Blockchain and Sustainability

With economic systems trembling and a growing lack of trust in financial services, such as banks and credit systems, users are now looking for alternatives to centralized monetary infrastructures in the financial sector. The Blockchain appears to be a promising solution to disrupt the way transactions are currently taking place. In fact, in September 2021, El Salvador became the first country to adopt Bitcoin as a currency, allowing citizens to purchase anything with the Bitcoin cryptocurrency.

Besides the exciting features of Blockchain, this technology is also said to be hazardous to the environment, mostly regarding its high energy consumption rates. According to the Cambridge Center for Alternative Finance (CCAF), the Bitcoin energy consumption rate is around 92 Twh per year, which is roughly equivalent to the annual energy of 0.47% global electricity production. However, what some discussions about Blockchain’s environmental impact normally obscure are the additional layers of complexity that demand deeper analysis to better understand how this technology is evolving and what needs to be done to improve it.

To grasp the very essentials of Blockchain, Envisioning interviewed Jonathan Knegtel, a Blockchain expert from Blockdata and a long-time Blockchain advisor. To start, he enlightens us with some truth or myth answers:

This interview intends to democratize information about technological developments and discover what the future holds for Blockchain and its infinite layers, thus generating more debates igniting critical thinking and advancing more sustainable practices. For the terminology contained in the interview, we have prepared a glossary including key terms and their corresponding description, as well as some additional information regarding the most popular technology methods used in the Blockchain.

How Does Blockchain Work?

According to Knegtel, the Blockchain is a cloud-based ledger settled on a distributed ledger technology. More specifically, it is "[...] the lower level archetype, where you store things such as Directed Acyclic Graphs (DAGs)." The big difference between databases and distributed ledgers is, he says, "a database you can change. The whole idea of the Blockchain is that you cannot go in and randomly start changing the records added to the ledger. Both concepts— Blockchain and cloud-based ledgers— store data," but one allows you to modify the data inserted, and the other creates records of each transaction.

He continues, "[...] the Blockchain is a settlement layer for transactions. In any financial transaction or any transaction, there is the delivery of assets, and then the payment of these assets." These assets can be stakes in companies, projects, or cryptocurrencies. Knegtel explains, "cryptocurrency is one of the many applications of the Blockchain, used to reduce the amount of paperwork, as you can use your phone for signing transactions. It helps to reduce the cost of transferring assets between individuals. It can open up new industries, applications, and new ways to interact with purchasing."
Unlike traditional financial services, in which a third party usually performs the exchange and transfer of assets, such as through Visa and Mastercard, assets in the Blockchain are owned by the users and transferred by them without any intermediary. Yet, consensus mechanisms like Proof of Stake (PoS) allow some third parties to be involved in the process, in contrast to how Proof of Work (PoW) functions.

What is the Difference Between the Proof of Work (PoW) and Proof of Stake (PoS) Consensus Mechanisms?

Simply put, Knegtel explains that "[...] with Proof of Work (PoW), nobody fundamentally trusts anybody. There are a lot of independent verifiers trying to maintain the security of the immutability of the network." This process, especially for Bitcoin mining, consumes immense amounts of energy because the miners, according to Knegtel, "are trying to solve mathematical puzzles and making sure that those are correct." Simply put, miners do what they do because the mining process exists to confirm whether a transaction is authentic or not. The mining process is how miners earn cryptocurrency without having to invest money in it. Bitcoin miners receive Bitcoin as a reward for completing "blocks" of verified transactions.

In contrast, the Proof of Stake (PoS) consensus mechanism consumes less energy due to the lower computing power requirements compared to PoW. In Knegtel's words, it is "less energy-consuming and more efficient because there are fewer validators of information" as it uses a random algorithm that selects those miners holding a more significant percentage of tokens. However, by giving PoS validators more power in the ledger, the information transferred is centralized in the hands of a few. He adds, "[miners] are responsible for verifying the information added to the ledger. They, in turn, can affect the image, the immutability, and characteristics of the Blockchain." Lyn Alden, the founder of Investment Strategy, writes, "centralized things inherently tend to be efficient. Sending payments between parties and tracking peoples’ balances can be as simple as updating an internal database.”

Alden argues that "the problem, of course, is that centralized things do not tend to be resilient; [...] relying on a centralized entity cedes control to others, which rests on the premise that those others are moral and competent." This subsequently leads to a more vulnerable network susceptible to attacks. In a Compass Mining podcast, Ben Edgington, developer for Ethereum, expands on the vulnerabilities of PoS, saying "it is not obvious how to make it robust, there are attacks [...] that just do not exist in PoW, that we have had to think through and come up with solutions to” make PoS consensus more secure.

Can There be Any Balance Between Security and Sustainability?

A PoS mechanism can consume less energy than PoW, reaching almost 100Twh less than the Bitcoin network, which relies on PoW consensus mechanism. Knegtel reveals it is the design considerations of the many types of consensus mechanisms that will make them more or less energy efficient. In his words, these mechanisms "require different levels of computing power because of the schemes on how people are rewarded and how they earn. The amount of computing power employed on the Bitcoin network, for example, is an incentive to get economic value through the mining of cryptocurrencies. It is not so much about the technical design of the technology, but the economic structure of the entire system that is causing these huge amounts of energy to be consumed to secure the network.

He adds, "if we look at Ethereum, they are moving from PoW to PoS. This is taking them a very long time because it is a core change to the infrastructure, but also, there is no central authority to upgrade the entire process. They are not managing 10 euros worth of Ethereum, but billions and billions of dollars. Emerging initiatives like Solana,” a company developing more user-friendly Blockchain applications, “[...] are employing PoS and different types of consensus algorithms, promising higher production rates.”

This shift from PoW to PoS is promising, especially from a sustainability point of view. However, it does come with a trade-off. Knegtel explains that "[...] somebody with a lot of supercomputers could gain control of the network because with PoS, it depends on who has a lot of the assets. For example, Elon Musk could come along with his quadrillion dollars, buy a lot of the web and start to influence the transactions. So the balance between security and sustainability is not related to the technology of Blockchain, but the economics behind it."

How Can We Make Blockchain Greener?

Some experts suggest the Ethereum PoS network will continue to gain traction, consequently making the Blockchain more energy-efficient in the future. But, if we decide to look strictly at the “energy problem” related to Bitcoin mining, what common knowledge does not show is that, according to research, most of the electricity employed in crypto mining comes from renewable sources. According to Stephen Stonberg, Chief Executive Officer at Brittex Global, in a recent article published in We Forum, "[...] the Proof of Work consensus algorithms that power the Bitcoin network does indeed require a lot of energy. But what these arguments about Bitcoin’s environmental impact obscure are that the broader crypto ecosystem is in the midst of a shift towards a cleaner, greener, more sustainable future that will result in significantly lower carbon emissions."

Currently, the renewable energy share used in mining is higher than 78%, and hydroelectric power is also becoming the leading energy source for Bitcoin. Besides, crypto miners prevent unused renewable energy from going to waste by using the electricity surplus coming from power plants. In fact, when compared to the global traditional financial system (card, banking networks, ATMs), the Bitcoin network requires much less energy. These financial systems, besides their high-energy consumption rates, are responsible for providing financial aid to the most notable and hazardous projects to the planet’s natural ecosystems.

But initially, the mining of Bitcoin was not always that green. This ongoing shift, as stated by Knegtel, was triggered by the banning of Bitcoin in China. In his words, "China was one of the most popular places in the world for Bitcoin miners. [...] People were mining Bitcoin [there] because it had the cheapest power. Normally, during the wet season, miners moved their computers closer to hydropower because that was the most affordable energy. In the dry season, they moved again from hydropower to the coal plants because it was cheaper."

He continues, “when mining was banned, huge warehouses stacked 20 meters high, filled with computers, were clogged, packed into container ships, and shipped across the world. These computers needed to find new warehouses in North America, South America, and other continents. China's ban on Bitcoin proved that crypto-mining could move worldwide to where there is, not only the cheapest but also the most sustainable energy without the network going down. Bitcoin miners are very mobile and can go next to the power plant they wish. This shows how resilient Bitcoin is, even more than any other traditional payment network."

Knegtel concludes, "[…] because of all the investments that have been made into sustainable energy, renewable energy is now some of the cheapest energy you can get. By China banning Bitcoin mining, they have made the entire Bitcoin network run off of more green energy, because green energy in the Western society is generally cheaper these days than oil or other ones." Indeed, according to the International Renewable Energy Agency (IRENA), in 2020, roughly two-thirds of the solar, wind, and alternative renewable energy sources were cheaper than the cheapest fossil fuel.

These pieces of evidence show that, perhaps, we should ask ourselves how Blockchain can become a transformative engine to the energy sector, and how its innovative financial and economic proposals can offer new pathways to transparency, decentralization, and opposition to capital controls.

What Does the Future Hold for Blockchain?

"In the future, 99% of Blockchain users will never know that they are using Blockchain. Just like how when you use your credit card, most people have no idea of all the technology that exists behind it. But people know that they can perform transactions by simply touching their plastic cards on a payment terminal. They know their money is flowing. The same goes with Non-Fungible Tokens and blockchain gaming; people know that they can play a game and earn money with that. They do not need to know all the ins and outs of the Blockchain to use it," he says.

In terms of energy consumption and sustainability, Knegtel also shares some insights in the case Blockchain becomes widely adopted. He says that "[...] if everyone started using Blockchain, we would be able to account for all carbon emissions.” In other words, as the Blockchain system itself allows tracking and monitoring of all transactions through immutable and tamper-proof records, it would enable users to know the de facto amount of Blockchain CO2 emissions without anyone manipulating its figures. He adds, “users would finally start to see how things move around the economy. Blockchain enables the creation of decisions based on truth because users would be able to ask a question without having to go to hundreds of different information sources; you could simply press a button, and it would [reveal everything]."

In politics, Knegtel adds, "every major government around the world right now is looking at blockchain to implement it in the future; otherwise, they are going to be left behind. With the Blockchain, economies can become more efficient through shared sources of truth. Why should every single company have an accounting department, for example? When you think about things like the central bank, they are from there from the 1960s. Systems do not last forever; they evolve. Technology is just another layer, which is the next evolution of where we are going. When we have hit technology, what happens is these systems turn into utilities. In the case of Blockchain, it is becoming the data network utility of society and collaboration."

He concludes, "that is why regulators have been excellent at not regulating blockchain. Regulators are not there to protect the current market structure but to protect the masses, how they interact with each other, and the economy and society. They want to make sure that this autonomous and independent system made of actors collaborating is safe to avoid data leaks and breaches, as demonstrated by some scandals featuring big tech companies, such as Facebook and Google. With cases like these, systems lose money or lose on general data protection. If this world is going blockchain-based, let's make sure that everyone does it in a way that is aligned with European values."

Ultimately, Knegtel is optimistic about the many realities Blockchain could bring —and is bringing— to our world, with countries and industries finding opportunities within it. "It is no longer a fairy tale. [But] it is going to take years to be finally widely adopted. The EBSI (European Blockchain Services Infrastructure), for example: all member states have already signed an agreement that they are going to be building infrastructure for Blockchain services across the European Union. More and more businesses are looking at Blockchain. In three years, real estate, as an industry, will be the biggest use of Blockchain tech because for them there are a lot of people and paper involved, they can put it in the Blockchain and simply resolve all the paperwork."

Additionally, Blockchain can also bridge poorly regulated sectors, such as the case diamond supply chain in Africa. Recently, Everledger launched a 2.0 version of their blockchain platform that includes a tracking system delivering “[...] collaborative, transparent, and reliable sources to track diamonds and check their origins.” This solution propels myriad solutions to other industries, such as in land use management programs.

By combining detailed data of local land use and spatial data, the Blockchain could become a toolbox to enable policymakers and stakeholders to visualize the outcomes of various long-term scenarios with a focus on changing land-use across the globe. According to research, Blockchain applications hold the promise to establish fair international agreements on sectoral cooperation for emerging countries, thus supporting better-suited subsidies, creating internal policies, and overcoming unfair trade agreements.