What Is the Role of Blockchain and Cryptocurrency in a Low-Carbon Future?

House Hearing Tackles the Energy Impacts of Blockchain

April 8, 2022

There is a lot of talk—and hype—about the potentially revolutionary applications of blockchain and cryptocurrencies in the financial sector. The technologies have advantages in terms of privacy and security, but they also have significant drawbacks. In particular, there is growing concern among policymakers about the high energy consumption of blockchain technology. A House hearing earlier this year, Cleaning Up Cryptocurrency: The Energy Impacts of Blockchain, dived into the issue and the Administration is working on a report following a presidential executive order released in March.

A blockchain, such as a cryptocurrency blockchain, records information through a digital ledger—a record of transactions—that exists on many computers, making it difficult or impossible to change and cheat the system. With access to energy and an internet connection, a blockchain is globally readable. This technology empowers users to exchange information peer-to-peer without going through large intermediaries like financial institutions.

One use of blockchain is to create and exchange digital assets called cryptocurrency. Blockchain miners, or people who use mining machines to validate transactions by solving complex math problems, are rewarded with cryptocurrencies, like Bitcoin, if they are the first to solve the math problem.

Cryptocurrency mining accounts for about 0.59 percent of global electricity consumption—more than the entire nation of Argentina. Much of this energy is fossil fuel-based. For example, Kazakhstan generates some of the dirtiest energy in the world, and is also the second-biggest crypto-mining country, making its cryptocurrency especially carbon intensive.

In March 2022, completing a block of about 500 transactions would reward the miner with 6.25 Bitcoins worth about $265,000 and consume about 586,500 KWh of energy (which would cost about $78,000 in Washington, D.C.). The considerable energy intensity of blockchain has raised questions about its impacts on U.S. grid infrastructure and how energy policy should incorporate blockchain.

The Biden-Harris Administration's recent “Executive Order on Ensuring Responsible Development of Digital Assets” calls for the federal government to better understand the intersection of blockchain, cryptocurrencies, and climate. Calling on federal agencies to produce a report on the topic, the executive order highlights the need to understand both the “potential uses of blockchain that could support monitoring or mitigating technologies to climate impacts” as well as the “implications for energy policy, including as it relates to grid management and reliability, energy efficiency initiatives and standards, and sources of energy supply.”

The House Energy and Commerce Committee is also concerned. Its aforementioned hearing, Cleaning Up Cryptocurrency: The Energy Impacts of Blockchain, drew together panelists to discuss the benefits and costs of blockchain technology and its implications for policy. This article unpacks some of the key focus areas of the hearing, which are also likely to emerge as areas of inquiry for a federal agency report slated to come out in September, according to the executive order.

Proof of Work versus Proof of Stake

A common energy-intensive component of blockchain technology—and the method Bitcoin uses—is called proof of work (PoW). An alternative called proof of stake (PoS) is more than an order of magnitude less energy intensive. The two largest cryptocurrency companies, Bitcoin and Ethereum, currently rely on PoW, but Ethereum is planning to adopt PoS.

Gregory Zerzan, shareholder at the law firm Jordan Ramis P.C. said, “PoS systems are less energy intensive than the PoW method because rather than requiring multiple parties to compete to find the correct answer, using vast quantities of computation, a limited number of validators are chosen to validate a less computationally intensive equation.”

However, some witnesses expressed reservations about keeping blockchain secure under a PoS system. PoW enhances the security of the blockchain networks, since more than 51 percent of the network’s computing power would need to be controlled by one party for it to unilaterally rewrite blocks of transactions in the blockchain. The energy and computing power required would be prohibitively expensive, so rewriting blocks is largely considered impossible.

“As a result, the Bitcoin blockchain has never been hacked and no Bitcoin has ever been counterfeited,” said Bitfury Group CEO Brian Brooks, a witness at the hearing. “Only proof-of-work provides a truly trustless system of peer-to-peer exchange.”

PoS, with less energy consumption and computing power required, is in theory easier to corrupt. By this reasoning, it is precisely the PoW’s energy intensity that makes it so secure. However, even though hundreds of billions of dollars have been secured through PoS, there have been no foundational attacks against important PoS systems.

Supporting Renewable Energy or Revitalizing Fossil Fuels?

Some witnesses argued that blockchain provides a significant opportunity to support renewable energy because cryptocurrency mining is a large, but flexible load. Up to 30 percent of potential power at solar and wind farms is regularly curtailed, or not captured, when there is no demand for the energy. Renewable energy curtailment in China alone could power 80 percent of global Bitcoin consumption. Energy developers are beginning to see data centers as a catalyst for renewable energy sources that would otherwise not be developed. John Belizaire, CEO of Soluna Computing, cites a wind farm project in Morocco that produced more energy than the grid could handle. Blockchain was an immediately deployable solution to use the excess energy.

Steve Wright

There are concerns, though, that blockchain will increase demand for dirty energy sources that were otherwise in decline. Steve Wright, former CEO of Chelan County Public Utility District (PUD) and the Bonneville Power Administration, said that the industry would rely more on fossil fuels in the short term, since the value of clean energy is increasing and the industry often flocks to the cheapest sources.

Energy and Commerce Committee Chair Frank Pallone (D-N.J.) also expressed concern: “We cannot bring retired fossil fuel plants back online or delay the retirement of some of our oldest and least efficient plants in support of energy-intensive crypto-mining activity, particularly in light of the clean blockchain technology that already exists.”

Risks to the Grid

Blockchain can also overwhelm grid infrastructure. Around 2014, low electric rates and high-speed internet attracted crypto miners to Chelan County PUD in Washington state. However, the 24-hour per day crypto-mining operations presented health and safety concerns for the suddenly overloaded distribution infrastructure. In one instance, melting insulation led to a fire near residential houses.

The grid infrastructure needed upgrades to support crypto mining, but the county was not sure they wanted to become a crypto mining hotspot. The community had many concerns about the impact of crypto mining on the area, including stranded asset risks, few local jobs per unit of energy consumption, modest tax benefits, and uncertainty about future government regulation.

While mining centers often move on short notice, the infrastructure needed to support them are capital intensive, stationary, and have a long lifetime. Since the nomadic nature of crypto mining puts usual rate recovery methods at risk, the PUD eventually decided on collecting an upfront payment from new crypto miners to support transmission and distribution infrastructure upgrades. The new upfront costs discouraged crypto mining, and crypto mining in the county dropped dramatically.

Although it presents many challenges, crypto mining can also support the grid. Crypto-mining centers are a uniquely flexible load that could strengthen the grid by ramping up or down in response to fluctuating energy supply and demand. However, miners often want to run machines continuously, since mining machines only last up to five years. Utilities and crypto miners will have to balance these conflicting interests to ensure grid stability and provide inexpensive and sustainable energy for the industry.

Regulatory Uncertainty Threatens Blockchain

Witnesses warned that the current absence of blockchain policy is limiting investment. This lack of policy has led some to compare the industry to the “Wild West.”

Zerzan said, “Regulatory uncertainty, or overly restrictive new laws and regulation, could prevent this technology from reaching its full potential in the United States and drive innovation offshore.”

Witnesses also asserted that financial regulations should not categorize all blockchains as financial products: although cryptocurrency is a significant use of blockchain technology, it is not the only one. Broad financial regulations for blockchain would likely be more stringent than consumer good regulations.

“There is nothing inherently financial about digital tokens themselves,” Zerzan said. “People routinely purchase and hold collectibles like baseball cards, stamps, and cars in hopes that the items will increase in value, but this does not turn those items into financial products.”

Policymakers are racing to regulate blockchain as it becomes increasingly mainstream. As they look to protect consumers and address the technology's energy intensity, policymakers have much to consider. Their policies will determine the path forward for blockchain in the United States—specifically whether blockchain is treated as an opportunity or a burden for the energy transition.

Author: S. Grace Parker