The Greening of Crypto: Proof of Stake and Beyond

Crypto is feeling intense pain right now. But the ecosystem must address a thorny problem as it comes of age: energy consumption.

The crypto industry is feeling intense pain. Issues of legitimacy and trust thwart its every move. And the plummeting crypto market cap–just under $1 trillion, down from almost $3 trillion–along with escalating legal and regulatory challenges might suggest an unraveling. But if, as the industry insists, this is a recoverable blip in the maturation cycle, the crypto ecosystem must address another thorny problem as it comes of age. And that’s energy consumption.

All currencies (including the U.S. dollar) require some energy to be expended in its production. But cryptocurrencies and NFTs have come under fierce scrutiny for the extraordinary amount they require. According to the Cambridge Centre for Alternative Finance, which monitors cryptocurrency mining efforts worldwide, Bitcoin currently consumes electricity at an annualized rate of 127 terawatt-hours (TWh). That exceeds the entire annual electricity consumption of Norway or Greece.  Other numbers, like these reported in Protocol, show that Ethereum production alone emits as much carbon as the countries of Serbia and Montenegro.  And PosterGrind shows that the Ethereum platform (upon which most NFTs are based), is estimated to consume 48.14 kilowatt-hours of energy per transaction. That’s about as much energy as a single US household uses in a day and a half. So think of that next time you’re enjoying a Bored Ape, or whatever. Additionally, it’s well documented that the higher the price of Bitcoin, the more energy it consumes. That’s because more so-called “miners” are competing to fulfill the need for cryptographic security.

The Energy Costs of Proof of Work and Proof of Stake

Everything that happens on a blockchain is based on some sort of consensus mechanism — a collective community agreement that a transaction has been properly processed as a “block” on that blockchain.  And we all know that achieving consensus, in real life or digitally, has never been a very efficient process.

Proof of Work (PoW) and Proof of Stake (PoS) are the two main ways of cryptocurrencies achieve consensus today. Each has its pros and cons, environmentally and otherwise. Bitcoin takes the rap for being the most energy-glugging coin to “mint,” as the process is called, because of its reliance on PoW. Ethereum is also currently based on PoW, though it is expected to switch to PoS in coming months.

The goal of these mechanisms is to create cryptographic security, which is why they are called cryptocurrencies. PoW involves a race among miners to determine who can solve an algorithmic challenge the fastest. Each time there’s a request to mint a token, it is doled out across the entire miner network. Whoever breaks the algorithmic code, which may involve making trillions of numerical guesses (and chewing up vast amounts of power in the process), wins the bid to mint that block on the Bitcoin blockchain. The system is spectacularly decentralized (anyone with computing power can participate), fair in doling out work, and quite secure. But it is incredibly energy inefficient–even deliberately so. The problem is so bad that Europe last winter considered banning PoW altogether. Kosovo did in fact ban it and the NY Legislature proposed a bill that’s pending approval to halt carbon intensive mining in the state.

Proof of Stake (PoS) is a newer, kinder-to-the-environment way to mint, but it’s less fair. It’s run more like a lottery, but everyone does not have an equal chance to participate. Every time the network needs a new block, an algorithm grants the opportunity to a specific “staker,” meaning someone who already holds that particular cryptocurrency. The more of the staked currency someone holds, the better their chance of winning this lottery (sort of like how you get more voting power if you own a larger apartment in a New York City co-op). The miners are thus incented to hold significant stakes in the currency they mine. Many miners pool their coin on a validated server to better their chances of earning the right to create new blocks on the chain. Binance and PolkaDot are some of the major currencies using PoS.

Most experts will tell you that PoS is safe from attack, but probably not as cryptographically safe as PoW. The advantage of PoS is that it does not require expensive hardware or lots of mining processing power. Stakers are vested in the overall health of their ecosystem. Transactions are faster and relatively less expensive. And it’s a huge saver of energy.

Today, most NFTs (digital assets, including digital art, fashion, and real estate) rely on the Ethereum ecosystem for minting and transactions. But as Ethereum migrates to PoS and other NFT marketplaces start to work with PoS systems, the hope is that creating NFTs will stop being such an energy-monster.

Some currencies use their own consensus methods, including Solana’s proof of history, XRP Ledger’s Ripple Protocol Consensus Algorithm (RCPA), and so-called Proof of Authority mechanisms such as the Energy Web Chain. These offer different ways to achieve security with less electricity consumption. There is real commitment in much of the crypto community to become more climate-friendly. A significant number of crypto companies have joined the Crypto Climate Accord (CCA), whose mission is to decarbonize the global crypto industry.  And we’re seeing lots of new experiments, both by using different mathematical approaches and by using renewable energy, to bring more sustainability to the dirty business of crypto mining.

Tiny pockets of progress are evident. In northern Sweden, the Canadian firm Hive Blockchain is relying on local hydropower at its Ethereum facility. KryptoVault in Norway runs off 95% hydropower and 5% wind. Jack Dorsey is building a bitcoin mining facility in Texas that feeds off of solar and Tesla-battery stored power. But to complicate things further, a growing controversy surrounds using sustainable energy sources for PoS mining, on the grounds that clean energy should be used for other purposes that reduce conventional power generation.

Searching for Green

As an attendee at the large, recent crypto-conference Consensus 2022,  I made it a mission to seek out companies committed to moving crypto into greener pastures. I was struck by a few standouts that are making greening their platforms not only a priority but also a product differentiator.

Flowcarbon raised $70 million to develop a protocol that tokenizes carbon credits and stores them on a blockchain, with the aim of driving investment in projects that remove carbon dioxide from the atmosphere. Flowcarbon is working with KlimaDAO, a leader of which spoke in a session on Crypto’s Climate Challenge at the Techonomy Climate conference in March.

Protocol Labs’ initiative includes tools that measure the “greenness” of its systems. “It is no longer acceptable for crypto companies to simply tout that they are reducing climate emissions. They must take quantifiable action”, said Marc Johnson of Filecoin Green at Protocol Labs, in an interview. Filecoin Green supplies tools to make energy usage on the Filecoin blockchain totally transparent. (Filecoin has a market cap of about $1.2 billion.) FileCoin Green explains here its master plan.

Hedera’s Brady Gentile explained how that coin’s network uses a smart contract consensus mechanism of its own called Hashgraph. (Hedera’s market cap: $1.5 billion.) It is a distributed ledger but not a blockchain. Because of its unique protocols to achieve network consensus on transactions, it is more energy-efficient, faster, and costs less. And because it’s a “leaderless” system there is no mining or bidding for mining. Tokens are instead pre-mined by the company, making it exceptionally eco-friendly.

Leaders at Algorand (market cap $2.4 billion), designed from the outset as carbon-neutral and based on a PoS blockchain, told me that it’s dedicated to minimally impacting the environment. It developed a new form of smart contract that aims to tackle the problem of carbon emissions. “A smart contract takes the parameters of the blockchain – how many relays are involved, how many nodes are involved, how many transactions, etc. – and comes up with the offset power that needs to be paid for, and then uses transaction fees to pay for that”, said

Vice President of Engineering Research Naveed Ihsanullah in this report by Coindesk.

Emerge’s CEO, Lucia Gallardo, is an energetic, environmentally committed Honduran whose mission is to use the blockchain for social action. She moved her servers to mint her regenerative climate-oriented NFTs to Montlucon, a small town in France where the heat generated by the servers powers hot water in the town. Gallardo says that it has delivered more than 41,000 hot showers to date, avoiding the emission of several dozen tons of CO2. Emerge’s newest project, The AEternals, is an NFT collection where more than half of the proceeds go to the Rainforest Partnership.  AEternals is a collection of 10,000 interactive and metamorphic NFTs, inspired by specific parcels of the Amazon rainforest. The NFTs mix art and gamification. Owners can interact with their land plot via their NFTs, and environmental data will trigger changes in the art. Think Tamagotchi meets environmental stewardship in a Web 3.0 world.

It’s said that winter, even crypto winters, are a time for hunkering down and building. Despite today’s “things fall apart” moment for the crypto industry, we’re also seeing a doubling down on crypto infrastructures, renewable-energy driven data centers, and more efficient mining and plumbing. Next year at Consensus I expect to find even more environmentally committed exhibitors and speakers.

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