How can blockchains be used to enhance sustainable business practices?

Date: 2023-01-14

A path down facts lane to discredit the biggest fallacy against blockchains

Blockchain has been commonly demonized by society due to its energy consumption.

This statement, besides being extremely biased, is blatantly misleading considering how today many blockchains have achieved high energy efficiency.

In fact, when people describe blockchains as 'wasteful' they are referring to Bitcoin and other proof-of-work blockchains, due to a mixture of ignorance and bias.

Actually, the vast majority of blockchains today don't rely anymore on this infamous sybil control mechanism, but on proof-of-stake, where the main consumed resource is no longer energy, but 'money'.

However, even a case can be made in favor of Bitcoin and other energy-intensive blockchains, as their mining facilities are, today, already being used as demand response mechanisms.

This also begs the question, are all types of energy consumption 'bad' just for the sole reason they consume energy?

Also, what critics seem to forget about blockchain is that, due to its core security features, it can be used to close the gap in one of business' most complex problems: traceability, a core need for multi-billion narratives like, ironically, ESG.

I'll go straight to the point.

If you want to supercharge your knowledge about blockchains and have the capacity to debunk anyone who tries to undermine them by claiming they are 'unsustainable', keep reading.

How can blockchain be used to support sustainable business practices?

Blockchains, lies, and half-truths

To better understand why blockchains are being accused of being 'wasteful' in the first place, we need to understand these weirdly-named mechanisms blockchains use to function.

Blockchain 30-second 101

Blockchains are, put simply, distributed databases.

In other words, a set of servers, called nodes, distributed throughout the whole world, have a complete copy of this database, and by a consensus mechanism, they agree in the next group - or block as we normally describe them, hence the name blockchain - of transactions to be added into this distributed database.

But who gets to add the next block? How do we agree on the next group of transactions to be added if everyone simply adds the transactions they want?

It's impossible.

For that matter, blockchains use a sybil control mechanism, proof-of-work (PoW from now on) in the case of Bitcoin and proof-of-stake (PoS) in the case of Ethereum, to decide which node (server) gets to decide the next block of transactions to be added to the chain.

In short, PoW and PoS simply define the rules of participation in the blockchain to get chosen to introduce the next block.

If your node gets chosen, you can decide the next block to be introduced and you receive a series of rewards for doing so. Because nobody is going to do all this process for free, right?

This 'need' to reward nodes is what requires the concept of cryptocurrency, which is the medium of pay of the blockchain to these nodes for actively participating.

Inevitably, this whole process consumes a lot of resources. And here lies the 'problem' for Bitcoin. The main consumed resource for Bitcoin is… energy.

If you want more detail, you can read my in-depth article about the blockchain, explained to you like you were five years old.

Proof-of-work, the beauty, and the beast

As described in the last paragraph, nodes in the Bitcoin network must consume huge amounts of energy.

To earn their right to introduce the next block, all the nodes in the chain contending for that right compete in a guessing competition.

A guessing competition that people informally describe as mining.

A certain hash threshold is defined, and the first node to find the number whose hash is below that certain threshold earns that right. To achieve this value, nodes use ASIC miners, expensive hardware specifically designed to be able to guess a huge amount of numbers per second.

This competition is conceived and designed to last for ten minutes.

That is, this ASIC miner hardware, normally grouped in 'mining hubs', will have to be calculating random numbers for 10 minutes straight.

It's not surprising then that the amount of energy consumed by these super calculators running for 10 minutes at a time is huge.

In fact, it's country-level huge. Yes, Bitcoin consumes more energy than some countries.

But the truth is that the majority of blockchains today don't use this system to decide who introduces the next block anymore.

PoS has taken over by a landslide.

Proof-of-stake, where money is your resource

This healthy competition to decide who introduces the next block of transactions is essential to a properly functioning blockchain.

Without this competition, the incentive to participate in the blockchain is no more, and without an economic incentive, no one would ever participate.

In the end, it's always about money.

Thus, a few years after the birth of Bitcoin, a new alternative way to define the rules of this competition was proposed. This new alternative, called proof-of-stake, was a crucial change to how blockchains worked.

The move was insanely controversial. In fact, to this day, many Bitcoiners think that anything that doesn't use proof-of-work is not a blockchain, but "something else".

Thus, how does PoS work?

Instead of trying to guess the hash like in proof-of-work, in proof-of-stake you 'bet' your own money in order to participate in the competition.

The higher your stake, the higher the chances the algorithm assigns to your bet.

Also, PoS introduces a new feature, slashing, which in short terms means that the cryptocurrency you stake can be taken away from you if you misbehave.

This mechanism to assign the rights to introduce a block to a specific node makes a transcendental change to blockchains, as the main resource running them is no longer consumed energy, but money.

For that reason, blockchains running with PoS consume considerably less amount of energy than PoW blockchains.

For reference, Ethereum consumes 99.8% less energy now as a proof-of-stake blockchain than when it was a proof-of-work one.

Needless to say, a quick question arises:

If PoS is that superior when it comes to energy efficiency, shouldn't all blockchains be using it by now? Well, it turns out that Bitcoin's mining hubs, albeit its undeniable energy consumption, have a secret benefit up their sleeve… demand response capacity.

Bitcoin, a fundamental resource in future energy grids

Renewable energy is the undisputable future of energy grids.

Almost every country on Earth besides some notorious exceptions is embracing renewables as the main source of energy in the long term.

This seems logical, as renewable energy makes human progress on Earth more sustainable. But renewable sources have a catch: controllability.

While Hydropower and Natural gas are fairly controllable, nuclear and coal can be controlled to a lesser extent - nuclear plants can't be stopped because starting them again is very expensive - solar and wind are completely uncontrollable. And this is a huge problem.

An unpredictable supply is worthless

Electricity has become almost like a commodity these days.

Even as the Russian/Ucraine war is ramping up the prices, it's really hard to come across someone in the first world without access to electricity. In fact, many would argue it's almost like a human right at this point.

It fuels everything. Cars, your home lights, your kitchen, your computer, your work tools.

Everything.

But that makes energy supply unpredictability a huge problem. If demand is going to be high and steady, we need an energy supply that's not only abundant but highly predictable.

Therefore, if you fail to supply energy when needed, your country will almost certainly collapse:

• Companies, especially digital-based ones, won't be able to work
• People won't be capable of heating or cooling their homes
• People won't be capable of storing fresh food

And that would be just the tip of the iceberg.

For that matter, countries all around the world have started to analyze how can they create suitable response systems to this unpredictability.

And guess what, here comes Bitcoin.

Bitcoin mining hubs for demand response

Surprisingly, the asset once demonized for its energy consumption is now viewed - and already used - in some places to respond to unpredictable energy supply.

Bitcoin mining systems are superior to other systems as responders to supply shortfalls and minimize the impacts of energy dependence.

The reason for this is simple.

Blockchains are all about economic incentives.

It really doesn't make sense to have Bitcoin mining hubs on when the energy supply is low, because that ramps up the price of electricity, tightening Bitcoin mining companies' margins to an extent that keeping them on in those situations is unprofitable.

Also, their capacity to be switched on and off very quickly makes them great solutions to sudden demand peaks.

But all of this isn't theoretical, it's being used as you're reading this post, in places like Texas.

Bitcoin doesn't like that bad now does it?

Furthermore, we can take this argument a step further by acknowledging a feature of blockchains, traceability with guaranteed immutability, and how it supports sustainable business practices.

What happens in blockchains stays in blockchains

The decentralized nature of peer-to-peer systems is that content deletion or modification is really hard, especially in blockchains.

While in other peer-to-peer networks like BitTorrent content can actually be deleted if the only node possessing it does so, the synchronized nature of blockchains, forcing all nodes to agree on the global state of the network, makes tampering with data an almost impossible task.

Now, take that feature and think of all the use cases where it might be useful. I'll give you a very powerful one, ESG.

ESG is nothing without proof

Enterprises today are all about selling the idea that they are sustainable, or 'green' as people describe it.

This narrative, named ESG, forces companies all over the world to rethink their business practices to be more sustainable. It's so powerful that consumers actually 'weigh in' on how green a company is when deciding if they want to buy its products.

But this opens an almost philosophical question:

How can blockchain be used to support sustainable business practices? It's not enough to simply state it, and our proof-craving society demands it.

And here's where blockchains come in.

As mentioned, anything that goes into a blockchain, after a certain period of time (this is because the newer blocks are not that secure, so you need to give at least some extra blocks to get your transactions fully secure), is automatically settled, forever.

Thus, if you're capable of logging into a blockchain with a series of proofs about your sustainable activities, the blockchain acts as a guarantor of them. Considering blockchains are public, this is a great of showing the world that you're truly sustainable.

For instance:

• You can log into blockchain transactions that prove that your raw materials come from sustainable sources
• You can register into blockchain transactions that prove that you only deal with sustainable partners

And so on.

However, we must be truthful to one issue blockchains have: they have a serious issue with scalability, especially with performance and data storage.

Thus, if we want to have truly useful blockchains, blockchains that will be used and leveraged by billions, we need to put a solution to that problem.

Luckily for us, we already know the answer to that question also: zero-knowledge proofs.

Zero-knowledge proofs, the final solution for blockchain

Zero-knowledge proofs take one of blockchain's most important problems, scalability, and solve it.

But what on Earth are they?

Zero-knowledge proofs are a cryptographic primitive that allows proving the veracity of a statement without showing it. In other words, it allows you to prove something to someone without telling them what you're proving to them.

I know, that didn't make any sense, but it works.

By performing a series of small proofs, these small proofs validate a certain statement without actually revealing it.

The power of proving without showing

Let's see this with an example:

I want to prove I'm Spanish without revealing who I am. How can I do this? Without ever revealing my identity, I can:

• Prove I live there by showing I recurrently pay mortgage payments with a Spanish account (the identifier reveals its Spanish without revealing the underlying owner)
• Show receipts proving that my dog attends a specific Spanish doggie daycare every day
• Show I voted in Spanish elections without revealing my name

And so on and so forth.

After a series of small proofs, the verifier acknowledges that the only way all of them are true is if I were, indeed, to be Spanish.

Now, take this concept and apply it to blockchains.

While storing only the key information and zero-knowledge proofs, you can prove:

• That computations that have occurred outside the blockchain are valid, increasing performance by outsourcing computation
• That data stored in a specific place hasn't been tampered with and thereby the metadata stored in the blockchain remains valid

And many other use cases.

Also, one of the great offerings of zero-knowledge technology is privacy. Using the nationality example earlier, I can prove ownership of transactions without revealing my identity, as some blockchain protocols like ZCash are already doing.

Consequently, zero knowledge technology closes the gap that, for years, has crippled blockchains' capacity to perform under situations of high demand.

Additionally, it allows blockchains to become truly data-efficient, by allowing them to grow and scale without having to store more and more data that would force nodes in the system to become larger and larger, putting its raison d'être, decentralization, at risk.

Undoubtedly, this is just another way to debunk any 'blockchain is unsustainable' narratives. Considering that this narrative has been historically blockchain's most criticized problem, what does this leave for critics then?

Unsustainable? Tell me more

In summary, next time someone counterarguments your blockchain praises with the 'unsustainable' mantra, you now have plenty of ammunition to deal with it.

Thanks for reading!