Beyond Bitcoin: how to build an energy-efficient blockchain that can help the energy transition

Bitcoin mining facility in Ordos Inner Mongolia (photo Bloomberg)

There is widespread concern over the high energy use of Bitcoin mining. But blockchains can be highly energy-efficient, writes Sam Hartnett of the Energy Web Foundation, a joint initiative of Rocky Mountain Institute and Grid Singularity who have partnered with Shell, Statoil, Engie, and other energy companies to accelerate adoption of blockchain technology in the energy sector. According to Hartnett,  blockchain technology will help accelerate grid decarbonization – not exacerbate current challenges.

Digital cryptocurrency Bitcoin experienced a dramatic rise in popularity and value in 2017. Deployment of blockchain technology, which underpins Bitcoin and numerous other digital currencies, is poised for similar growth across multiple sectors.

However, the environmental impacts of Bitcoin—especially its high energy consumption—have come under scrutiny as the network’s use has increased. There is widespread concern that continued growth of blockchain-based currencies like Bitcoin will undermine global efforts to reduce carbon emissions and threaten grid stability.

This is unfortunate, because there is every reason to believe that blockchain technology could actually accelerate—not hinder—environmental and energy goals.

Blockchains of course are not limited to digital currencies. Nor are all blockchains created equal. There are many ways to design, govern, and operate a network; these decisions influence energy intensity. At Energy Web Foundation (EWF), we’re building an energy-efficient blockchain to support applications that unlock new opportunities for renewable energy and distributed energy resources. In other words, we’re developing an energy-lean blockchain specifically for the energy industry that can also accelerate grid decarbonization. 

With Bitcoin’s growing popularity comes with growing energy use

Bitcoin mining—the process by which computers in the Bitcoin network validate transactions, create new Bitcoins, and earn a reward payment – is a computational burden that requires high-powered, and increasingly specialized hardware. Bitcoin’s fast-growing energy use is a byproduct of how the network validates and adds blocks to the chain.

Estimates of Bitcoin’s total electricity consumption vary between roughly 1 TWh and 44 TWh per year, depending on methodology; the former is enough to power roughly 90,000 U.S. homes for a year, the latter is larger than the annual electricity use of Denmark. Today a single Bitcoin transaction consumes as much electricity as an average American home does each week. And that’s just Bitcoin.

A blockchain (such as the Bitcoin network) keeps track of transactions between parties; details of each transaction are added to the distributed ledger (i.e., the “chain” of blockchain) in encrypted blocks of data. For each block of transactions, a massive global network of computers race to solve an encrypted, complex equation that can only be solved through trial-and-error. The “winner” (i.e., the computer that solves the problem first and is subsequently confirmed correct by the network) earns a Bitcoin reward, hence the “mining.” The more computing power you have, the more likely you are to win bitcoins by solving the equations.

As Bitcoin’s value increases, there is greater incentive for miners to add computing resources in order to beat their competition. By design, the greater the total computing power of the network, the more difficult the equation becomes. The result is a reinforcing feedback loop with the potential for runaway energy consumption. 

Not all networks are created equal

Bitcoin’s consensus protocol—the mechanism by which the computers in the network validate and agree upon transactions—is called “proof-of-work” (PoW). It is so named because miners work hard (i.e., devote real-world resources like computers and energy) to solve an equation and prove it to the rest of the network. Though inherently energy-intensive, PoW sets an extremely high bar for validating blocks and makes it exceedingly difficult to manipulate the blockchain.

Yet PoW is only one way to validate transactions, and at least two alternatives hold promise for blockchain applications with a lighter energy footprint:

• Proof-of-Stake (PoS): Under a PoS system, there are no races for validating blocks; there are no miners. Instead, network participants own a share of the system’s digital currency and are selected to validate blocks in proportion to their share. This proportional stake—and the risk of losing this “deposit”—disincentivizes malicious actors. Since there isn’t computing competition among all participants to solve an encryption problem (as in a PoW network) PoS blockchains use a fraction of the energy.

• Proof-of-Authority (PoA): PoA systems rely on a trusted set of authorities to create and validate blocks. PoA blockchains could be private or public but in either case there is a reduced number of validators (albeit optimal in number and diversity to ensure decentralized system democracy), with reduced computational power required and reduced opportunities for system attacks. Authorities are compensated for their block-validation role through standard, nominal transaction fees not tied to the nature or value of the transactions themselves. To ensure good governance, there are rules that regulate how authorities join the network and how transactions are validated, and these rules are currently in development since PoA only became available this year starting with the Kovan testnet. Such PoA networks are well-suited to regulated industries where entities responsible for maintaining the network (authorities) need to be known, rather than remain anonymous as in mining-based chains like Bitcoin and Ethereum. And since only approved authorities are the ones validating the blockchain, there is no competition amongst authorities to race each other, which means less power consumption than PoW blockchains.

Energy Web Foundation – A new blockchain for the energy sector

EWF is building a public, open-source blockchain-based platform designed to host decentralized applications that support distributed and renewable energy-focused business models and products. Meeting this objective requires a highly scalable network with a robust governance structure that doesn’t require massive computational, hence energy resources.

EWF is currently designing a PoA consensus mechanism for its network, with EWF affiliates—energy companies who have partnered with EWF—serving as authorities. This validating system addresses both the technical and regulatory challenges associated with implementing a blockchain in the energy sector. The PoA consensus mechanism allows EWF’s network to maintain a light energy footprint. Authority nodes can run on simple hardware and initial data indicates that typical demand for an authority node is approximately 78 watts – on par with a common incandescent lightbulb. With 20 authority nodes currently on the EWF network, the upper boundary total energy demand is approximately 1.5 kW – roughly equivalent to a microwave.

Since energy use will increase linearly as the EWF network grows, with 1,000 authority nodes expected energy demand will be less than 80 kW – enough to power about 10 US homes. The actual number is likely to be even lower, since improvements in hardware efficiency or the use of shared servers will reduce the energy burden of a given authority node.

In addition to limiting energy consumption, the PoA consensus mechanism will improve performance and buttress security, addressing potential regulatory concerns (e.g., regulators will know who the actual authorities are and will be consulted when designing relevant protocols and applications). The network will enable applications ranging from a more effective facilitation of certificates of origin for renewables to improved grid access and management.

The reader might wonder, doesn’t this put the energy companies that function as authorities in a privileged position? There are several reasons why this is not the case. First, the authorities include major energy companies as well as startups – all have a vested interest in the success of the network and are thus incentivized to maintain its integrity. Secondly, eventually we aim to have 1000 or more authorities that are geographically and organizationally diverse.

In addition, EWF is also implementing a governance system that will not only disincentivize malicious behaviour but will also include protocols for removing authorities that misbehave. We encourage all affiliates, as well as the public at large, to utilize the EWF chain to support new applications and businesses.

Efficient by design

It is difficult to predict how Bitcoin and other digital currency mining will impact energy usage. If Bitcoin’s price continues to soar and more miners join the pool, some of the more dire warnings could come true. Conversely, an act of regulation, an innovative competitor, new computing technologies, or some other event could make Bitcoin mining more efficient, less appealing, or obsolete.

But no matter what happens in the broader blockchain space, the nature of the EWF network ensures that it will be less energy intensive, faster, and even more secure even as it grows. EWF’s blockchain will unlock new opportunities in the energy transition, not exacerbate current problems.

Editor’s Note

Sam Hartnett is an associate at Rocky Mountain Institute and member of the Energy Web Foundation team, where he works with major energy companies to develop blockchain applications for demand response, electric vehicles, and peer-to-peer markets.

This article was first published on the website of Energy Web Foundation and is republished here, in a slightly edited form, with permission.