Why Not All Cryptocurrencies Are Alike, and Why You Should Care and (Re)Act
For longer than I’d like to admit, I’ve had expertise in banking and retail payments infrastructure. Being very curious about all things digital, especially in my profession, I added distributed ledger technology, blockchain, tokenization, cryptocurrencies, as well as central bank digital currencies to my areas of research. expertise.
So, now that all the Toms, Dicks, Harrys, and sadly El Salvadors have gotten into cryptocurrencies, and Gucci and Mastercard and Visa allow them to be spent in real life, I thought it was important to add some serious food for thought for those who have, or are considering entering the cryptocurrency space.
The basics of cryptocurrency
Before diving into what cryptocurrencies such as Bitcoin, Ether (ETH) or Dogecoin are (besides not being money), there are a few basics to understand.
The basis of cryptocurrencies is the blockchain database. As the name suggests, data is stored in blocks with blocks added together in a long endless chain of blocks, hence the term blockchain. The blockchain (the ledger) is distributed on many independent computers and is an example of Distributed Ledger Technology or DLT.
Ensuring the legitimacy of the bloc
For an individual block to be connected or chained to the existing blockchain, the block must be validated to ensure that the parties performing the transactions are who they claim to be, that they have the permission to transact, that transactions occur in order, and that there is no double spending of an asset.
On a blockchain the validation method is called the consensus method, which means that all computers on the blockchain can have a say and a role in validating the addition of a block (of data). A computer validating a block receives a reward for the inconvenience. On a blockchain, this reward is called its cryptocurrency.
Block Validation Types
Typically, one of two consensus models is used:
Proof of Work (PoW):
First introduced on the Bitcoin blockchain, Proof of Work describes an approach in which computers on a blockchain can compete to solve a complex mathematical puzzle by employing “brute force”, i.e. contributing to computing power to validate transactions and create the hash of a block, close it and add it to the blockchain. This is called mining.
The computer that solves the puzzle first receives the block reward mentioned above in the form of the blockchain cryptocurrency. The greater the perceived value of the reward, the greater the incentive to apply computing power. In the case of the Bitcoin blockchain, this is encouraged by the reward being 6.25 Bitcoins (at the time of writing) or the equivalent of approx. $200,000!
Proof of Stake (PoS):
Instead of all computers expending computing power at the same time to solve puzzle and “hash” blocks, each computer can participate in a kind of lottery where the computer is chosen at random. The more lottery tickets, the greater the chances of being chosen and receiving the reward. In other words, the more the challenges, the more chance there is of a reward, hence the name Proof of Stake. Lottery tickets are the cryptocurrency of the blockchain. As the computer chosen to solve the puzzle is random, it involves much less total computing power than PoW.
Why Bitcoin is Bad
Bitcoin and ETH (Ether) make up the vast majority of cryptocurrency transactions. And many of the other estimated 10,000 cryptocurrencies are built on the Ethereum blockchain.
Bitcoin and Ethereum blockchains are both PoW-based, where increased traffic and interest in a cryptocurrency translates directly into applied computing power and, therefore, higher energy consumption. high. And in the case of Bitcoin and the Ethereum platform, it is a considerable amount of energy! Some bitcoin miners just focus on this reward and have built huge “mining” farms, basically consisting of thousands of powerful computers competing to solve the puzzle and receive the bitcoin reward. Mining operations are a huge drain on the power grid as some mining operations have gone so far as to reactivate abandoned coal-fired power stations!
At the time of writing, a year’s traffic and usage of the Bitcoin blockchain alone accounted for 205 TWh of the world’s energy consumption of 166,000 TWh, 70% of which was coal, gas or of nuclear. Over a year, Bitcoins uses (at the time of writing):
- 1 bulb lit in 800
- 17 times the energy of Google and its entire operations (12 TWh per year)
- 41 times the energy of Facebook (5 TWh per year)
- The equivalent of Thailand’s annual energy consumption
How to reduce energy on cryptocurrencies?
There are other validation methods besides Pow and PoS such as Delegated Proof of Stake (dPoS), Proof of Authority (PoA), Proof of Burn (PoB), Proof of Developer (PoD), and Suite.
They all reward the chosen validating computer, with a cryptocurrency tied to that blockchain. Each method has its advantages and disadvantages, but none depends as much on computing power (therefore energy consumption) as proof of work!
Ethereum plans to fully transition to Proof of Stake consensus in late 2022, which is supposed to be 99.95% more energy efficient than Ethereum’s current proof of work.
When it comes to Bitcoin (which accounts for 2/3 of PoW-based traffic (2022), the genie is unfortunately out of the bottle. No one controls Bitcoin, so there’s no way to override its built-in PoW.
By way of great [global] large-scale regulatory measures, could it be possible to affect the Bitcoin blockchain or other PoW-based blockchain cryptocurrencies.
A 51% attack, exploiting the PoW consensus model, might also do well on a PoW-based blockchain.
A global agreement with 100% of countries and territories agreeing to make PoW (cryptocurrency mining) illegal is also an option. However, that seems highly unlikely.
A final option would be for the world’s major card schemes to make it harder, not easier, to exchange between PoW cryptocurrencies and real-world money. However, they seem to be increasingly focused on getting a “share of the action” and partnering with exchanges and issuers, trying to leverage their global networks to make it easier to actually use Bitcoin. and other power-hungry PoW cryptocurrencies.
Visa and Mastercard are using Bitcoin as the engine for their entry into the cryptocurrency space. However, this puts MasterCard’s crypto program in clear conflict with sustainable growth, as stated in the “Mastercard Manifesto” and Visa’s crypto program in conflict with “Visa’s values” on “protecting the planet”. “.
Blockchain is a very exciting good technology and has the potential to dramatically change our world. Subject to regulation (and thoughtful and enduring enforcement), blockchain and even cryptocurrencies have a role to play regarding the digital exchange and management of assets and securities. But the proliferation and indiscriminate use and application of PoW-based blockchain does not bode well for the world.
One of my astute fellow experts especially in CBDCs, Lasse Meholm, also posted about the [lack of] sustainability behind crypto assets. Read his blog here [in Norwegian].
I also invite you to read my other blog on why cryptocurrency is not money.