- Climate change, the economic crisis, and the negative geopolitical situation are forcing people to think about the appropriate use of energy.
- The argument that PoW must consume energy to provide security is valid only until the security budget is exhausted.
- The use of green energy for PoW mining is not a relevant argument for the ECB. Jurisdictions must meet emission limits. Green energy can be used elsewhere.
- It is difficult to see how authorities could opt to ban petrol cars over a transition period but turn a blind eye to bitcoin-type assets built on PoW technology.
- People should decide what technologies they want to use. However, they should take into account other people’s wishes.
Protecting the environment is a priority for our planet. For many years, this topic has been overlooked as governments have focused mainly on economic development and technological progress. Ecology has been seen as an obstacle or a topic that can wait a few more years. This is changing rapidly. In Europe, and elsewhere in the world, we are reaching new temperature records. Britain has experienced 40-degree heat. It is also hot in France and some states in the US. The climate is changing faster than we expected. Thanks to negative geopolitical events, the price of energy is rising steeply, and this is at a time when Europe is committed to going green. The green deal is now in jeopardy, but legislators are trying to achieve the goals that Europe has decided to achieve.
These, and many other reasons, are leading to a growing debate on the meaningfulness of Proof-of-Work (PoW) networks. While the cryptocurrency community strongly believes that blockchain is revolutionizing the world of finance, not everyone on the planet shares this enthusiasm. We need to look at the issue dispassionately and understand the arguments of people who have not yet grasped the meaning of cryptocurrencies.
Importantly, the concept of decentralization is not only associated with Bitcoin, i.e. with the PoW consensus. Cardano is proof that Proof-of-Stake (PoS) consensus is a quality alternative to PoW. PoS in Cardano will celebrate its second birthday in 2022. There are many other PoS networks in the cryptocurrency space that have also been running for several years. No PoS network has yet been successfully attacked.
Should energy intensity be a barrier to decentralization, the cryptocurrency industry will survive without PoW networks. Bitcoin is a hugely important project for the entire industry and has a lot of backers behind it. On the other hand, the energy intensity of this PoW network is huge and, more importantly, hard to predict. If the value of BTC coins were to increase dramatically in a short period of time, say 100x, the energy intensity would also increase at the same time in the same proportion. If Bitcoin consumes as much energy today as, say, Spain, after such a dramatic increase in the value of BTC coins, Bitcoin would consume as much energy as 100 countries the size of Spain. Even Bitcoin fans have to admit that this is hardly sustainable for our planet.
We can also see the other extreme, i.e. that the value of BTC coins will not rise as quickly. In that case, however, the security of the Bitcoin network will decline, as the halving event gradually reduces the number of coins miners receive to cover the cost of the energy they consume. It would be unwise for the world to adopt a network whose security is inadequate. I have seen many successful attacks on PoW networks. A low hash rate was always to blame. PoW networks can’t afford for native coins to not permanently grow in value.
Peter Todd, a former Bitcoin core developer, has created a tool that shows the security budget of Bitcoin. Anyone can play around with the parameters and see under what circumstances Bitcoin remains secure and decentralized. For example, if you leave the default settings in the tool, i.e. the average fee at $1.50, the block size at 1.20 MB, and set Bitcoin’s market capitalization at $100T in 2140 (4,7M USD per BTC), you will find that by 2024 Bitcoin’s security will be “Insecure” according to Peter.
We all know that the overall capitalization of the Bitcoin network is influenced by the big players and banks. If regulations and laws forced these institutions to refrain from investing in Bitcoin, the value of the coins would drop, which would have a dramatic impact on the security of the network. In other words, if Bitcoin is to be secure, it probably cannot do without support from the highest levels of politics.
Let’s not forget the ESG initiative, which can also influence decision-making quite significantly. It is time for the cryptocurrency community to share its views on the future with legislators. Ignorance and disinterest in talking to politicians on this topic can backfire. The energy demand for running PoW and PoS networks is a topic that should be addressed more, not only across the cryptocurrency community but also at the level of politicians and other important bodies. Let’s take a look at the energy intensity of Cardano and Bitcoin networks in this article.
How to calculate the power consumption of the Cardano network?
The energy consumption of the Cardano network is independent of the value of the ADA coins. This means that the power consumption is almost constant regardless of whether it is a bear market or a bull market. The number of nodes on which the pool or relay service runs must be taken into account in the calculation. Even so, the calculation may not be straightforward.
Based on Cardanians’s live relay analysis, some pools have 5 relays, others share some relays together, others run multiple pools on a single device, some have more relays under one DNS name, etc. Some run failover infrastructure and some have non-public relays. We have tried to factor in an appropriate average of all of these. Our estimation includes all nodes in the infrastructure.
If we consider 45W as the consumption of one node, we get the total consumption of the Cardano network by multiplying this constant by the number of all nodes in the infrastructure. At the time of writing, there are 4286 nodes in the network. The annual energy consumption of the Cardano network comes out to about 1.6 GWh. Current data can be found in Cexplorer.
How to calculate the power consumption of the Bitcoin network?
The PoW consensus is based on electricity consumption. Unfortunately, the calculation is not so simple, as the power consumption is directly dependent on the value of BTC coins. Since the value of BTC coins is volatile over time, the electricity consumption also rises and falls. Because security is directly tied to the security budget, network security also rises and falls with the value of BTC coins.
The hash rate can rise regardless of the energy consumed as the efficiency of ASIC miners increases. This means that even if the price of BTC coins were stable for an extended period, the hash rate would increase. Miners cover the cost of buying energy through BTC rewards. Because the price of energy is different in each country, it is difficult to estimate how much energy miners will purchase.
There are several ways to reliably estimate the energy costs of mining. Let’s show some of them. It is possible to use a total hash rate and assume that miners have the latest ASIC miners. Miners always try to be as profitable as possible. On the other hand, it is not always economically viable to buy new hardware. So not all miners will have the latest models. Moreover, chips are currently a scarce commodity, so the demand for ASIC miners may not always be met in time. Anyway, if we know what hash rate one ASIC miner can produce, we can divide the total hash rate of the Bitcoin network by the hash rate of one device. This gives us the number of ASIC miners in the network. As we said, one must take into account that part of miners is older. Since we know the cost of running one ASIC device, we can also estimate the total power consumption.
The network security budget can also give us a rough idea. If we assume that mining must be profitable, we know that miners will not spend more money on energy than what the network pays through BTC coins. We have to subtract the cost of buying ASIC equipment, labor, the space in which the miners are located, costs related to cooling, fees to pools, profit, taxes, etc. We can calculate the gross cost per day of running a bitcoin network by multiplying the number of rewards per day by the number of bitcoins miners receive in block rewards (including fees), and multiplying the whole thing by the current value of BTC coins. Thus, (6 * 24) * (6.25 BTC + 0.1 BTC) * 20,000 USD. That’s a total of $18,288,000.
If we wanted more accurate results, we would need to know specific data directly from the miners. Still, we can make a rough estimate. The gross annual cost of running the Bitcoin network is approximately 188,222 GWh at this point, according to our calculations. Our results are consistent with what is published, for example, by statista.com (177 000 GWh) and digiconomist.net (134 000 GWh). Keep in mind that these numbers are from the time the article was written, and as we wrote, they change significantly over time.
If we take the annual cost of running the Cardano network, 1.6 GWh and compare it to the annual cost of running the Bitcoin network, 188,222 GWh, we find that the Cardano network is about 117,000 times more environmentally friendly.
As you can see, the carbon footprint of the Cardano network is almost negligible compared to Bitcoin. PoW mining has a very negative impact on the environment and generates 74.76 Mt of CO2 per year, similar to the state of Colombia. A single Bitcoin transaction costs the world 1,491 kWh, which is roughly the cost of running a U.S. household for 51 days.
The fundamental argument in favor of PoW is that energy consumption is a prerequisite for securing the Bitcoin network. Time has tested this argument, but it is often forgotten that the rewards process is dynamic. As Peter Todd suggests, the security of Bitcoin is by no means certain and will depend on the growth in the value of the coins. Unchanged monetary policy is a groundbreaking technological advance, but long-term sustainability must not be forgotten. If it’s only supposed to work for, say, 20 years, it’s not as useful as it first seemed.
There is no convincing argument that PoS doesn’t work or that it has some fundamental weakness. Both PoW and PoS networks can be attacked. The attack vectors are different. There are several implementations of PoS and none of them have failed yet. It turns out that dependence on power consumption is not necessary. The advantage of PoS networks is that, unlike PoW, they are sustainable in the long term.
The security of PoS networks also grows with the growth in coin value, as it makes it more difficult for a single entity to accumulate large numbers of coins. On the other hand, the security of PoS networks also depends on the distribution of coins among users. If more than 50% of the coins were owned by 10M network users who would not sell them due to passive income, an attacker would essentially have no chance to get the necessary majority to attack. At the same time, it would be enough that the value of the coins would not drop dramatically, i.e., they could remain at the same level, and the security of the network would not be fundamentally altered by value drops.
Assume that all coin holders are honest participants because they have an economic incentive to protect the network. PoW networks have the disadvantage that strong competition can drive honest miners out of the game. In other words, an honest miner may not be profitable and is forced to stop mining. Thus, he cannot participate in the security of the network even if he would like to. This leads to a centralization of power. PoS networks are likely to always be more decentralized as they allow all users to participate in the decentralization and security process. Every player, even the honest whales, protect the network from attack.
For the purposes of this article, let’s stick mainly to energy consumption.
What does the EU think about excessive energy consumption?
The European Central Bank (ECB) has released a report entitled “Mining the environment — is climate risk priced into crypto-assets?”, which looks at the energy consumption of cryptocurrencies. The report is well written and detailed.
The document says that some crypto-assets have a significant carbon footprint and that this undermines their green transition commitments. Estimates of the carbon footprint for Bitcoin and Ethereum further show that their combined yearly emissions as of May 2022 negate past and target greenhouse gas (GHG) emission savings for most euro area countries.
Jurisdictions may also look more closely into the productive use of different energy sources as a result of the recent spike in energy prices following the Russia-Ukraine war. The authors of the paper point out that there is an alternative and much less energy-intensive blockchain technology that can achieve similar results to the energy-intensive ones.
Clearly, the authorities have a well-mapped cryptocurrency space and know the differences between PoW networks and greener alternatives such as PoS. The authors of the paper are aware of initiatives to transition mining to green energy sources. The document mentions the Crypto Climate Accord and the Bitcoin Mining Council.
The drive for greater transparency in mining and the commitment to achieve zero emissions by 2030 is viewed positively. On the other hand, there is criticism that these efforts are only voluntary and that the methodology is not clearly explained, as well as the lack of important details and unreliable data in the documents from these movements.
The transition of PoW mining to green resources is the biggest argument of Bitcoin proponents. However, from the EU’s point of view, this is not a solution, as PoW crypto-assets transition to renewable energy sources, they may crowd out other uses of renewable energy, putting countries’ green transition targets at risk. The document states:
Renewable energy is limited. The share of renewables in global electricity generation was 29% in 2020. Hence, it will take time to have a fully renewable energy supply. Using existing renewable energy sources to mine bitcoin generally implies that less renewable energy can be used for other purposes such as providing electricity to households, as well as to eventually cover the required climate transition.
The significant energy consumption weakness of PoW can be addressed by another blockchain consensus mechanism, namely proof-of-stake (PoS). It is estimated that PoS blockchain technology dramatically reduces energy consumption while ensuring the same functionality.
Public authorities do not want to stifle innovation and technological progress, as this driver of economic growth. On the other hand, authorities have doubts about Bitcoin’s benefits to society. The potential of blockchain technology is so far considered uncertain.
Authorities must look at the whole issue holistically. This perspective is often lacking among cryptocurrency proponents. Authorities must carefully balance the pros and cons. The document goes on to say the following.
It is difficult to see how authorities could opt to ban petrol cars over a transition period but turn a blind eye to bitcoin-type assets built on PoW technology, with country-sized energy consumption footprints and yearly carbon emissions that currently negate most euro area countries’ past and target GHG savings.
This holds especially given that an alternative, less energy-intensive blockchain technology exists. To continue with the car analogy, public authorities have the choice of incentivizing the crypto version of the electric vehicle (PoS and its various blockchain consensus mechanisms) or restricting or banning the crypto version of the fossil fuel car (PoW blockchain consensus mechanisms). So, while a hands-off approach by public authorities is possible, it is highly unlikely, and policy action by authorities is probable.
It is highly unlikely that investments in PoW-based assets can be part of an ESG investment strategy. Even so-called green crypto mining would crowd out other, likely more productive uses of renewable energy.
Whether we like it or not, we don’t think the authorities will be satisfied with the argument that PoW mining can switch to green energy. We must consider that Bitcoin is not the only PoW project and new ones may emerge in the future. To determine the overall negative environmental impact of PoW mining, we need to sum up the consumption of all existing projects. Authorities cannot grant an exemption to one project and ban others. If there is a green alternative to PoW, it is a fair argument that people should use a more environmentally friendly technology.
From our point of view, people should choose what they want to use. Authorities should respect people’s choices and not restrict them. On the other hand, awareness of cryptocurrencies is low among the mass population today, and Bitcoin’s high energy consumption is criticized by experts and the general public. It is not true that everyone who understands Bitcoin necessarily agrees with its high energy consumption. The population will always be divided in opinion and it is questionable how the authorities should approach this, as it is in their job description to take into account the views of both camps and decide in favor of the majority.
We believe that the PoW consensus makes sense if the problem of the declining security budget is somehow resolved. Building network security on the assumption that the value of coins will grow indefinitely doesn’t make much sense. The concept of useful PoW, where computing power is used to solve a real problem, is interesting. PoW can play a significant role in securing blockchain networks, but it is questionable whether it will in the form that Bitcoin is currently using it.
We understand that people selfishly advocate for their own investment first and foremost, so they feel the need to overlook the needs of other people who don’t have skin in the game. There has not yet been a rational and open debate in the crypto-community on the subject of the over-consumption of electricity. We assume that it will not even take place because the different communities are hostile to each other and have no desire to accept the arguments of the other side. Everything is wrapped in false ideology. Frankly, we are not surprised that the authorities have taken up the issue and feel the need to make a decision. We do not like the possible ban on PoW, but we understand the arguments from the document that was published by ECB.
If we are able to create a more environmentally friendly technology, we have a moral obligation to use it. Nobody wants to live in cities full of dangerous fumes that will shorten our lives. With emission limits on internal combustion engines, we can live much better in cities. The pressure to use more environmentally friendly technology is relevant and in the interests of all people. Decentralized money and services make sense, but not at the cost of sacrificing our planet. In the past, we have often neglected the environment, and we still do. Now almost the entire world is trying to change that and the blockchain industry can’t get a special exemption.
If you want to look at the current power consumption of Cardano and Bitcoin and compare it, you can use Cexplorer, which updates the data regularly.