Blockchain — accelerator of the energy transition or energy polluter?
Blockchain technology offers high potential for energy and cleantech sectors. However, it also consumes a lot of processing power, which in turn uses energy. So, the question arises whether Blockchain will accelerate the energy transition, thus allowing us to achieve our climate goals quicker, or whether its energy consumption nullifies its benefits.
Current energy use of Blockchain
The most widely known implementation of Blockchain is the cryptocoin Bitcoin, the first Blockchain application. Bitcoin recently made the headlines with record highs, catapulting from a value of around 20,000 US Dollars at the end of 2020 to almost 60,000 USD mid-February of this year (21st February, 57.5 k).
Due to the potential returns, investing in Bitcoin is attractive. Imagine having bought one Bitcoin when the currency was valued at 500 USD in May 2017 and selling it in February 2021. Your profit: 57k USD.
There are different ways of measuring the energy use of Bitcoin, which all show a correlation between its valuation and amount of energy used per year. This value has reached total energy use of a country in the world: the range lies between the yearly electricity use of Chile with 79 terawatt hours (tWh) and the Netherlands with 120 tWh for the year 2021, according to German newsportal Tagesschau. The Netherlands have around 17.5 million inhabitants and are one of the most densely populated countries in the world. Chile is significantly larger in terms of area, but only has 1.5 million more inhabitants than the Netherlands. The difference in tWh per year comes from the different levels of industrialization and development.
These were numbers for the annual consumption. But how much energy is required for an individual transaction? In 2020, one of the transactions consumed 741 kilowatt hours (kWh). 1 tWh is one billion kWh. And this translates to up to 5,200 km with a Tesla model 3 depending on the driving style. Or almost 500,000 credit card transactions of Visa, as summarized by Wallstreet Online. However, this is not an average number; most transactions consume considerably less. The amount of kWh per transaction depends on the amount of users in a network that are involved in processing and verifying the transaction.
Where the energy goes or some background on Bitcoin
As the name “crypto” says, Bitcoin is a digital currency, a currency that is bought and sold online. One of the inherent processes belonging to any cryptocurrency is “mining”. Simplified, “mining” is used to process transactions, secure them and to synchronize the computers in the network, so that they confirm the data on the Blockchain is valid. Thus, mining prevents fraud. But, in reality, this is a very complicated process for which computers — much more powerful than our home pcs — solve complex calculations. This uses a lot of computing power, which is an energy intensive process. Energy intensity equals a high amount of electricity used in turn resulting in costs and carbon emissions. The more profitable the business with Bitcoin, the more willing people are to handle these costs.
Measuring energy use of Blockchain
The estimated range of energy use is quite large. Of course, predictions for a year are difficult to make. But there are also different ways of measuring the energy use of Bitcoin out there. Why? The International Energy Agency (IEA) found that there is limited data availability and highly variable conditions across the industry, e.g. in hardware used (Dr. G. Hileman & M. Rauchs, 2017). Also, both top-down and bottom-up approaches exist. Nevertheless, all approaches normally give a range of the highest amount of energy they believe could be used and the lowest.
The Bitcoin Energy Consumption Index (BECI), the most cited source, uses a top-down approach and assumes that a miner will spend around 60% of their revenue on electricity. This estimates the yearly energy consumption of Chile.
Recently, the Cambridge Bitcoin Electricity Consumption Index (CBECI) has received a lot of coverage. This is a bottom-up approach that assumes the yearly energy consumption of the Netherlands. Starting point are different types of available mining hardware.
Do solutions exist?
Interest in Bitcoin has strongly increased with its rise in value. However, we generally see a strong drive towards digitalization and e-solutions. 2020, impacted with Covid19, presented us with the possibilities that exist.
Also in Bitcoin and other Blockchain applications we see a development. The current process of mining and validating transactions is called “proof of work”. This rewards spending computational resources. The higher your computational power, the higher your influence. An alternative that is currently being developed and used by Ethereum 2.0 is the so-called “proof of stake” approach. As the name says, stake plays an important role: validators would be chosen based on their monetary deposits. Rather than involving all participants in a network, “proof of stake” limits it to those that are necessary.
Since its beginnings, the Blockchain has been in constant development, from seeing different coins arise to new applications that could be displayed with the Blockchain. With the rise in interest and importance, it is no surprise that energy use spiked recently, and it will probably hit more record highs in the future. It is comforting to see, though, that the climate impact and protection debates have also been absorbed by Blockchain developers that are now working towards finding solutions that use less energy. Nevertheless, roadmaps towards more and cleaner energy that compensate rising computational powers need to see quick implementation.