Over the past decade, cryptocurrencies have grown into the mainstream as one of the most exciting, yet controversial assets today. The exponential growth in price, the flash crashes, governments accepting while others ban it, exponential growth in the number of projects, etc. However, the crypto ecosystem has raised some of the biggest controversies as environmentalists keep calling out the massive use of electricity by proof of work (PoW) blockchains such as Bitcoin and Ethereum.
If you have been following Bitcoin’s progress over the years, the environmental impact of mining has been a problem to the overall adoption of Bitcoin and crypto in general. Earlier in March, Microsoft founder Bill Gates warned that the excessive electricity use by Bitcoin was “not a great climate thing”. These sentiments were echoed by U.S. Treasury Secretary Janet Yellen who bashed the electricity use as “staggering and dangerous”. Iran also banned the mining of Bitcoin early in the year after a blackout ravaged the nation, with Bitcoin partly taking the blame.
The past year has seen Bitcoin triple in price to trade at $54,000, but the run-up is gradually leading to significantly higher energy consumption by the top cryptocurrency. According to a New York Times report, the process of creating or spending Bitcoin is around 91 Terrawatt-hours of electricity annually, representing 0.5% of the total global electricity consumption, a ten times increase in the past five years. This is more than is used by Finland, Denmark, and Washington State yearly and more than seven times as much electricity as all of Google’s global operations.
The high electricity consumption is due to the mining of Bitcoin, whereby miners compete to secure the network. This simply means solving complex mathematical problems to verify the network’s transactions. The miners who solve these problems are then rewarded with Bitcoin (the digital currency). With the price skyrocketing, more people have taken up mining as they compete for the rewards hence more energy is used.
Nonetheless, developers and crypto enthusiasts have been working on solutions to the environmental impact of Bitcoin mining.
The solution to excessive energy consumption by proof of work (PoW) mining is proof of stake (PoS) consensus mechanisms. As the first consensus algorithm, PoW proved itself as a secure and effective algorithm to verify transactions. However, newer blockchains are moving away from PoW to more energy-efficient algorithms such as proof of stake.
Ethereum, the second-largest blockchain, uses close to a third of the energy consumption of Bitcoin to verify transactions. However, in 2016 (less than a year after inception) Ethereum developers decided to switch the blockchain into a PoS consensus algorithm to do away with mining for a less power-hungry validation system.
Proof of stake blockchains do not require powerful mining equipment to verify transactions but rather ask participants in the network to contribute or “stake” their tokens to verify transactions and earn a reward. The network selects validators on various factors such as the number of tokens staked and how long they've been staked, thereby rewarding the people that are the most invested in the network.
PoS replaces the energy-intensive mining process on PoW chains meaning the networks use significantly less energy and reduce the cost of verifying transactions as users don’t need to run powerful and expensive computers to mine. Reportedly, a switch from PoW to PoS could reduce Ethereum’s total energy consumption by 90%.
Nonetheless, critics of PoS argue that the security of these chains could be compromised, stating PoW as the most secure blockchains. One project, Qtum, a proof of stake blockchain, integrates the advantages of Bitcoin maintaining the security of the network while saving on energy consumption.
The developer-friendly platform takes the best of Bitcoin and Ethereum to create a powerful and efficient blockchain network. Specifically, Qtum takes Bitcoin's UTXO transaction model and combines it with an adaption layer interface to the Ethereum Virtual Machine to produce the first UTXO-based smart contract platform. With a high transactional throughput of about seven times that of Bitcoin and five times of Ethereum, Qtum boasts one of the fastest layer-1 blockchains in the crypto space today.
However, PoS is not the only solution to the energy-intensive mining process that PoW chains use to verify transactions.
The #Qtum blockchain will halve for the first time at block 1,427,004— Qtum (@qtum) November 24, 2021
Block rewards will be reduced from 1.0 QTUM every 32 seconds~ to 0.5
This will change the annual inflation rate to about 0.5%
Expect this to happen around Dec 1st, see this website:https://t.co/tm2kQGvnm2 pic.twitter.com/mbpY76cA0p
In September, El Salvador’s young president, Nayib Bukele shocked the world by signing in Bitcoin as a legal tender in the small nation. Since then, the country has introduced plans to build a “Bitcoin City” to empower its people. Additionally, the small volcanic country is harnessing renewable geothermal energy from the potentially active volcanoes to mine Bitcoin.
As seen with Ethereum, the process of moving from a PoW to a PoS chain is quite tricky and difficult to accomplish. Instead, miners are inclined to use renewable energy sources to power their Bitcoin miners, with El Salvador leading the way. The energy harnessed by the turbines set at the base of the volcanoes reach up to 107 megawatts, with Bitcoin mining taking up 5 megawatts and the rest distributed to the country’s grid.
Having proof of stake chains such as Qtum is the quickest and most efficient way to reduce energy consumption by proof of work chains. However, in the case of Bitcoin, which would be nearly impossible to switch to PoS, the use of renewable sources of energy such as solar, wind and geothermal plants could be the best solution, Nayib shared in an interview.