IT’S NOT EASY for cryptocurrencies to be green. They use a colossal amount of energy in writing transactions into digital legers. But one of the cryptocurrencies is planning to reduce consumption by up to 99.5 per cent.
Cryptocurrencies are real energy hogs. They are gobbling up energy just when Europe is experiencing a shortage due to Putin’s revenge. Russia has cut off natural gas supplies to Europe in retaliation to sanctions.
The energy used by cryptocurrencies in 2021 alone increased eight-fold to 81 TWh (Terawatt hours) according to Digiconomist. That’s as much electrical energy as all of Chile or Finland consumes in a year.
How can you even call them currencies when a transaction can cost more than what you are buying? If you used a Bitcoin to buy a two dollar cup of coffee, you would end up paying $91.08! (Each Bitcoin transaction consumes 707 kilowatt-hours (kWh) and in B.C. the average cost per kWh is $0.126.)
Compare that cost of a two dollar cup of coffee using a credit card. If the merchant charged you his credit card fees of two percent, your total would be $2.04.
It doesn’t have to be that way. The world’s second-largest cryptocurrency, ethereum, is switching to a different, greener operating model. Developers of the new model say it will reduce the amount of energy needed to run its open legers by up to 99.95 per cent. The legers, called blockchains, maintain a record of ownership of digital assets.
The switch has been years in the making because of its technical complexities. The major update has been dubbed “the Merge.”
Energy savings will result from a different way of confirming transactions. The old way depends on a “proof-of-work” system, which relies on massive computing to validate transactions by solving complex mathematical equations.
The new system is called “proof-of-stake” in which individuals and companies will act as validators of the blockchain by putting up a stake of their own money. This stake would be collateral in the form of ether.
Validators will replace the old “mining” that requires massive computing power. Blockchain miners are paid in cryptocurrencies for their investment in computing power.
Validators are paid as well but not for the computing power they provide. Instead, validators put their own cryptocurrency up as collateral. Proof-of-stake requires consensus among other validators to confirm the transaction.
if the validator behaves dishonestly or lazily their collateral can be destroyed. The validator is responsible for checking that new blocks in the blockchain are propagated over the network are valid and occasionally creating and propagating new blocks themselves.
In this way, proof-of-stake protocols will use capital rather than energy.
If you’re like me, you’ve received a lot of spam about making money in Bitcoins. In one case, I received an email from my cousin promoting Bitcoin investment. While the name was the same as my cousin, the email address was not hers and I realized she was not pitching Bitcoins.
Confidence in cryptocurrencies has plummeted recently and investors have lost billions.
Maybe confidence will return when the cost of transactions becomes reasonable and collateral replaces the energy hog of old technology.
David Charbonneau is a retired TRU electronics instructor who hosts a blog at http://www.eyeviewkamloops.wordpress.com.