts on web3 in their #web3wednesday series. They didn’t shy away from asking the big questions. Questions like, why does web3 matter and how will web3 fail?

Catch Evelina and what she has to say plus other speakers they have on their ongoing series. You can watch it directly on Alchemy Pay’s Youtube channel, here.

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Yours UNTAM3D