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Ecological impacts and challenges of blockchain technologies
On May 16th, 2018, Alex de Vries published an article titled Bitcoin’s Growing Energy Problem in which he attempts to calculate the energy consumption of mining Bitcoin. His comparison of consumption between the Bitcoin network and that of Ireland rapidly becomes a common reference to decry the gargantuan appetite of blockchains for gigawatts.
Calculating the ecological footprint of blockchains is a complicated exercise that requires taking into account many variables, some of which suffer from a lack of reliable information. How much electricity do blockchain activities consume? Where does the electricity come from? From fossil fuels or renewable energy? Among these various ecological factors, identifying the origin of the electricity consumed by Bitcoin is a key issue. Coal-fired electricity consumption has a carbon footprint more than 170 times greater than that of hydropower electricity.
In addition to these factors, for which there is no precise information today, the second-order effects resulting from this consumption should be added to the calculation, such as the energy spent to cool the mining farms, or the pollution of technological waste and the extraction of rare metals.
This consumption should then be compared with what is comparable: that of traditional systems of value transfer and storage (e.g. the banking network) and value creation (e.g. gold mining).
This article does not aim to quantify the energy consumption of blockchains; Bitcoin, which is cited as an introduction, reveals the obstacles encountered by this type of calculation. We will analyse here the different impacts of blockchains on the ecology through their operation and the use cases that these technologies allow to develop for the benefit of other industrial sectors to reduce their ecological footprint.
How blockchains work: an ecological footprint depending on the consensus protocol
In order to function, all public blockchains require a consensus protocol to validate the various blocks. Consensus can be achieved in different ways and it is one of these processes, Proof-of-Work (PoW), that is singled out as the main energy consumer of blockchains. There are other mechanisms, of which the most important are Proof-of-Stake (PoS) and Delegated-Proof-of-Stake (dPoS). These three protocols cover more than three-quarters of the global blockchain activity. Indeed, Ethereum (PoW, progressively implementing PoS) and Bitcoin (PoW), account for 77% of the global crypto-asset capitalization while EOS (dPoS) and Tezos (dPoS) account for 75% of the global number of transactions in blockchains.
Historically and through its use, PoW is the first consensus protocol. It is also the most energy-intensive protocol. The consumption of electricity and the cost it generates are not an unexpected consequence of the use of this protocol, but were present at the genesis of the proof-of-work. This cost safeguards the honesty of the miners and thus the integrity of the blockchain, as the potential benefits of dishonest validation are countered by the electric cost that this action would require. Indeed, miners contribute through the computing power of their hardware. Currently, more and more miners are gathering and forming mining farms, thus concentrating a large amount of computing power, a large amount of electricity consumption, and de facto a high financial cost.
The power consumption studies all focus on Bitcoin, and do not look at other blockchains, such as Ethereum, running on the same protocol. While their figures on the overall consumption of blockchains are imprecise, they nevertheless offer an order of magnitude of the global consumption: 88.96 tWh in 2020 according to the CBECI for example, and reveal the need to address this.
There are no quantitative studies yet exploring the overall electric consumption of a blockchain operating with PoS. Nevertheless, its operation differs greatly from PoW, and helps to explain its significantly lower electricity consumption. Indeed, the network’s validators commit assets: their digital assets, and are randomly selected to validate blocks. There is no longer any notion of race for computing speed, and no longer any concern about excessive electricity consumption. PoS can be seen as a solution to the ecological footprint of blockchains, but there are other issues involved in its adoption.
Similar to proof-of-stake, it adds a layer to the validation process. Participants who earn their assets will then vote and elect delegates to reach a consensus. While the use of this protocol raises other issues, particularly regarding security, it also presents a more environmentally friendly solution for the operation of blockchains than PoW.
In terms of the ecological footprint of blockchains, PoW-based blockchains are much more energy intensive than PoS or dPoS-based technologies.
Will proof-of-stake and delegated proof-of-stake reduce the ecological footprint of the blockchain? While at first glance these solutions seem promising, it is not easy to switch a blockchain from one consensus protocol to another. Ethereum is proof of this, its transition from a PoW protocol to a PoS protocol is a long process, which should be fully implemented in 2022 after launching the first phase in December 2020, already the result of several years of research. For blockchains, such as Bitcoin, other solutions are possible and being considered to reduce the ecological impact of their operation.
Towards more green energy: the new opportunity of geographical arbitrage
The alignment of needs between green energy producers and blockchain miners is a rare opportunity to reduce the latter’s carbon footprint. Producers have plant construction costs to amortize, and suffer a loss of energy when their production capacity exceeds the demand of their grid or when there is a significant difference between day and night electricity demand. One way to reduce their costs is to sell the electricity they produce to third parties. Miners, on the other hand, seek the cheapest electricity and have the ability to locate anywhere on the globe.
In 2020, 76% of miners included green energy in their energy mix; an estimate based on the mix of the countries in which they are located. This represents 39% of renewable energy in final consumption, which is higher than the global average. These figures can be explained by the unprecedented possibility for miners to make a geographical arbitrage, i.e. to locate anywhere close to an inexpensive source of energy production. They are gradually migrating to areas where there is an overproduction of green energy and low prices: Iceland, Scandinavia, the Caucasus, the Pacific Northwest, Eastern Canada and Southwest China.
A recent example also shows the potential for mining farms to amortise the construction and operating costs of hydroelectric power plants where supply still far exceeds demand. While the primary objective is economic, the environmental impact will be no less: the deployment of electrification for the 520 million people in Sub-Saharan Africa who have no access to electricity. Since 2017, Virunga, DRC, has been equipped with hydroelectric power stations that will eventually meet the needs of the region and combat deforestation in Virunga (the world’s second largest forest park after Amazonia). These power stations are currently in excess production capacity due to the lack of economic development in the region. BigBlock Data Center, a mining company, has set up a farm that gets supplied by the hydroelectric plants, enabling these plants to write-off some of their costs.
Green energy, while not reducing the amount of electricity consumed by PoW blockchains, does reduce their carbon footprint. Hydroelectric generation produces 6 grams of CO2 per kWh, while coal produces 1060 grams, fuel oil 730 grams, and gas 418 grams. Blockchain has the opportunity to solve part of its ecological challenge by positioning itself among the greenest industries and having a positive impact on the development of renewable energies.
Towards more green energy: increasing industry empowerment
The crypto-assets industry is increasingly aware of and committed to reducing the ecological impact of applications developed and services offered through blockchain technologies. The frenzy around non-fungible tokens (NFTs) earlier this year has reinvigorated this debate, and partly explains the accelerated timeline for Ethereum’s full migration to PoS, now scheduled for October 2021. Also, in early April, the Crypto Climate Accord was born. Launched by Energy Web, the Alliance for Innovative Regulation and RMI, and supported by more than twenty sponsors (including traditional players such as Engie and EDF’s Exaion subsidiary), this private initiative promotes the urgent decarbonisation of the crypto-assets industry and sets three (possibly adjustable) objectives to this end: enable all blockchains to run on an energy mix consisting exclusively of renewable energy by 2025, measure the industry’s CO2 emissions by developing an open source accounting standard, and achieve net zero CO2 emissions by 2040. This last point seems to echo certain commitments made by large companies (e.g. Amazon), and thus anticipates symmetrical injunctions.
These various signals testify to the growing awareness that environmental issues do not spare the sector.
It is possible to reduce the ecological impact of the operation of blockchains: miners can play on the opportunity of geographical arbitrage allowing them to choose their energy sources, and different protocols are intrinsically less energy intensive. Several signals also show that industry players are gradually but ambitiously taking up this issue.
It is clear that blockchain as a whole currently has a high ecological cost. As established, this is mainly due to the PoW protocol, which is not used by all blockchains and some of which tend to deviate from it. In addition, the PoW protocol can also be used as a lever to increase green energy production.
In its use cases, this technology presents opportunities for carbon footprint reduction, waste reduction, or decentralisation of energy supply. Scientia potentia est: traceability, an inherent advantage of blockchain, also increases the power of the citizen to demand more responsible means of production. Finally, blockchain, like any technology, is just a tool whose use depends on the will of those who use it. Today we are seeing the emergence of projects focusing on ecology and the environment.
This article was written by Bettina Boon Falleur