1/3. We are publishing a series of three articles dealing with blockchain and the environment. The first article sets the basics: the impact of blockchain (energy consumption, measuring the environmental footprint). The second article highlights the proximity of the EU’s new environment regulation and blockchain. In the third article, we analyze carbon footprinting solutions: we will compare those powered by blockchain and other tools.
60% of stakeholders worldwide consider the environmental impact of blockchains is important (or very important). On the contrary, only 20% of blockchain players consider this issue as “not important”.
Vaclav Smil does interdisciplinary research in the fields of energy, environmental and population change, food production, history of technical innovation, risk assessment, and public policy. He is now seen as one of the world’s foremost thinkers on development history and a master of statistical analysis. Bill Gates says he waits for new Smil books the way some people wait for the next Star Wars movie. The latest is ‘Growth: From Microorganisms to Megacities’.
In his latest book, Vaclav Smil states that “growth must stop, which our economist friends don’t seem to realize. We have always come out of a recessionary period thanks to an increase in energy consumption. This model of growth can become unstructured in the face of a system that is becoming impoverished and where natural and energy resources are running out.
Does the paradox of blockchain’s impact on the environment still exist?
Many voices criticize blockchain for its energy consumption. Yet experts praise the merits of blockchain to track and even reduce environmental impact. A legitimate cause for concern in the use of public Blockchains is the significant environmental impact from the energy consumption required.
Bitcoin mining consumes as much electricity as a country like Finland, which is one third of all the digital infrastructure in the world. This growing consumption has led some countries, such as Kazakhstan, to curb mining due to energy shortages. The European financial regulator has even gone so far as to recommend a ban on bitcoin mining. The design of the blockchain protocol, and the measurement of its footprint, remains a crucial challenge as the adoption of this technology grows.
The blockchain is a system for storing transaction information in digital blocks. The name comes from the fact that blocks contain three key items — time stamped records of valid transactions, a “hash” or digital fingerprint of the block and a hash of the previous block. In this way any block is linked or chained to the previous block thus forming a “Block-Chain”.
Through blockchain’s decentralised ledger system, individuals and corporations can be confident that information on blockchain are auditable and immutable.
The question of the energy and carbon intensity of blockchains, and therefore of the design of the protocol and the measurement of its footprint, remains a crucial challenge as the adoption of this technology grows. Footprint, remains a crucial challenge as the adoption of this technology grows.
In France this trend is much more much more marked, with 72% of of players consider the environmental impact impact as important. This concern for the the environment is also noticeable is also reflected in the criteria for choosing of the blockchains to be used.
source: PwC 2022
The energy consumption of the blockchain is neither a black box nor a taboo. Many tools have been developed to accurately measure this consumption.
Blockchain protocols: Proof of work vs. Proof of stake
A blockchain like Bitcoin’s relies on a block verification method called Proof-of-Work (PoW), which is by design energy intensive. In a PoW protocol, the producer of blocks, called a “miner”, is selected in proportion to his ability to solve computational problems. Having more computational capacity means being able to generate numbers faster, and thus having a greater chance of validating the block and thus receiving a reward. To increase their computational capacity, miners now ubiquitously use ASIC (application specific integrated circuit) computers that are designed to specifically earn PoW mining as frequently as possible. These machines can rarely be used for other purposes and must be replaced quickly as new ASICs are created and come to market. PoW increases in difficulty as more and more miners enter the network looking to take advantage of the strong growth in crypto currency prices year over year.
The difficulty also increases by design every four years and there is a strict cap on the total number of crypto-currencies that can be mined, further increasing competition between miners.
This increasing difficulty and competition means that miners need increasingly powerful and power-hungry computers and data centers to compete.
PoS is less energy-intensive than PoW. Ethereum has said for years that it will eventually switch to proof of stake. That’s what crypto art optimists are hoping for. The problem is that people have been waiting for years for Ethereum to make the change, and some are skeptical that it ever will. First, Ethereum will have to convince everyone that proof of stake is the way to go. Otherwise, the whole system could collapse.
“If not everyone agrees to that change, you’re going to be in a situation where the network just falls apart,” says economist Alex de Vries. “It can literally break into multiple chains if not everyone runs the same software. That’s the downside of trying to upgrade public blockchains like Ethereum.”
Ethereum will soon transition away from Proof-of-Work (PoW) algorithms towards Proof-of-Stake (PoS). Initially slated for a 2019 release, Ethereum 2.0’s first phase launched on 1 December 2020. However, with two phases still to go, the full release [initially estimated in June 2022] is not estimated to happen until later in 2023.
Tim Beiko Developer at Ethereum
Proof of stake (PoS)
This system still requires users (“stakers”) to have some kind of skin in the game to dissuade bad behavior. But instead of having to pay for huge amounts of electricity to enter the game, they instead have to lock up some of their own cryptocurrency tokens in the network to “prove” they’ve got a “stake” in keeping the ledger accurate. If they get caught doing anything fishy, they’ll be penalized by losing those tokens. That gets rid of the need for computers to solve complex puzzles, which, in turn, gets rid of emissions.
Given concerns about cost, energy intensity, and scalability, emerging blockchain applications are increasingly relying on PoS and other less expensive and energy-intensive verification methods. Recent and emerging verification methods include (but are not limited to) “Byzantine Fault Tolerant” (BFT), “Practical BFT” (PBFT), “Proof of Authority” (PoA), “Proof of Significance” (PoI), and “Proof of History” (PoH) protocols, which are also considered to be less cost, energy, and time intensive.
Potential solution is to build out another “layer” on top
There are other ways to bring down emissions from NFTs and keep a more decentralized proof-of-work network. One potential solution is to build out another “layer” on top of the existing blockchain. Working on this second layer can save energy because transactions happen “off-chain” — away from the energy-intensive proof-of-work process. For example, two people who want to trade NFTs might open up their own “channel” on the second layer where they can make a virtually unlimited number of transactions. Once they’re done doing business, they can settle up the net result of their transactions back on the blockchain, where it can be added to the verified ledger via the proof-of-work process. You’re essentially bundling or netting a whole bunch of transactions into just a few that need to take place on the inefficient blockchain, which ultimately saves energy.
50% of French players consider energy costs as a criterion for choosing their blockchain (versus 21% for global players).
source: PwC 2022
Measuring the environmental footprint
Regarding the question of measuring the environmental footprint of a blockchain, the life cycle assessment (LCA) approach can help to frame the exercise. LCA is based on the ISO 14040 and 14044 standards which are widely recognized and used for footprint measurement. It can help analyze the environmental impacts of a blockchain in relation to its main transaction function, and answer questions such as:
- What might be the environmental impacts of blockchain?
- What are the main life cycle stages and sub-stages that cause major impacts?
- What are the main factors influencing the impacts?
This approach allows for the entire lifecycle of the blockchain and all the elements required to run the protocol, including the use of the Internet. The devices considered in the model are analyzed throughout their life cycle from the acquisition of raw materials to the end of life of the equipment.
Furthermore, LCA allows for the evaluation of several impacts, not only energy consumption and carbon footprint, but also other indicators such as resource use, pollution and the associated impact on human health.
One of the complexities of the analysis lies in the fact that, by design, the blockchain is decentralized, making it difficult to access the data needed for evaluation
In addition, validators can use different sets of hardware: laptop, single-board computer, servers in data centers or in the cloud, dedicated or shared. The exercise may therefore require finding the best possible barycenter between real data collection from validators, interviews, blockchain and API explorers, and existing literature.
Beyond the environmental issue, there are a number of other risks to manage and challenges to overcome in order for blockchain technology to realize its full potential: adoption challenges, technology barriers, security risks, legal and regulatory challenges, and interoperability risks.
Blockchain can contribute to greater stakeholder involvement, transparency and engagement and help bring trust and further innovative solutions to the fight against climate change, leading to enhanced climate action.
Alexandre Gellert Paris, associate program officer at United Nations Framework Convention on Climate Change
Building blockchains for sustainability
While the negative externalities of blockchains need to be managed, they are also seen as a solution to some sustainability challenges.
Indeed, according to the PwC report “Building block(chain)s for a better planet“, blockchains may have applications for addressing various environmental challenges, such as climate change, biodiversity conservation, ocean health, water security, air and weather quality, and disaster resilience.
On the other hand, blockchains can provide greater financial and civic inclusion for billions of people currently excluded from traditional systems. The technology enables broader access to finance for impact projects that often appear too risky, as proposed by the Cardashift project, for example.
These benefits are made possible by blockchains thanks to their decentralized construction creating a cryptographic, secure and immutable register of all transactions of value, be it monetary, physical, property, labor or votes. Thus, blockchains have the capacity to bring transparency to supply chains, a key issue in particular in informing consumers about product characteristics.
Many other promising opportunities are also given by blockchains, such as: a more sustainable management of resources in a decentralized way and an incentive for the circular economy, a transformation of the carbon market, a change in the steering and verification of extra-financial performance, or even greater efficiency in the management of damages related to natural disasters via smart contracts.
Thus, as with many digital technologies, the societal benefits of blockchains should be systematically weighed against an assessment of potential negative externalities. It is on this condition that blockchains can deliver their full potential for a more sustainable society.
Source : PwC