The European Parliament has voted 30-23 against proposals to ban “proof of work” (PoW) cryptocurrencies, such as Bitcoin, as part of a broader debate on the draft Markets in Crypto Assets regulations.
The ban on PoW models, which essentially require that anyone obtaining cryptocurrencies through mining uses ever-increasing amounts of computing power to break the cryptographic codes, was added as an amendment and (unsurprisingly) faced serious opposition from those in the crypto space.
Extremely high stakes vote in the EU. That such a proposal made it this far is extraordinarily concerning and unlikely to stand up to practical reality. https://t.co/t8xA0EnVfEMarch 12, 2022
Setting aside the fact that owning an asset (especially large quantities of an asset) makes you naturally opposed to anyone trying to outlaw it, blanket laws to ban a certain type of asset do come with some disadvantages.
The general idea from the EU was correct though: PoW models use a huge amount of energy to do something that can broadly be accomplished by both traditional financial services and Proof of Stake (PoS) models, which are used by Solana, Bezos, and other newer cryptocurrencies.
The technical differences between PoW and PoS (two fairly unfortunate acronyms in their own rights) are complex but on the basic level PoW requires a lot of computing power (read: energy consumption) while PoS requires verification via “validators” that cut out the energy-intensive parts.
The European Parliament wanted to make sure that all cryptocurrencies met its “minimum environmental sustainability standards with respect to their consensus mechanism”. Or, in other words, PoS would become the standard in the EU, mandated by law.
Climate crisis
The total market cap of cryptocurrencies currently stands at $1.72 trillion, an unimaginable amount of wealth generated in less than a decade – and that’s significantly down for its all-time high in 2021.
With that enormous growth comes myriad challenges, however, and perhaps the most prominent is the incredible amount of energy needed to obtain and use cryptocurrencies, especially compared to traditional finance (or TradFi, as it’s known).
By one estimate, Bitcoin currently uses 2,258 kWh for one transaction, compared to 1.5 kWh for a Visa transaction. In other words, a single Bitcoin transaction uses 1.5 million times as much energy, or enough to power a household for 2.5 months.
Other estimates – and it’s worth noting that these are contested – show that Bitcoin uses around as much energy as Finland, Chile, Denmark, and The Netherlands.
Some miners have been trying to ameliorate the huge energy usage but ultimately the argument that a hugely volatile cryptocurrency that uses an order of magnitude more energy is more efficient or useful than TradFi rings fairly hollow.
The background to all of this is, of course, the worsening climate crisis; the world can scarcely afford to accommodate the most energy-intensive cryptocurrencies, especially when alternative technologies exist.
