The FINANCIAL -- When it comes to cryptocurrency's energy consumption, there's only one direction it moves: through the roofBitcoin. One minute it's up, the next minute it's down. But when it comes to the cryptocurrency's energy consumption, there's only one direction it moves: through the roof.
For all of the wondrous qualities of Bitcoin and its underlying blockchain, environmental sustainability is not one of them. The electricity needed to conduct a single Bitcoin transaction could provide a day's worth of energy to 33 U.S. households, according to Digiconomist, which tracks Bitcoin's energy consumption. Bitcoin "miners" used more energy last year than 159 countries, according to another study.
Lately, more of that energy is coming from countries with cheap and abundant hydro and geothermal energy. But even those clean energy sources exact a toll on the environment, via damming of rivers and drilling holes in sensitive areas.
With no end in sight to Bitcoin's energy demands, a backlash has been brewing—at least one major power company has refused to sell energy to a Bitcoin miner due to environmental concerns. It's also set off a race to develop cleaner, greener blockchain variations.
The original blockchain
What makes Bitcoin and other cryptocurrencies so energy-intensive? The problem lies with the cryptographic "mining" process required to create new coins and keep the system operating.
That process combines distributed computing and cutting-edge cryptography to create a secure, tamper-proof and transparent way of recording transactions.
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In such a distributed ledger system, transactions do not pass through a central authority, such as a bank or clearinghouse. Instead, they are validated and stored by participants in the blockchain network.
That notion—of a more decentralized, egalitarian system that can put power back in the hands of individuals—is at the heart of the excitement around Bitcoin and, more importantly, it's underlying blockchain architecture.
In search of consensus
Putting the power of verification into the hands of a group has certain implications, however. Members of a network must have an incentive to participate in verifying and storing records, which comes at a cost. And they must agree upon the results. To ward off cheating or fraud, those operating the network need to have some skin in the game to prove their commitment and good intentions.
In the case of Bitcoin, consensus is achieved through a mechanism known as Proof of Work (PoW). Proof of Work involves a competition among network participants to see who can solve a cryptographic puzzle first—the first one to solve it gets to create the next "block" of transaction data, which is then linked to the preceding block in the chain. Block creators are rewarded for their trouble with newly minted coins. The process is referred to as mining.
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The investment in resources—in this case, computers and the energy needed to run them—represents the miners' skin in the game.
However, like its real world equivalent, Bitcoin mining comes at a steep cost. Initially, Bitcoins could be mined from a standard desktop computer. But as more coins have been issued, the puzzles have become harder to solve.
Today, Bitcoin miners operate huge warehouses of specialized computers that thrum away 24/7. Even after falling from its lofty highs, the value of a Bitcoin (around $8,000 per coin at the time of this writing) creates a powerful incentive for miners to invest in more and more computational power and the electricity needed to support it.
Another drawback of Bitcoin is the time required to solve the mining puzzles—transactions can take roughly 10 minutes to settle (in which time Bitcoin's price can fluctuate dramatically).
Powering the next generation of blockchains
Fortunately, more eco-friendly blockchain designs that don't require mining are emerging.
Here's a sampling of green consensus mechanisms that could power the next generation of blockchain systems:
Proof of Stake (PoS)
In this system, a member's stake in the network is what counts. Validators are chosen via a lottery that also considers the number of tokens they own and the length of time they've owned them. Rather than investing in computing power, they invest in the network itself and put up an ownership stake as a sort of collateral. This process is called forging.
In a PoS system, all coins are created at the launch of the network, so forgers are rewarded via transaction fees rather than new coins. If they validate a fraudulent transaction, they lose the stake they put up.
Pros: Forging does not require expensive equipment or large amounts of energy. And since long calculations are not required, transactions are validated more quickly than with PoW. PoS also rewards long term ownership.
Cons: A small group of people owning a majority of tokens will exert control as validators
Delegated Proof of Stake (DPOS)
A twist on PoS where token holders select delegates who will create blocks and operate the network on behalf of its members. Each token equals one vote, so members with more tokens have more power to choose delegates. The delegates, known as block producers, are rewarded for their service with tokens.
Proof of Burn (PoB)
Similar to PoS, in a Proof of Burn system, members 'burn' coins by sending them to an irretrievable address, ensuring they cannot be spent. The more coins that are burned, the better the chance of being chosen to validate the next block (and earn rewards).
Pros: Little energy required, encourages long term participation
Cons: Power goes to those who can afford to burn the most coins.
Proof of Space
Also called Proof of Capacity, this method relies on computer storage as the resource. Pre-solved computations (called plots) are stored by each node, and mining software automatically reads through the plots to forge each block. The more solutions you are able to store (aka the more storage you have) the greater your chance of having the solution to validate a given block.
Proof of Elapsed Time (PoET)
As its name suggests, this protocol rests upon time. Wait times are randomly assigned to each node, and the one with the shortest wait time gets to validate a new block. PoET is designed to for use on permissioned blockchains, where members are known to one another (as opposed to an anonymous, public blockchain such as Biotcoin).
Pros: A more democratic system of determining validators in that everyone has an equal chance of being chosen in a lottery. PoET does not require intensive computing, so it's light on energy usage—and can even be operated on chips found in everyday electronic devices and appliances.