The energy consumption of Bitcoin made headlines again this year and, although important context is left out when you simply compare the electricity consumption of Bitcoin mining to a small country, the fact remains that the Bitcoin network requires a large amount of power.
According to the Cambridge Global Cryptoasset Benchmarking Study, Bitcoin consumes more energy than New Zealand and Belgium combined — around 115 terawatt-hours per year — due to its reliance on a system called proof-of-work for securing its network.
The larger context of Bitcoin’s energy use has been comprehensively covered in a recent MyBroadband article. It considered the power consumption of Bitcoin in contrast to global energy consumption and wastage, and highlighted that it is premature to conclude how harmful Bitcoin is to the environment until there is better data about what energy sources are used to power the Bitcoin blockchain.
While more conclusive data about Bitcoin’s energy mix is still being gathered, Cambridge’s aforementioned benchmarking study has found that 39% of Bitcoin mining is powered by renewable sources, primarily hydroelectric.
The study also found that Bitcoin miners tend to move between locations according to seasonal variance in the production of renewable energy. In other words, Bitcoin miners go where the renewables are, as they tend to be cheaper.
More recently, Tesla boss Elon Musk and MicroStrategy CEO Michael Saylor announced that they had met with the leading Bitcoin miners in North America, and agreed to form the Bitcoin Mining Council which will promote energy usage transparency and accelerate sustainability initiatives worldwide.
None of these arguments and developments change the fact that proof-of-work remains an energy-intensive mechanism to secure the Bitcoin network, though.
Proof-of-work is not the only option available to cryptocurrencies. There are alternative systems that require much less energy to run, the most prominent of which is proof-of-stake (PoS).
Ethereum, the second-largest cryptocurrency by market cap is busy implementing a PoS system referred to as Ethereum 2.0.
While Ethereum’s transition to proof-stake is still in the works, there are fully functional PoS systems already in use. One promising candidate among these is the Ouroboros protocol, which is used by Cardano. Cardano’s native cryptocurrency, ADA, is currently ranked 5th by market cap.
A modified version of Ouroboros is also used by the Polkadot project, which they have dubbed “Grandpa”.
Proof-of-work relies on complex mathematical problems that require large amounts of computing power to solve.
Proof-of-stake, on the other hand, is driven by individuals who possess a certain cryptocurrency, and “stake” some or all of their coins as a basis from which other transactions can occur.
This essentially means you invest in a coin and willingly “freeze” those coins to secure the blockchain.
Whereas your rewards as a proof-of-work Bitcoin miner are linked to how much computing power you can dedicate to creating blocks for the blockchain, proof-of-stake rewards are linked to the number of tokens you stake towards securing the network.
The higher your stake, the higher your chances of being chosen as a validator for a block. Once assigned, validators “forge” a block and receive its transaction fees.
Many proof-of-stake systems also offer validators an additional reward for forging a new block, similar to proof-of-work.
Various mechanisms are put in place to ensure that no single validator dominates, and encourage a proof-of-stake network to be as decentralised as possible.
While Cardano’s Ouroboros and Ethereum 2.0’s Beacon Chain are quite different in their approach, these basic principles are the same.
The notable point, however, is the minuscule power usage of PoS compared to PoW.
According to research conducted by Cardano developer IOG, Ouroboros could consume as little as 15.67MWh per year as opposed to the 115TWh (115 million MWh) of Bitcoin.
By shifting a blockchain’s security protocol from computing power to having a financial stake in the consensus mechanism, PoS protocols like Ouroboros and Beacon Chain address the power consumption issues presented by PoW-based cryptocurrencies like Bitcoin.