on January 20, 2022, usa. uu. The House Energy and Commerce Committee (the “Committee”) held a hearing on the energy consumption associated with cryptocurrency activity. announcing the january 12, 2022 hearing, committee chair frank pallone (d-nj) and chair of oversight and investigations diana degette (d-co) stated: “in just a few short years, cryptocurrency has seen a meteoric rise in popularity. it is time to understand and address the strong energy and environmental impacts it is having on our communities and our planet.”
At the end of the hearings, committee members received a two-hour lesson on a wide range of topics: blockchain (and its various types of consensus mechanisms) and its energy impact on the climate; how crypto mining can affect the management of energy resources by utilities and ultimately the price consumers pay for their electricity; how utility companies deal with energy-intensive miners; and where to strike a balance between green energy goals and cryptocurrency economic development. several committee members seemed open to preserving the potential innovations and economic growth of blockchain while also improving energy efficiency and achieving growth in renewables.
Reading: Bitcoin energy hearing
This is part i of a two-part post on the issues raised by the congressional hearing on blockchain energy use. In this part, we will discuss how different blockchain consensus mechanisms impact energy use and some possible solutions discussed in the audience. In Part II, which will be published soon, we will delve into some of the esg considerations that are now affecting companies in relation to cryptocurrency investments and the use of blockchain.
Ultimately, the hearing was more of a productive and educational discussion for Congress, with more discussion of concrete policy or law drafting reserved for the future. Still, looking ahead, the energy issues accompanying cryptocurrencies are reminiscent of a host of esg issues businesses will face in the future, as blockchain, crypto, and nfts gain a greater presence on tech balance sheets and wish lists. .
hearing comes on the heels of the much-hyped energy consumption of cryptocurrencies, specifically the energy needs related to proof-of-work (“pow”) blockchains rather than proof-of-stake blockchains (“post”). Various commentators and legislators have sounded the alarm about the potential adverse impact of power usage attributed to bitcoin (and other pow blockchains). Senator Elizabeth Warren previously warned that protecting the planet required cracking down on environmentally wasteful crypto mining practices. The European Securities and Markets Authority (“ESMA”) has warned of “soaring” environmental costs and called for a ban on proof-of-work mining. Institutional investors have also been warned about the increasing esg exposure to the asset class.
Hearing largely focused on how to make proof-of-work networks (i.e. bitcoin and, for now, ether) greener, either by using renewable energy or by turning to other chains of blocks using the lowest power consumption test. -consensus mechanisms in play.
At several points, the audience highlighted bitcoin’s use of electricity: President Pallone, in his opening statement, noted, for example, that the 2021 carbon emissions from bitcoin and ethereum crypto mining were 78, 8 million tons of carbon, roughly the equivalent of tailpipe emissions. of more than 15.5 million gasoline cars on the road. it was also noted in the hearing that bitcoin consumes more electricity than ukraine or norway (and if “cryptocurrency mining” were a country, it would be the 27th most energy-hungry in the world).
The experts also piqued the committee’s curiosity by explaining the concept of “constrained” energy. Until battery storage technology improves and power grids modernize, a certain percentage of the green energy produced may go to waste when, for example, a solar or wind farm produces more power than is needed. there was testimony at the hearing that suggested that crypto miners (or crypto miners combined with data centers) located near green energy sources may use this restricted energy or excess energy that would otherwise be wasted. By using these flexible charging arrangements, the committee heard, miners can provide environmental value by providing capital for renewable projects through their consumption of excess renewable sources, or by consuming energy that would otherwise be burned (will be discussed in part ii of this publication).
However, not everyone on the committee was convinced that renewable energy is a panacea; instead, they suggested that transitioning from proof-of-work networks to proof-of-stake networks, which consume less power, is the best way forward.
proof-of-work vs. proof-of-stake: what’s the difference?
pow and pos are the two main consensus mechanisms that cryptocurrencies use to verify new transactions, add them to the immutable ledger of the blockchain, and create tokens. decentralization requires many computers, each using power, to participate in the verification process. pow and pos are the two methods by which computers agree on the legitimacy of a transaction.
Proof-of-work, the blockchain’s original consensus mechanism, was a method of cryptographic proof that became popular with the advent of bitcoin (and the publication in 2008 of satoshi nakamoto’s remarkable article on the underlying technology) . Blockchains using POW consume vast amounts of energy as virtual miners from around the world compete to solve a complex cryptographic problem in order to protect the network and gain the right to update the blockchain. winners are rewarded with network currency. As an example, bitcoin and ethereum currently use pow mechanisms, although ethereum plans to transition to ethereum 2.0 later this year, which will use pos. In practical terms, this power consensus mechanism incentivizes miners to invest in expensive computing equipment, which in turn leads to investments in places to store and cool equipment, and the consumption of massive amounts of energy to power their systems or platforms. .
on the other hand, proof of stake, the predominant consensus mechanism used by some other blockchains (and soon ethereum 2.0), consumes much less power, to the tune of 99.99% less than blockchains. pow pos “validators” are the analog of pow miners: validators secure the network in exchange for a cryptocurrency reward. while energy miners use their intensive energy and computing power on the run to validate transactions and protect the network, pos “validators” dedicate their own share of cryptocurrency to the network.
In contrast to pow, pos does not require high-powered or power-intensive computers because any user can act as a validator using a computer to create a node. pos nodes only use slightly more power than a laptop. furthermore, pos is faster, more scalable, and can process more transactions per second than pow.
so, as you can see, the congressional hearing revealed many issues that will require further deliberation. news abounds about technological advances in blockchain, including, for example, new decentralized finance (defi) applications (or daaps), cross-chain solutions, nfts, metaverse applications, supply chain modernization, or new cryptocurrency offerings . However, alongside these advances, there will undoubtedly be efforts to “green” the blockchain, whether through moves toward increasing renewable energy sources for crypto mining or a greater move toward pos blockchains. the last congressional hearing is likely not the last we hear about these issues.