Proof of Work is an environmental disaster, and long-term investors in cryptocurrencies like Bitcoin should beware

Blockchain is an innovative and disruptive technology with many applications in cryptocurrency, decentralized finance, NFTs, etc., and many of these applications are in their infancy. However, investors in tech using Proof of Work (PoW) consensus should reevaluate their position due to scaling problems and environmental impact.

PoW requires specialized computers to generate random numbers at an astonishing rate to solve complex puzzles that validate transactions and secure the network.

A Bitcoin mining rig uses thousands of specialized computer chips running around the clock generating random numbers attempting to solve the cryptographic puzzles

On the Bitcoin network, computers across the world are performing 170 quintillion (170e18) computations or 170 “exahashes” per second and humming 24/7/365 to “mine” coins and maintain the network.

The largest cryptos using PoW include $BTC, $ETH, $DOGE, $LTC, $BCH, and $XMR. It’s worth noting Ethereum (ETH) uses PoW but is switching to a more efficient Proof of Stake in the near future. In this article, I use Bitcoin (BTC) as an example since it is the largest cryptocurrency by market cap.

There are no shortcuts to solving these puzzles without performing an enormous amount of computations, which use an incredible amount of energy — currently over 118 TWh per year on the Bitcoin network. Bitcoin represents 0.59% of total global electricity consumption and uses more energy annually than the Netherlands.

One Bitcoin transaction has the equivalent carbon footprint of approximately 1 million VISA transactions. In 2019, the VISA network consumed 740,000 gigajoules (0.206 TWh). Therefore, the Bitcoin network has a carbon footprint 574 times greater than that of the VISA network despite VISA performing 1,850 times more transactions per year than Bitcoin.

PoW is designed to always require substantial energy to mine coins to make it difficult for conspiring miners to achieve 51% of the total network hashrate. A “51% attack” could theoretically give the ability to reverse transactions and generally corrupt the network.

Since miners are rewarded with BTC, higher priced BTC will attract more miners, and consequently, the Bitcoin network algorithmically increases the difficulty of the puzzles so that mining each block always takes 10 minutes to generate. This means as the price of BTC goes up, the number of miners performing computations goes up, and so does the energy consumption.

Bitcoin transactions occur at a rate of 3.5 transactions per second. Due to recent high network traffic and a low transaction rate, Bitcoin transactions have had to pay higher fees to incentivize miners to confirm their transaction. In the past year, the average Bitcoin transaction fee has increased from $0.62 to over $50. This diminishes Bitcoin’s originally intended use as a peer-to-peer electronic cash payment system. The lightning network upgrade will help with some of the low transaction rate and high transaction fee problems, but it will not solve the vast energy consumption problem.

Source: ycharts.com

Eight Scherer Stations running simultaneously would be needed to power Bitcoin. Scherer Station is the largest coal-fired power station and fifth largest power station in the US. One Scherer Station can supply 15,420 GWh/yr and power 3 million households per year.

Scherer Station is a coal-fired power plant located in Juliette, Georgia, US

40% of Bitcoin’s energy consumption is from renewable resources, which produce significantly less carbon emissions than fossil fuels. However, renewables are not necessarily environmentally neutral — they come with their own environmental costs.

Source: u/UnrequitedReason on reddit.com/r/dataisbeautiful

Hydro power disrupts aquatic wildlife and fish migration. Solar and wind require mining large amounts of metals and other environmentally sensitive materials. Biomass (burning wood is the original renewable energy resource) still emits carbon, which contributes to climate change, along with deforestation and other sizeable impacts on the environment.

The other 60% of Bitcoin’s energy use is from non-renewables such as coal and fossil fuels. 65% percent of Bitcoin’s hash power (and thus energy use) is concentrated in China. About half of the country’s hash power is in the autonomous Xinjiang region, which makes up 36% of the global total.

The concentration of miners in China is primarily due to Chinese government subsidies on coal-fueled power and abundant hydro power during the rainy season leading to lower electricity costs for miners.

This centralization of mining undermines the original intent of a decentralized cryptocurrency, which is to have a distributed network of geographically independent computers to deter collusion and maintain network security.

The solution to climate change isn’t to keep accelerating our energy use while using less bad fuel sources as some Bitcoin supporters advocate. We need to slow the increasing rate of energy use and replace existing sources with more environmentally sustainable renewables.

Fossil fuels and coal are made more economically viable as they provide 60% of the energy consumed by Bitcoin mining. Source: Global Carbon Project

Bitcoin was invented in 2008 as a “a peer-to-peer electronic cash system” and has evolved into a kind of “digital gold” and store of value. It has thrived in serving the latter purpose with prices appreciating much faster than traditional stock market assets. However, this continued price increase relies on an indefinite influx of new money buying into the system.

At the time of writing this article, BTC’s price is $55k. As awareness around Bitcoin’s environmental impact grows, the rate of money coming in from new prospective investors will likely ultimately stagnate, the price of BTC will fall, and Bitcoin will be surpassed by other more practical and efficient cryptocurrencies.

A 2018 Pew Research survey found that 68% of people surveyed globally think climate change is a “major threat”, and another 20% see it as a minor threat. Public concern around climate change increases every year as we see more extreme weather, natural disasters, and loss of wildlife and its habitat. Long term, public sentiment around climate change will affect lawmakers, regulators, and environmentally conscious investors, which may then suppress Bitcoin’s widespread adoption and price growth.

Source: Pew Research

The good news is that alternatives to PoW exist. The most common alternative in cryptocurrency consensus mechanisms is Proof of Stake (PoS), which has “validators” instead of miners to verify the creation of new blocks. Validators’ power to create new blocks is proportional to the amount of cryptocurrency they have “staked” or locked-up where they cannot touch their tokens for a period of time. If a validator misconducts according to other validators, that validator may have their stake “slashed” as a penalty.

PoS may even be more decentralized than PoW because PoS has a lower barrier to entry (negligible hardware cost for PoS versus a massive amount of computer chips required for PoW) and because a 51% attack may be more difficult for larger market cap cryptocurrencies. Mining pools and mining concentration in China have already shown the potential for a 51% attack on Bitcoin. If Bitcoin used PoS instead of PoW, validators would have to conspire and collectively stake 51% of Bitcoin’s $1.04 trillion market cap to attack the network. This is harder to imagine than miners obtaining 51% of the total mining power in the case of PoW where mining pools already have formed and additional hash power can be purchased or rented.

Most importantly, PoS doesn’t inherently waste energy like PoW, and consequently PoS uses orders of magnitude less energy than PoW. Ethereum, the second largest cryptocurrency, plans to cut its energy consumption by 99% when it switches from PoW to PoS.

Bitcoin had the first mover advantage by being the first cryptocurrency, but Bitcoin and other PoW consensus blockchain technology have been losing market dominance. PoW eventually will be surpassed by faster and more environmentally friendly technologies that do not use the PoW consensus mechanism, which is a good thing for the sustainability of blockchain technology and our planet.

This article is not financial advice. Here is a resource to learn more about Bitcoin’s environmental impact: https://digiconomist.net/bitcoin-energy-consumption

Freelance data analyst | former chemical engineer | environmentalist