Blockchain: Power guzzler or solution for the energy revolution?

When Tesla CEO Elon Musk openly criticized Bitcoin's eco-balance at the end of May 2021, its price plummeted by double digits within a few hours. However, when Musk hinted that Tesla wanted to continue holding on to its $1.5 billion Bitcoin ownership, the sell-off was halted. In the following days, Bitcoin and other affected cryptocurrencies even recovered noticeably, as the Tesla founder says he wants to campaign for a “greener Bitcoin.”

He spoke with well-known industry representatives such as Argo Blockchain, Blockcap, Core Scientific, Galaxy Digital and Hive Blockchain Technologies to make the production and use of Bitcoin more sustainable. Musk also attended a meeting of Bitcoin Mining Council, which includes bosses of large crypto mining companies. Together, they now want to ensure greater transparency about the industry's energy consumption. In addition, the crypto industry's sustainability efforts and its use of renewable energy are to be accelerated worldwide.

Environmental sinner Bitcoin mining?

Loud University of Cambridge data The global energy requirement for mining bitcoins is currently around 113 terawatt hours (TWh) per year. As a result, the server farms required for mining consume more electricity in one year than the Netherlands. Bitcoin electricity consumption is mainly due to so-called “mining”. Bitcoin miners use particularly high-performance computers and graphics cards that are connected to the cryptocurrency network. They must solve cryptographic computing problems. The miner who is the first to solve a specific task and thus checks a new block in the blockchain is rewarded with units of cryptocurrency. The high power consumption of many blockchains is caused by computer power, cooling, but above all by a special component of the technology known as Proof of Work (PoW).

Blockchain is more than Bitcoin — the consensus mechanism is decisive

So when people report on the high energy consumption of Bitcoin, they actually mean mining using PoW technology. Its poor ecological balance is due to the fact that many millions of energy-intensive computational operations must take place worldwide to solve the calculation problem. PoW proves that the calculation path was carried out without errors. Many major cryptocurrencies are based on this energy-intensive method — in addition to Bitcoin, Ethereum, Litecoin or Monero.

However, there are now numerous, energy-efficient blockchain solutions whose consensus mechanisms are based on other technical processes and are therefore much less harmful to the climate. These are blockchains that use methods such as Proof of Stake instead of Proof of Work, for example. Instead of many miners, randomly selected individual validators (“accountants”) are then responsible for securing transactions. They too can ensure the security of the distributed database — but without the massive, parallel computing effort.

Proof of Stake significantly reduces energy consumption

As one of the most important cryptocurrencies, Ethereum started the transition from Proof of Work to Proof of Stake (PoS) with the so-called “Beacon Chain” on December 1, 2020. After the transformation, which is to be completed in 2021, the Ethereum network should only consume as much energy as a village of 2,000 inhabitants. Although Ethereum 2.0 will have a signal effect for the entire crypto industry due to its important market position, the pioneering work is being done by smaller cryptocurrencies, which are already based on the proof of stake process. For example, Cardano, Polkadot, EOS or Tron, whose price development benefited massively from Bitcoin's energy problem: Elon Musk's tweets have brought the negative environmental balance of Bitcoin into the focus of investors. They then invested more in POS-based alternatives. Many of these “green” cryptocurrencies were therefore able to two-digit range gain weight.

More sustainability in the blockchain can be achieved both through a more efficient consensus mechanism and through the increased use of renewable energy. Die Global Cryptoasset Benchmarking Study found that in September 2020, around 39 percent of crypto energy came from renewable sources — up from 28 percent in December 2018.

However, Bitcoin's ecological balance depends too much on China and its energy sector and policy. Around 65 percent of the world's Bitcoin mining takes place in the provinces of Xinjiang and Sichuan. But 62 percent of China's electricity mix is dominated by fossil fuels and coal-fired power plants, which are even being expanded rather than reduced.

Blockchain can support renewable energy

Politics and science worldwide should therefore recognize Bitcoin's CO2 problem and seek solutions. It would be ideal if the blockchain was not only “greener” itself, but also contributed to a faster transition to renewable energy. This is because the blockchain itself is probably the most efficient infrastructure and could even drive the expansion of CO2-neutral energy generation.

The study came to this conclusion”Blockchain in the integrated energy revolution“from the German Energy Agency (dena). She examined the contribution of blockchain to the energy transition based on eleven specific use cases from the core energy sectors of asset management, data management, market communication, electricity trading and financing.

An example of the potential environmental added value of blockchain-based solutions: Network charges and electricity purchase prices today only insufficiently reflect bottlenecks in networks or the scarcity of the wholesale marketplace. By precisely documenting local and timely generation and consumption information using smart contracts, these systems can be made more effective.

Using blockchain's value-added potential across sectors

However, in order for blockchain technology to continue to develop and expand its use in the energy sector, among other things, politics and business still need to take important steps. The Federal Government has taken a significant step with Blockchain Strategy Release already done in 2019 and specified again in May 2021. The aim of the strategy is to use the opportunities offered by blockchain technology, to mobilize its potential across sectors for digital transformation and to further strengthen Germany as one of the leading locations for this technology. German start-ups such as Lition show that linking blockchain and energy transition can work: The company uses blockchain technology to bring green electricity providers and customers directly together without the detour via large network operators and thus provide users with more direct and inexpensive access to green electricity.