What Can Be Done about Bitcoin’s Energy Problem

Discussion

John Schmidt:

"Solving Bitcoin’s giant energy consumption problem doesn’t require returning to centralized systems like Visa’s network—after all, the central promise of Bitcoin is the elimination of middlemen like the card networks and their concentrated power over finance. Instead, Bitcoin’s advocates have more than a few options.

Switch to Renewable Energy

Bitcoin mining powered by renewable energy fell when China took measures to eliminate Bitcoin mining within its borders, forcing mining in that country to go underground.

Since China’s crackdown last year, the share of renewable energy powering crypto mining fell from nearly 42% in 2020 to 25% in August 2021.

Countless startups are to address Bitcoin’s carbon footprint, each targeting new ways to bring more environmentally friendly energy to Bitcoin.

Take LiquidStack, which aims to more efficiently lower the temperature of mining rigs, or Genesis Mining, which exclusively uses clean energy sources.

But despite these carbon-reducing endeavors, experts say Bitcoin’s carbon emissions have mushroomed and are now comparable with Greece, a country with more than 10 million people.

Transition to Proof-of-Stake Systems

Proof of stake doesn’t require this same mad dash as proof of work to solve complex puzzles, and it uses fewer resources.

Put simply, proof of stake requires network participants to front a small amount of cryptocurrency to be entered into a lottery for the chance to verify transactions. The thought is that if you’re putting up some amount of value as collateral, you’re less likely to approve fraudulent transactions that would devalue the currency and cost you your stake.

Because proof of stake systems remove the competitive computational element, “it saves energy and allows each machine in a [proof of stake] to work on one problem at a time, as opposed to a PoW system, in which an array of machines are rushing to solve the same problem, thus wasting energy,” says eToro cryptocurrency market analyst Simon Peters.

Ethereum, the second largest crypto by market cap after Bitcoin, is in the process of converting to proof of stake from proof of work as part of Ethereum 2.0. This will dramatically reduce the energy consumption of Ethereum-based tokens and blockchains by an estimated 99.95%.

Embrace Pre-Mining

Some cryptocurrencies have introduced pre-mining to avoid wasteful computing. Pre-mining is a system that functionally works much like fiat currency or stocks. A central authority creates a set amount of an item and then carefully releases it into the economy depending on what’s going on in the world or their business.

“Several other crypto-assets like XRP [also popularly referred to as Ripple] weren’t mined at all but were instead produced algorithmically,” Peters says. “This eliminates the need for dedicated high-speed mining equipment.”

In these systems, transactions are still verified by a decentralized network of validators before they’re added to the currency’s blockchain record, but those involved in the transaction may have to pay a small transaction fee to compensate the validators for their effort since the currency system itself doesn’t always reward them. In the case of XRP, this fee is a fraction of a penny.

Transitioning Bitcoin to a proof-of-stake or pre-mined system wouldn’t be easy: To alter the Bitcoin protocol, someone would have to convince the majority of miners to agree to the new system, a tough ask when billions are at stake and the existing system works, if slowly and electrically inefficiently.

Introduce Carbon Credits or Fees

Carbon credits represent the government-sanctioned ability to allow a company to emit a certain amount of carbon emission into the environment. They’re often securitized, meaning they can be traded by companies that don’t need to produce a lot of emissions compared with other companies that do. This incentivizes a company to produce less than its allotment—as well as penalizes those that go over.

In the case of a crypto mining company, this might mean it purchases carbon credits from another company to help offset the emissions it creates or switches to greener energy to earn a profit from selling its credits.

“These are a tried-and-true method under a variety of programs like the Clean Air Act to get to net-zero emissions for products,” says Scott Janoe, chairman of environmental, safety, and incident response at Baker Botts. “So, I would see a move toward stapling credit products to Bitcoin mining and transactions to offset those emissions.”

Brody similarly foresees consumers being able to pay to offset their crypto emissions. “I anticipate a future where it will be possible to simultaneously pay a transaction processing fee on networks like Ethereum as well as a carbon-offset fee, just as you have the option when traveling by air,” he says."

(https://www.forbes.com/advisor/investing/cryptocurrency/bitcoins-energy-usage-explained/)