Why not all cryptocurrencies are alike, and why you should care and (re)act
Background
For longer that I’d like to admit, I’ve built expertise within banking- and retail payments infrastructure. Being highly curious about all matters digital, especially within my profession, I’ve added distributed
ledger technology, blockchain, tokenization, cryptocurrencies, as well as central bank digital currencies to my areas of subject matter expertise.
So, now that every Tom, Dick, Harry, and sadly, El Salvador, have gotten
into cryptocurrencies, and Gucci as well as both Mastercard and Visa enable
real-life spending of these, I thought it important to add serious food for thought to those that have, or consider, engaging in the cryptocurrency space.
The basics of cryptocurrency
Before diving into what cryptocurrencies such as Bitcoin, Ether (ETH) or Dogecoin are (besides
not being money), one needs to understand some basics.
A blockchain
The foundation for cryptocurrencies is the blockchain database. As the name suggests, data is stored in blocks with blocks added together in a long, never-ending chain of blocks, hence the
term blockchain. The blockchain (the ledger) is distributed onto many, independent computers and is an example of Distributed Ledger Technology or DLT.
Ensuring block legitimacy
For an individual block to get connected or chained to the existing chain of blocks, it requires that the block is validated to ensure that the parties transacting is who they say they are, that they have the authorization to transact, that transactions
happen in order and that no double spend of an asset happens.
On a blockchain the method of validation is called the consensus method, meaning that all computers of the blockchain, may have a say-so and role in the validation
of the addition of a block (of data). A computer validating a block receives a reward for the trouble. On a blockchain, this reward is called its cryptocurrency.
Types of block validation
Mostly, either of two consensus models are used:
Proof of Work (PoW):
First introduced on the Bitcoin blockchain, Proof of Work describes an approach in which computers on a blockchain may compete in solving
a complex, mathematical riddle by employing ‘brute force’, i.e., by contributing computational power to validate transactions and create a block’s hash, close it and add
it to the blockchain. This is called mining.
The computer that solves the riddle first, receives the above-mentioned block reward in the form of the blockchain’s cryptocurrency. The larger the perceived value of the reward, the more
incentive to apply computational power. In the case of the Bitcoin blockchain, this is encouraged by the reward being 6,25 Bitcoins (at time of writing) or the equivalent of appr. 200,000
USD!
Proof of Stake (PoS):
Instead of all computers spending computational power at the same time on solving the riddle and ‘hashing’ blocks, each computer may enter a lottery of sorts where the computer is chosen at random. The more lottery tickets, the higher the chances of being
chosen and receiving the reward. In other words, the higher the stakes, the more chance of reward, hence, the name Proof of Stake. The lottery tickets are the blockchain’s cryptocurrency. As
it is random which computer is chosen to solve the riddle, it entails a lot less total computational power than PoW.
Why Bitcoin is bad
Bitcoin and ETH (Ether) make up the vast majority of cryptocurrency transactions. And a great
number of the other estimated 10,000 cryptocurrencies, are built on the Ethereum blockchain.
Both Bitcoin and the Ethereum blockchains are based on PoW where increased traffic and interest to a cryptocurrency, directly translates to applied computational power and thus, higher energy use. And in the case of Bitcoin and the Ethereum platform, this
is a considerable amount of energy! Some Bitcoin miners focus solely on this reward, and have built massive “mining” farms, essentially consisting of thousands of powerful computers competing to solve the riddle and receive the Bitcoin reward. Mining
operations are a huge drain on the electrical grid to the extent where some mining operations have gone as far as to reactivate discontinued
coal power plants!
At time of writing, traffic and one year’s use of the Bitcoin blockchain alone, made up 205 TWh of the global energy consumption of 166,000
TWh with 70% of this being coal, gas or nuclear. Over a year, Bitcoins uses (at time of writing):
- 1 out of every 800 lightbulbs lit
- 17 times the energy of Google and all of its operations (12 TWh per year)
- 41 times the energy of Facebook (5 TWh per year)
- The equivalent of the annual energy usage of Thailand
How to reduce energy on cryptocurrencies?
There are other methods of validation that Pow and PoS such as delegated proof-of-stake (dPoS), proof-of-authority
(PoA), proof-of-burn (PoB), proof-of-developer (PoD),
and more.
They all reward the chosen, validating computer, with a cryptocurrency tied to that blockchain. Each method has its pros and cons, but none as dependent on computational power (thus, energy usage) as Proof of Work!
Ethereum is planning to fully move to Proof of Stake consensus end 2022, which is supposedly 99,95% more energy efficient than Ethereum’s current Proof of Work.
Regarding Bitcoin (which makes up 2/3 of the PoW based traffic (2022), the genie is sadly out of the bottle. Nobody controls Bitcoin, so replacing its built-in PoW is not possible.
By way of large [global] scale regulatory measures, could it perhaps be possible to affect the Bitcoin blockchain or other PoW based blockchain cryptocurrencies.
A 51% attack, exploiting the PoW consensus model, would also perhaps do the trick to a PoW based blockchain.
A global agreement with a 100% of countries and territories agreeing to make PoW (cryptocurrency mining) illegal is also an option. However, this seems very improbable.
A final option would be if the major card schemes of the world, would make it harder, and not easier, to exchange between PoW cryptocurrencies and real-world money. However, they seem increasingly focused on getting a “piece of the action” and partner with
exchanges and issuers, trying to leverage their global networks to ease real-life use of Bitcoin and other PoW energy demanding cryptocurrencies.
Both Visa and Mastercard leverage Bitcoin as a driver for their entrance into the cryptocurrency space. However, this puts MasterCard’s crypto
program in clear conflict with sustainable growth as stated in the “Mastercard’s Purpose Manifesto” and Visa’s
crypto program in conflict with ”Visa’s values” on “protecting the planet”.
Epilog
Blockchain is a good and very exciting technology and has the potential to radically change our world. Provided regulation (and thoughtful,
sustainable application), blockchain and even cryptocurrencies have a role to play concerning the digital exchange and management of assets and securities. But the proliferation and blind use and application of blockchain based on PoW does not bode well for
the world.
One of my astute, fellow experts in especially CBDCs, Lasse Meholm, also published an article on the [lack of] sustainability behind crypto assets. Read his blog here [in Norwegian].
I invite you also to read my other blog on why
cryptocurrency is not money.
