Sustainable Business Management; Technology 5.0 And Sustainable Development
It won’t be wrong to say that blockchain technology has taken over the world by a storm. Thanks to the cryptocurrency realm and it’s massive success, blockchains are soon becoming a mainstream phenomena. While the likes of Bitcoin have garnered enormous popularity amongst the investors and speculators alike, a very small portion of them actually understand the technology behind it. In fact, Bitcoin’s success can be partly attributed to the general narrative of ‘Us’ (Bitcoin Investor) vs ‘State’. This has attracted a lot of young Generation ‘Z’ kids who are jumping into this realm.
This lack of understanding of technology has created issues like undue speculation, capital loss etc. While these issues are more at a personal level, there is something that has taken a global centerstage: Sustainability and Environmental Concerns.
So, in this paper, author would attempt to share an abstract of why Bitcoin is considered detrimental to the environment. We’d also touch upon the fact if something is being done to fix it. And finally, what’s the way forward from here.
Quantum of the Problem:
If we focus on Cambridge Bitcoin Electricity Consumption Index from Cambridge University, Bitcoin’s bad impact on the environment raises – compared to the Digiconomist’s Index – to an electric consumption of 133.68 TWh per year.
That makes Bitcoin’s impact on the environment equivalent to a country like Sweden’s and its 131.80TWh annual electricity consumption. Or similar to the consumption of countries like Poland (152.57TWh/year) Egypt (150.58TWh/year), Malaysia (147.21TWh/year), Ukraine (128.81TWh/year), or Argentina (125.03TWh/year).
The dilemma involved here is very real. Should we consider Bitcoin as a parallel currency and compare it with the likes of State Bank of India (which probably consume way more energy than Bitcoin)? Or shall we deem it as an asset class and rethink if we wish to sacrifice our future for some decent returns on investment.
To put the energy consumed by the Bitcoin network into perspective we can compare it to another payment system like VISA. According to Statista (May 2021), one Bitcoin transaction alone spends, on average 1200.86 kWh, while 100,000 VISA transactions spend only 148.63 kWh – it’s a huge difference.
The problem doesn’t end here. Mining Bitcoin (more on it in a while) requires specialized hardware. This hardware can be graphic cards, computers etc. Multiple such devices are pooled together to create a mining ring. Once these devices break down, they cannot be recycled. Thus generating enormous electronic waste.
The Digiconomist suggests the amount of electronic waste Bitcoin produces: 11 kilotonnes/year.
Why is Bitcoin (Blockchain) Consuming So Much Electricity?
In order to look for alternatives efficiently, one needs to understand how Bitcoin works. This would give you a perspective of how it is leading to a gigantic carbon footprint.
Let’s rewind a little bit to understand how Bitcoin works. That should serve as a perspective of why there is so much power required to run this network.
So blockchains in essence are nothing but a chain of blocks. These blocks can store data: text, images, videos, transactional data, anything.
Now let’s consider the blockchain that runs Bitcoin. All transactional data is stored on to this blockchain. So if Person A pays Person B a sum of 1BTC, it is stored on a block with these details.
USP of the blockchain technology is the fact that it is decentralised. This means that there is no single, central authority running the show. How blockchains typically operate is through nodes.
These nodes are computers with high end configuration that help maintain the system. Every node has the copy of the entire blockchain.
Now if anyone tries to cheat on the system, there copy of the blockchain becomes different than the other copies. Therefore everyone else comes to know of this fraudulent activity and that copy of blockchain is simply shunted out of the system.
So far so good right? But then if changing the blockchain is so easy, everyone would come up with their own version of blockchain and it would become impossible for anyone to guess which blockchain has the legitimate data. In other words, we would end up with multiple blockchains with no way to pin point the correct one.
Proof of Work
Just to solve for that problem, a concept of ‘Proof of Work’ was introduced. This means that if people had to work hard to create a new block (basically change the blockchain data), they would think twice before tampering with the system.
Without going into too much of technicality, this is achieved through making people solve a complicated mathematical puzzle. If you are interested in understanding how this puzzle works I would recommend that you read this post.
In order to solve this puzzle, people spend their computational resources and hence electricity in the process. Why would some do that you ask? Because they would get rewarded in BTC if they successfully validate a transaction.
Now, what happens in a proof of work mining system is that every node would try to solve for the mathematical puzzle in order to win rewards. And the one which would solve it first, would win the rights to forge the next block and hence the rewards.
Think of it like multiple computers racing towards a single reward. While the winner gets it all, others who participated simply waste electricity and get nothing.
‘Proof of work’ is called a consensus mechanism (as it is helping the entire blockchain decide on the legitimacy of the next blog) and the nodes who run in this race are called miners.
Note: No miners = No validation = No security = No blockchain
With that explanation out of the way, let’s try to understand how can this problem be solved.
But before we get into that, a quick disclaimer: ‘Proof of work’ has stood against the test of time and has made BTC an extremely secure blockchain.
A. Renewable Modes of Mining:
One obvious thought that comes to the mind is the fact that why can’t we use the electricity produced by renewable modes? After all, electricity isn’t our enemy. It’s the way it is produced that’s a cause of concern right? So if you could use solar, hydro energy to mine Bitcoin, it should be on the right side of the environment.
A lot of thought is being given to this niche. In fact, El Salvador, world’s first country to recognise BTC as a legal tender, has decided to pioneer this innovation.
The country has started harnessing the power of volcanos in the region to mine Bitcoin. President Nayib Bukele has even given it a cool name: ‘Volcanode’.
The electricity produced by using the geothermal energy would be used for mining green Bitcoin.
In a more recent news, a Texas based startup called Lancium has just closed a round worth $150m to mine Bitcoin using green energy sources.
Lancium, founded in 2017, describes itself as a carbon neutral cloud computing company. It plans to build and operate technologically advanced data centers that will promote renewable energy growth.
B. Changing the Consensus Algorithm:
What if there was another way to validate the transactions and create the next block. What if every node in the system wouldn’t compete for the rewards? Well, that’s exactly the ethos behind another consensus algorithm that is now gaining popularity with every day.
Proof of Stake:
Unlike proof of work, there is a subtle difference in this consensus algorithm. Imagine everything else remains the same but now, system picks up an individual node that would validate the transaction and hence forge the next block.
That’s the basic premise behind ‘Proof of Stake‘ consensus algorithm. But what if the node selected decides to dupe the system? Well, that’s why each of these nodes are asked to stake a certain sum of money before going ahead. For example for becoming a node in Ethereum, one needs to stake a minimum of 64ETH. Since now the nodes have a skin in the game they have zero incentive to cheat the system.
In a PoS algorithm, system assigns the mining rights to single node on the basis of following parameters:
- Time since node is present in the system (older nodes are given a precedence)
- Total amount staked by the nodes
- An element of randomization
Apart from that, any node that forges the block incorrectly is also penalized in the form of currency and future consideration for mining decisions.
This consensus mechanism has become quite popular now. All next generation blockchains like Tezos, Polkadot, Near run on Proof of stake. Even the largest blockchain Ethereum is all set to switch from proof of work to proof of stake within this year.
Delegated Proof of Stake Algorithm:
But once PoS started gaining traction, the next concern was around decentralization. Blockchains are all about democratizing wealth. However with exorbitant sums required to become a node, it was almost impossible for a retail investor to take part in staking. Therefore, a work around was formulated in the form of dPoS or delegated proof of stake algorithm.
In a dPoS algorithm, apart from the algorithm’s input to decide on the next validator, there is an additional input. Retail investors can also bet on a node’s probability to successfully validate the transactions. And more the backers of a node, more is the amount staked by it, more are the chances of getting the rights to validate. With that, everyone can stake smallest portions of their coins to a node to earn a proportion of rewards in return.
While the blockchain technology is new, the consensus algorithms other than proof of work are even newer. As the general narrative and selling proposition of blockchain is decentralization and security, proof of stake has it’s own set of challenges too.
As the Co-founder of Ethereum foundation suggests that blockchain trilemma is real. Which means out of three metrics, decentralization, security and scalability, only two can be chosen.
With that being said, it’s too early to conclude that BTC is degrading the environment because as per the stats about 52% of the miners are using electricity generated by the sustainable sources. With remainder 48% still leaving behind a significant carbon footprint, Bitcoin should be facing the wrath of another set of non-adopters in the society.
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Until next time..
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