Energy-hungry cryptocurrencies could undermine our renewable goals
Stephen Morgan is an application security consultant in the financial technology industry who also enjoys parenting, and coding.
OPINION: Of all the recent announcements by Government aimed at reducing emissions, I would like to throw in a proposal that has been weighing heavily on my mind lately: cryptocurrencies. Or rather, more specifically, an outright ban on what’s known as “proof of work” cryptocurrency mining within New Zealand.
You may be wondering: you mean that thing my nephew is always telling me to buy, Bitcoin?
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Yes, though I don’t propose to ban the purchasing of the token itself, because I believe everyone should have the opportunity to lose their money anyway they like. But I’m proposing a ban of the resource-intensive and inefficient-by-design process by which transactions are confirmed.
See Bitcoin is the most high profile example of a cryptocurrency that uses proof of work as the mechanism to add transactions to a database known as the blockchain.
Blockchains are slow, irreversible, and come with a litany of user experience problems (oops I deleted my life savings). But one of the few benefits of a blockchain is that, rather than being centralized, it is distributed – meaning that anyone in the world with access to a computing device can add to it.
Except it’s not that simple (sorry!).
If anyone, anywhere was able to add transactions to the blockchain willy-nilly then it would be trivial for a bad actor to add fake transactions and steal everyone’s money.
Enter proof of work.
This is a mechanism whereby anyone that wants to add transactions to the blockchain must find a magic number (known as a nonce) that when computed (or more accurately, hashed) against the summary of a block of transactions they want to add, results in a very low number.
To summarise, nonce + block of transactions = hash.
Miners need to keep cycling through nonces to find a hash that equal to – or less than – the target hash. The system wants a target hash number low enough that it takes the network 10 minutes to find. But that’s 10 minutes for millions of computers around the world to find.
A miner is rewarded with a fee for successfully finding the nonce and allowing the transactions on that block to be added to the blockchain.
If this sounds hard, it is. For Bitcoin alone, the computers committed to crunching this number consume as much energy per year as that of Thailand.
This is super villain levels of inefficient.
Firstly, everyone is trying to find that number independently so naturally the same computation is being repeated over and over again by different miners.
Secondly, the protocol is designed to make finding the nonce harder and harder as more computers are added to the network, to maintain that 10 minute per block rate.
When I briefly dabbled in Bitcoin mining 10 years ago, it was still possible to make slightly more money mining Bitcoin on a desktop computer than it cost in electricity to run – relative to Bitcoin prices at the time. These days, so much computational power is needed, only those with warehouses full of specialized equipment can make a profit.
To paint a colorful analogy, proof of work mining is like trying to find a single grain of sand within 92,000 tonnes of sand, where every group of miners is searching a separate beach.
To put this all into perspective, when you make one transaction with your Bitcoin, you are consuming the equivalent of 109 days of the average energy the typical Kiwi household consumes.
Every Bored Ape NFT you buy costs the energy equivalent of 23,577 hours of watching YouTube.
Other examples of proof of work cryptocurrencies include Ethereum, Dogecoin, and Litecoin. The mechanism is used by three out of the top 10 cryptocurrencies.
There are alternatives to proof of work, proof of stake for example is much more energy efficient. Investors freeze their currency in exchange for a chance to be picked as a “validator” of a block of transactions and earn the fee for doing so. Proof of stake is roughly 1000 times more energy efficient.
It’s been a tough time for crypto enthusiasts, last month seeing a huge sell-off of the risky “asset class”, with one popular token in particular suffering catastrophic losses.
But as the zealots are learning that the value of cryptocurrencies is imaginary, why should our country, one that prides itself on how green we are, contribute to the enormous waste these networks produce?
Their voracious need for electricity could hold us back from achieving our renewable energy targets. But why should they?