How can blockchain features support sustainability efforts?

Date: 2023-01-22

Are blockchains really unsustainable?

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

But that statement is a half-truth at best. In fact, when Crypto critics describe blockchains as 'wasteful' they are knowingly or not referring to proof-of-work (PoW) blockchains like Bitcoin, those which are a minority today.

Many blockchains today no longer rely on PoW. Instead, they use proof-of-stake (PoS) where the main resource consumed is money, rather than energy.

However, it could be argued that even energy-intensive blockchains like Bitcoin are valuable because their mining facilities are being used as demand response mechanisms.

But besides this, there is another future use case of blockchains conceived to, among other things, help energy grids become more efficient. The concept, known as DePIN, has in energy networks one of its flamboyant use cases.

Considering all this, what should you expect from reading this article?

By the end of this blog post, you will thoroughly understand not only why the arguments that most people claim against blockchains are obsolete, but also how blockchain's core features will actually help in creating a more sustainable world. Or, in other words, this article is a response to the following question:

How can features of blockchain support sustainability efforts?

Blockchains, a story of a bunch of lies

The energy consumption regarding blockchains can be perfectly summarized like this: Depending on how blockchains decide how the network nodes - servers - participate in it, will define if the blockchain consumes a lot of energy or not.

Long story short, the majority of them don't anymore. But why?

Blockchain 30-second 101

Blockchains are essentially distributed databases where a group of servers, known as nodes, maintain a copy of the database.

These nodes use a consensus mechanism to come to an agreement on the next set of transactions, known as a block, to be added to the database.

The question is, how do we determine which node gets to add the next block? And how do we ensure that everyone agrees on the transactions to be added if anyone can add whatever transactions they want?

Without a proper mechanism in place, this would be impossible without a centralized entity defining governance procedures. But blockchains by design aren't meant to have centralized entities participating in making decisions, so how do we decide who's the next server in charge of introducing the next set of transactions?

Blockchains use a Sybil control mechanism, Proof-of-work (PoW) for Bitcoin and Proof-of-stake (PoS) for Ethereum, to determine which node gets to add the next block of transactions to the chain in a decentralized, allegedly fair manner.

In layman's terms, PoW and PoS establish the rules for participation in the blockchain and determine which node gets to add the next block. If a node is chosen, it can decide the next block and receive rewards for doing so (if the block is correct).

These rewards require a medium of exchange, usually a cryptocurrency, to reward the participating nodes, hence the need for cryptocurrencies in the first place.

All this is great, but there's a catch. This process of adding blocks consumes significant resources, and in the case of Bitcoin, those resources take the form of... you guessed it, energy.

Note: 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, a miracle from the gods or a waste of resources?

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.

For that matter, all the nodes in the chain contending for that right compete in a guessing competition. This guessing competition is often described as mining which is why Bitcoin nodes are called miners.

The competition is as follows:

A specific hash threshold is set, and the first node to discover a number whose hash is below that threshold earns the right to add the next block. Nodes use ASIC miners, specialized hardware designed to generate a large number of guesses per second, to find this number.

The ASIC miner hardware, typically grouped in mining hubs for higher overall power, constantly calculates random numbers for 10 minutes. As a result, the energy consumption of these super-calculators running for that time is significant, even reaching a country-level of consumption in the case of Bitcoin.

As mentioned, this competition is designed to last for ten minutes, with the puzzle's difficulty being adjusted based on the network's guessing power. The goal is to maintain an average block introduction time in that time frame.

Why's that, you ask?

Simple, to prevent hacks.

By 'forcing' nodes to take 10 minutes to find the hash of a block, this means that for a hacker to update the blockchain, a concept known as a 'reorg', he needs to hold unfathomably high computational power to update the whole blockchain in those ten minutes before the next block is added, as the longest valid blockchain is considered the correct one.

It's an almost impossible feat to carry out, making PoW blockchains very secure networks.

However, this awesome security threshold hasn't prevented the majority of Crypto developers to move into PoS to design their blockchains.

Proof-of-stake, a change in paradigm

A healthy competition mechanism to decide who adds the next block of transactions is crucial for the proper functioning of a blockchain. Without competition, there is no incentive for participation, and without an economic incentive, the blockchain would not be maintained, as no one will willingly consume their resources for altruistic reasons.

It's sad, but this is simply how the world works; at the core, it's all about money.

However, a few years after the creation of Bitcoin, a new method called proof-of-stake (PoS) was proposed to change the rules of this competition. This change was a significant shift in how blockchains operate and was met with a lot of controversy. Even now, many Bitcoin supporters believe that anything that does not use PoW is not a true blockchain but "something else that isn't secure and doesn't solve anything".

In my humble opinion, that's simply a biased statement. Thus, how does PoS work?

In PoS, instead of trying to guess the hash like in PoW, you use your own money to participate in the competition by staking it. The more money you stake, the higher the chances the algorithm assigns to your bet.

Additionally, as the concept of "staking" implicitly induces, PoS has a mechanism called "slashing" which can result in losing the staked cryptocurrency if certain rules are broken. That's why it's called staking in the first place, because your stake can be lost.

This method of determining which node adds the next block makes a significant change to blockchains, as the main resource used is no longer energy but money. This is why blockchains using PoS consume significantly less energy than those using PoW. For example, Ethereum now consumes 99.8% less energy as a proof-of-stake blockchain compared to when it was a proof-of-work blockchain.

Needless to say, a quick question arises: Why aren't all blockchains, including Bitcoin, this way today?

The answer is simple. In the first place, many people believe PoS is fairly less secure than PoW. Also, it's due to the concept of demand response.

Bitcoin as part of our future energy grids

The use of renewable energy sources is widely considered to be the future of energy generation. Many countries are looking to adopt renewable energy as their primary source of energy in the long term, with some countries running already in a renewable-centric approach already, like the Netherlands or Spain.

This makes sense as renewable energy is more sustainable for the planet. However, one of the challenges with renewable energy is the lack of control, or predictability.

While some renewable sources like hydropower and natural gas can be controlled to a certain degree, others sources like solar and wind energy are completely uncontrollable. And this unpredictability can pose a significant problem.

No predictable supply, no party

Electricity has become an essential commodity in today's world. Even though prices may fluctuate, it is rare to find someone in developed countries without access to electricity. Some argue that it is even a basic human right.

Electricity powers virtually everything, from cars, lights, appliances, computers, to work tools.

But with this dependency on electricity comes a problem of unpredictability. To ensure that demand is met, a reliable and predictable energy supply is necessary.

If energy is not supplied when needed, it can have a significant impact on a country: businesses, particularly digital-based ones, would not be able to operate; people would not be able to heat or cool their homes; and people would not be able to store fresh food, among many other things.

For this reason, countries around the world have started to investigate ways to create response systems to handle this unpredictability, and Bitcoin comes into the picture as a potential solution.

Using Bitcoin mining hubs to tackle the issue of unpredictability

Interestingly, an asset that was once criticized for its high energy consumption is now being seen as a solution to address an unpredictable energy supply. It sounds ironic but it's true, as Bitcoin mining systems have proven to be more effective than other systems in responding to supply shortfalls and minimizing the impacts of energy dependency.

The reason for this is very simple, blockchains are built on economic incentives. As described earlier in the blog post, to create decentralized systems you need economic incentives for people to participate. With centralized systems, the incentive is guaranteed by assuming total control of the network. In the case of blockchains, as no central entity is making the decisions, you need truly collaborative environments that run on economic incentives to lure participants in.

Adding to this, when energy supply is low, it does not make financial sense for Bitcoin mining companies to keep their operations running, as it increases the cost of electricity and reduces their profit margins. Let's not forget that many mining companies are even traded in open markets, so profit and margins are always the move forward.

Additionally, as mining hubs' purpose is simply to participate in PoW, the ability to quickly turn on and off these mining systems makes them well-suited to handle sudden peaks in demand.

What's more, this is not just theoretical, it is already being put into practice in places like Texas. Furthermore, the traceability and immutability features of blockchains can support sustainable business practices.

What makes blockchain special

The decentralized nature of peer-to-peer systems makes it difficult to delete or modify content. This is particularly true with blockchains.

While in other peer-to-peer networks like BitTorrent or IPFS content can be deleted if the only node possessing it does so, the synchronized nature of blockchains, which requires all nodes to agree on the global state of the network, makes it almost impossible to delete (or modify for that matter) data.

This feature has many potential uses, one of which is making energy networks more efficient.

Increasing network efficiency

An exciting new trend is emerging for blockchains. The name? DePIN, or Decentralized Physical Infrastructure Networks.

Blockchains bring a unique opportunity to disrupt this market, by offering the possibility for ordinary people to lease their hardware in exchange for money.

For instance, let's take Filecoin.

Filecoin is a blockchain created by the same people that developed IPFS, the InterPlanetary File System, a peer-to-peer network. Filecoin allows you to rent storage from your own hardware at home while getting paid with $FIL, Filecoin's native cryptocurrency (remember, blockchains are all about the incentive).

As blockchains keep a full history of all events occurring in them, participants in the blockchains can guarantee that their actions will get paid.

This is the true power of blockchains, the power of allowing the creation of decentralized networks where no dominant companies can rule over society while offering an economic incentive to participate.

Now take this concept and apply it not only to storage, but also to computing, Wi-Fi, to VPNs... and finally to energy networks.

Blockchain-based energy management

Blockchain projects like React or Arkeen are already giving shape to this vision. In short, these projects aggregate distributed energy sources to create a more resilient and efficient energy grid.

Among other things, blockchains promise the following benefits:

• control of energy system flexibility (VPP)
• collection of real-time energy consumption data
• creation of renewable energy credits

Now, tell me again what were you telling me that blockchains are wasteful for the planet?

Unsustainable? Tell me more

Some blockchains consume a lot of energy, that's that. But we are slowly but steadily proving that this isn't necessarily bad, and that PoW blockchains can be used for the benefit of society by providing the necessary stability for renewable-centric energy grids to work properly.

Also, the rise in 2023 of DePIN in Crypto will blossom many use cases that will not only provide access to society to new economies once impossible to access, but those same use cases will be net positive contributors to the wellbeing of our planet.

Thanks for reading!