The Merge showed there is a new path Bitcoin can take, which governments will love and Bitcoiners will hate.
Earlier this month the White House released a 46-page report on the “Climate and Energy Implications of Crypto-Assets.” It’s a deep dive into the energy consumption of blockchains, their carbon emissions, as well as the stress they place on local energy sources — a growing concern given the current energy crisis.
It’s one of nine reports that comprise the White House’s all-encompassing “Comprehensive Framework for Responsible Development of Digital Assets” released last week. The recommendations presented in that report are likely to shape the future of cryptocurrency in the U.S. for the next decade. And as part of the focus pillar “Advancing Responsible Innovation,” the Comprehensive Framework report clearly identified the mitigation of energy consumption and environmental harms.
The effort the U.S. government has taken on its digital asset regulation research is unprecedented. The accompanying fact sheet clearly states that the recommendations therein could become law — whether the Bitcoin community likes it or not.
The Climate and Energy report’s main focus was Proof-of-work (PoW), which wasn’t discussed kindly. On the other hand, it flagged proof-of-stake (PoS) as a potential solution to many — if not all — of PoW’s issues. As such, the report clearly favored a future for cryptocurrencies where energy-efficient PoS chains are the norm.
With Ethereum having recently completed the Merge to PoS and decreasing its energy consumption by an estimated 99.95% (which is possibly 0.2% if measured globally), it’s clear that a new alternative for PoW blockchains is here. And with the three following government recommendations, it looks like holding on to PoW will become increasingly difficult to defend, both morally and legally.
1. U.S. law will soon require Bitcoin to be climate-friendly
The main takeaway of the Climate and Energy report is that blockchains must mitigate their carbon footprint and overall energy usage, pinpointing PoW chains as the major culprit.
As for Bitcoin in particular, the report states: “As of August 2022, Bitcoin is estimated to account for 60% to 77% … of the total global crypto-asset electricity usage.”
Crypto Assets and Climate Report | whitehouse.gov
The report immediately singles out PoS as a solution to this problem, and the numbers are astounding when compared with PoW.
“The global electricity usage for analyzed PoS crypto-assets has been estimated as less than 0.28 billion kWh per year, which is less than 0.001% of global electricity usage, and about 0.25% of the lower bound of total global PoW electricity usage.“
Even though the Climate and Energy report was commissioned before the Merge had successfully gone live, it was used as evidence that an existing PoW chain can migrate to a less energy-intensive PoS model. It states:
“Current discussions about reducing crypto-asset electricity usage primarily focus on PoW blockchains, particularly Bitcoin. There have been growing calls for PoW blockchains to adopt less energy-intensive consensus mechanisms.”
Industries all over the world have had to go green, and there’s no reason why any government would exclude blockchains from that list. But if going green isn’t enough, the raw amount of energy consumed is still a major threat to government policy and climate goals.
2. Bitcoin needs to reduce its total energy consumption
While most criticisms regarding blockchain energy use tend to ladder back up to carbon emissions, the Comprehensive Framework report points out raw energy consumption is a major issue too.
The report identifies several risks that occur as a result of U.S.-based mining operations that rely on local power grids:
- High consumption. Renewables have a low supply limit, so this creates increased demand for carbon-producing power sources.
- Always on. Miners operate on the grid 24/7, which creates issues during high user-demand times, and wears out infrastructure faster.
- Miners can cause energy prices to increase, which is bad for local consumers.
Simply powering Bitcoin with green sources is no longer going to be enough to offset the wider impact of its enormous energy consumption, especially as the world faces a new energy crisis.
3. Bitcoin needs to get its act together quickly — or else
Where the report really flexes its law-making potential — and where Bitcoiners really need to start paying attention — is the rhetoric about existing chains switching to PoS and what may happen if they fail to limit their emissions in other ways.
“Should these measures prove ineffective at reducing impacts, the Administration should explore executive actions, and Congress might consider legislation, to limit or eliminate the use of high energy-intensity consensus mechanisms for crypto-asset mining.”
The key takeaway is the potential to eliminate or legislate against specific consensus mechanisms. This threat isn’t in isolation either — it’s contextualized as necessary to ensure the U.S. meets its mandated climate targets, guarantees reliable energy and minimizes climate-related harm to U.S. citizens.
You might think the solution is simple: Just move mining operations offshore. It’s been done plenty of times before, like when Chinese miners had to pack up and move.
But outright banning PoW could have far broader implications than affecting where miners operate.
For instance, what’s to stop governments from banning the use, sale or transfer of assets that use a banned consensus mechanism — assuming these actions are done through a centralized platform? If that were to happen, would exchanges roll over and comply? Would they move offshore? Or would they pressure the Bitcoin community to consider the switch to PoS?
After all, Bitcoin is still the most valuable single crypto asset by a long shot, and to lose it from the U.S.-based crypto economy would be financially devastating for many related companies.
It’s not like they can just go anywhere else, either — The EU is already planning to introduce environmental requirements for crypto assets within two years. And China already cited environmental impact as one of the reasons it shut down mining. As environmental disasters increase, it’s likely that other countries will follow suit.
Fortunately though, the report does offer an olive branch. It’s by no means aggressive to crypto-assets or blockchains, but is rather deeply concerned with their environmental footprint.
To help with this, the Climate and Energy report nominates that government agencies — like the Environmental Protection Agency (EPA) and other major bodies — should work in consultation with industry stakeholders to develop effective, evidence-based means to operate blockchains in a climate-conscious way.
So the door to PoW isn’t shut yet, but it’s going to take a lot to keep it open.
Won’t somebody think of the profits?
The Bitcoin community at large has made it clear several times over that PoW is the hill it will die on, but if the pot of gold at the top of that hill starts to run dry, things could change.
While some Bitcoiners claim price is unimportant, many others see it as a one-way ticket to the moon. And let’s face it — the market is only as large as it is today due to investment interest from both retail and institutions alike.
According to leading expert on blockchain law Michael Bacina, the PoW sector is going to become increasingly problematic for institutional adoption, which in turn has clear implications for price.
“There is an ever increasing focus on ESG, particularly in the financial sector. Government scrutiny of energy efficiency and social pressures… is almost certain to add greater pressure on PoW blockchains over time. This issue is not going to go away as we see increasing energy instability and rising prices.”
Joe Lubin, the creator of Ethereum incubator ConsenSys had similar things to say about Ethereum’s PoW days. In an interview with Time.com, Lubin claimed that several “major financial institutions” he spoke with were waiting for Ethereum to switch to PoS before they could get “significantly involved.”
And last but not least: Retail investors are becoming increasingly climate-conscious too. This is evidenced by the rise in Green ETFs, climate-conscious pension plans and grassroots movements to get banks to divest from fossil fuels.
So when considering whether to buy Bitcoin, Ethereum or any other asset, Bitcoin will be shooting itself in the foot if it hopes to grow in value while staying in the dark ages of carbon emissions and dogmatic philosophies.
People change, technology changes, and staying rigid helps neither. It’s time for the Bitcoin community to calmly sit down, put some coffee on, invite their Ethereum neighbors over and discuss the possibility of PoS at last.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
