More value means more energy use

Like we discussed in the previous article, mining cryptocurrencies is only profitable if the rewards you receive for adding a new block to the chain are worth more than what you spend on the energy used for mining. This has been made abundantly clear with the mid-2022 crash of cryptocurrency values. The crash in value caused a lot of miners to stop their mining efforts, resulting in the total energy consumption of the Bitcoin blockchain going down from an average of 204.5 TWh per year to 131.24 TWh per year over the span of a single week. A reduction of 35%. Combined with the reduced energy use from the second largest blockchain, Ethereum, in that same week, this meant a reduction in yearly energy use to run these two blockchains equal to the yearly energy use of Austria.

None of this had any effect on the successful functioning of the blockchain. And, once the values of the cryptocurrencies operating on these blockchains recover, so will the incentive for miners to start adding their computational power and therefore energy use into the mix.

Who is responsible for the environmental impact of blockchain technology?

There’s clearly a close link between the value of cryptocurrencies and the blockchains they rely on. So, who is actually responsible for the massive energy use? The miners are the ones using the energy, but they are only doing so because the rewards make it worthwhile. The recent crash in crypto value clearly shows that when those rewards aren’t there, they stop mining.

As someone who works with life cycle assessment (LCA) on a daily basis, I see this as an allocation problem. Typically in LCA, when there are multiple users in a system, we need to find a way to determine who is responsible for what share of the impact. This can be done in many ways, all of them relying on identifying the functions of the system.

Option 1: Allocate to the miners

You could argue that the miners are the ones using the energy. And since they use the blockchain to make money, this is their responsibility. But as stated, the miners will quickly disappear when the incentive for their work disappears, and they have no vested interest in keeping the blockchain operational. They are simply paid to do a job.

Option 2: Allocate to people making transactions

So who needs the miners to do this job? Who is using the result of their work and for what reason? One can argue that the main purpose of blockchains is to enable decentralized transactions, whether that is of cryptocurrencies, NFTs (non-fungible tokens, often used for digital art) or other digital assets. That suggests allocating the energy use of the blockchain to those making transactions on the system, because it is those transactions that incentivize the miners to invest their computing power and use energy.

Still, if we allocate the energy used for adding a new block to the network to the transactions included in that block, we should also consider the complexity of the transactions. Some transactions, like transferring an amount of cryptocurrency, are simple and require little space in the block, while others are large and take up a lot more space. Each block has a set amount of space, so adding a complex transaction replaces several simple transactions. Hence, we can argue that complex transactions should be allocated a larger share of the energy used to add that block to the chain. Allocation based on transaction size would not be hard to do.

Option 3: Allocate to asset holders

However, focusing only on transactions disregards those users of the blockchain who hardly make any transactions, yet are very invested in keeping the blockchain operational. For example, people who own a lot of cryptocurrency as an investment. They may hardly do any transactions, yet keeping the blockchain flowing is necessary so their assets can maintain their value.

As a result, we can also argue to allocate the energy use of the blockchain based on the share each user has in its overall value. This way, those with the most interest in keeping the blockchain running in the long term are assigned the most responsibility for its energy use and the resulting environmental impact.

There is no clear answer to the allocation question

All of these allocation approaches have limitations in truly capturing the full purpose of the blockchain. While the many functions it is used for, like earning money, making transactions and investing in assets, are all in some way responsible for the high energy use, there is no clear main driver of the blockchain’s existence. This makes it easy for each party involved to shift the blame to another party, and since everything is decentralized and anonymous, it’s easier than ever to point fingers elsewhere.

But whoever is responsible, and whomever we decide to assign the energy use to, the issue remains that the energy use of Proof of Work blockchains is enormous and potentially limitless. If a crash in the value of cryptocurrencies can cause reductions in greenhouse gas emissions similar to the total emissions of Austria in a single week, we really must wonder if this is something we want to continue doing.

Thankfully, there are plans underway by some of the major blockchains to reduce their energy use by switching to a different consensus mechanism. One without a potentially endless energy use. This will be the topic of the next article in this series.

This was the second part of our series on blockchain technology. In the first part, we looked at why blockchain has such a high energy use. In future parts, we’ll look into alternative consensus methods such as Proof of Stake.