How policymakers can ensure blockchain and Web3 will run sustainably

"How policymakers can ensure blockchain and Web3 will run sustainably"

Climate change is looming large in the minds of policymakers, industry, and the public. As we adopt more decentralized technologies, there’s been a lot of talk about blockchain’s energy usage and its sustainability feasibility.

Bitcoin, the most prominent use case of blockchain, is always at the forefront of those conversations, and for good reason. Bitcoin uses a lot of energy to process and record transactions. In 2021, it was estimated that Bitcoin’s annual energy usage reached 130 TWh which is equivalent to the entire country of Argentina (1).

The reason that Bitcoin consumes so much energy is due to its consensus mechanism, proof of work (PoW), behind Bitcoin that requires significant energy, somewhat on purpose. However, while it is the first, it is not the only mechanism that blockchains can run on, and others are much less energy intensive. A consensus mechanism refers to “the entire stack of protocols, incentives and ideas that allow a network of nodes to agree on the state of a blockchain.” (2) The mechanism used by a blockchain can tell us a lot about how much energy is used that goes into records of transactions on the blockchain, whatever the transactions the blockchain may be recording from cryptocurrencies to carbon credits to supply chain trades. This blog will dive into different types of mechanisms and explore how blockchain technologies need not follow in Bitcoin’s energy-intensive footsteps.

It is essential that less energy intensive mechanisms behind blockchains are explored and used. As blockchains become more widespread and integrated into our daily lives, we can consider their climate impact early and prevent being put in a vulnerable position. As we have with technological innovation in the past, new technologies should not be required to fit into global and country-level goals of reaching climate action — especially when it is feasible and there are options.

Consensus Mechanisms

There are two common consensus mechanisms: proof of work (PoW) and proof of stake (PoS), though there are some other emerging mechanisms being used and developed. Their differences lie in the mechanisms that validator nodes use to reach consensus.

Proof of Work

As mentioned previously, Bitcoin uses the PoW consensus mechanism. Essentially, to validate a block onto the chain validator nodes race to solve complex math problems. These math problems take about 10 minutes to solve, but as more and more people become interested in Bitcoin and other PoW blockchains, more computers will be racing to solve these problems and encourage investment in more and more computational power. This computational power requires a lot of energy for the blockchain to run and record new transactions. In this way, Bitcoin and PoW-based blockchains actually incentivize and reward unsustainable behavior.

There has been significant effort by miners (people or organizations who have validator nodes) to use renewable energy, though this could be sped up and more widely adopted with policy support and regulation.

A recent report from the white house stated, “Global electricity generation for the crypto-assets with the largest market capitalizations resulted in a combined 140 ± 30 million metric tons of carbon dioxide per year (Mt CO2/y), or about 0.3% of global annual GHG emissions.” (3) For perspective, flying from Boston to London and back emits about one ton of CO2 per passenger (4). Though .3% of emissions may seem almost minimal compared to other industries, this is already occurring with half of Bitcoin operations using renewables, and a lot more growth is expected. Policymakers must act now to further encourage renewable investments by miners.

The large investments in solar farms and other innovations being used to make Bitcoin green may even be helping the larger renewable energy transition and electrification movement (5). Additionally, the US adopting renewables will lead to more sustainable mining operations as renewable prices drop further and are more easily integrated into the grid. However, miners are investing a lot now, and policymakers should specifically target them as they are being built and invested in.

Proof of Stake

Rather than requiring validators to use energy to solve math problems, PoS requires validator nodes to stake Ethereum which can be taken away if the validator acts “dishonestly or lazily” (6).

Increasingly, more blockchains are using PoS. PoS blockchains require upward of 95% less energy than PoW networks. PoS may also be quicker, more secure, and more scalable than PoW (7).

In the midst of high energy usage criticism, Ethereum switched from PoW to PoS in September 2022. This is particularly significant considering many applications and use cases for blockchain and Web3 are being built using the ethereum blockchain. Additionally, many other prominent blockchains like Tezos use PoS.

Proof of History and Other Mechanisms

There are multiple other consensus mechanisms popping up that offer similar energy savings and scalability. They may all be useful for different projects depending on varying goals. The less energy intensive the consensus mechanism, the more sustainable. The challenge is to have a complex enough mechanism to ensure the security of the blockchain while keeping it simple enough for computers to use minimal energy. I.e. the incentive for participating must not cost high energy usage, like PoW. The answer likely lies in a compromise: use PoW only for transactions that must be extremely secure and are few and far between, while other mechanisms like PoS, which are still very secure, can take on most blockchain use cases.

Proof of History (PoH), used by Solana, uses historical data to ensure validators are not bad actors. This type of data “fingerprint” may make PoH even faster and more scalable than PoS (8).

There are many other consensus mechanisms also being explored, such as Proof of Importance (PoI), Proof of Capacity (PoC), Proof of Elapsed Time (PoET), Proof of Authority (PoA), and Proof of Activity (PoA) (9).

Conclusion and Policy Implications

As blockchain technology becomes more widely used and applications scale in web3, energy intensity is extremely important to consider. Luckily, often the more scalable consensus mechanisms are the least energy intensive.

Naturally, PoW is the most energy-intensive mechanism. Though there has still been significant progress from the mining community around acquiring renewable energy resources to power mining operations, policy should support cleaner blockchains like Ethereum (PoS) for widespread adoption and web3 development. Most blockchain-based applications in sustainability (and more broadly?) are not using Bitcoin. They may, however, support or encourage the trading of blockchain as a reward. Ethereum is set up well to host other blockchain applications and is often used for sustainability-focused goals like carbon capture, energy trading, decentralized finance, supply chain tracking, and pollution records.

Bitcoin is not going away anytime soon. Policymakers should consider standards for consistent carbon reduction measures of blockchains, ideally reaching zero in the near future to ensure the US can reach carbon targets.Additionally encouraging projects to build on top of, use, and support more sustainable cryptocurrencies can further limit Bitcoin’s energy usage. This is also an opportunity to spur more renewable investments by using the market’s excitement and funding to create large renewable hubs on the grid while also pushing energy providers to adapt to renewable loads.

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"How policymakers can ensure blockchain and Web3 will run sustainably"