Blockchain, Cryptocurrencies and Energy Consumption

Blockchain and Wine

A few weeks ago, I attended a hybrid event on Blockchain in the wine industry organized by Geisenheim University. The agenda promise to bring together an interesting group of speakers. However, already during the first presentation I saw my hopes dented whether I would find out something new. Luckily, I was only off to a rough start and the event did eventually produced some very interesting insights how Blockchain technology is and, maybe more importantly since the wine industry is slightly behind the curve, can be used in the future in this sector.

Back to the first speaker though who had chosen to emphasize the energy consumption as one of the key elements of his presentation. He focused in large parts on the consumption of energy by Bitcoin, the world’s biggest cryptocurrency. While it was interesting to learn that Bitcoin apparently uses mostly surplus energy and as such does not weigh as badly on the global electricity bill, it was wondering how relevant that was in light of the wine industries use of Blockchain Technology. Actually, most use cases are either cryptocurrencies used for ICOs that are mostly based on Ethereum or NFTs, which again use in large parts the Ethereum platform or a handful of other blockchains such as Flow, BNB chain, Tezos and others. Bitcoin, though, does not appear to be very relevant in this sector.

Energy consumption and Cryptocurrencies

Still, it got me thinking and there is some relevance to energy consumption since Ethereum isn’t exactly carbon neutral either. Currently, a single transaction consumes as much energy as a whole family in a week. Or to paint an even bigger picture, on a yearly basis it eats up as much as the entire country of Chile.

Luckily, this is soon to be a problem of the past. Hopefully. Come September the highly anticipated Merge upgrade of the Ethereum blockchain could reduce its energy consumption by up to 99% according to its developers.

As unpredictable as is the exact consequences is the date though. Vitalik Buterin only the other week released a statement pointing to 15 September as the critical day that is to change everything, but the changes to the mechanism has been in the making for several years and the actual date was postponed several times. Are the developers finally going through with it this time? And if so, will it actually work? Crypto enthusiast are biting their nails in anticipation. But not only. After years of talking about its potential, Blockchain technology has been made large strides in its application though it is well off in fulfilling its true potential. That potential is why the big tech companies are so thrilled about it in general and Ethereum in particular. Similar to its use in the NFT world, it could play an equally dominant role in the metaverse. And while the market of digital art in itself is no slim pickings, this is an entirely different ball game.

Price Pressure

That might be one of the reasons why Ethereum has bounced back strongly and above average from the recent dip that hit the entire cryptocurrency market. And the upgrade adds to the trend.

The drop in energy consumption is only the result of the fundamental change that is to come. To understand this, you need to look at the way cryptocurrencies work. In a decentralized system where transactions need to be verified through the network before they are recorded on the blockchain, it is the mechanism that defines many of a blockchain’s aspects. Verification can be quite lucrative as the evolution of mining farms shows. While at the beginning anyone could join the game, it is now in the hands of organisations of industrial or state level. In most cases, cryptocurrency transactions are confirmed through a proof-of-work mechanism and whoever calculates the fastest to confirm the details of a transaction would be rewarded with a mining fee. The higher the computing power, the bigger the chances of winning. And that’s also the reason for the high energy consumption, since, after all, miners from all over the world compete with this mechanism. And if the value of a cryptocurrency is high, the value of a transaction increases, and with it the value of the fee that is to be earned. A vicious circle.

Price Developments

To break this circle, the new version is going to use a different mechanism where the orders are assigned to individual users at random. Anyone who owns ether can participate in this kind of lottery though you need to own at least 32 ether to play, the equivalent of about fifty grand at current market rate. So, not exactly everyone in practice. However, in this mechanism, the more coins you own, the higher the probability that you will be assigned the task. But you need at least 32 ethers.

Since a lot of owners don’t own as much, they could be tempted to lend their stake in exchange for interest, which in turn has seen and might even see further rate rises.

Returning to the aspect of energy consumption, this means less computers participate in the calculations as the task is simply distributed. It also means that miners no longer need expensive equipment such as computers with enormous performance or graphics cards to compete as a simple computer will do. Thereby, it reduces the secondary problem of electronic waste, especially in times of chips shortness. In a recent study, scientists calculated how much waste the current mechanism creates. While it focused on Bitcoin, the equipment used for Ethereum, the technical equipment is different, but similar to an extent and there is an equal amount of electronic waste as with Bitcoin, says Alex de Vries, one of the researchers. The study shows that mining produces tens of thousands of tons of scrap every year. Needless to say, that electronic waste is particularly problematic for the environment if it is not disposed of properly. Toxic chemicals or heavy metals can then penetrate the soil, the air or the groundwater.

If this works, and there is no small question mark here, what does this mean for Bitcoin though? Calls have been voiced by the public as well as regulators that the proof-of-work mechanism is ought to be abandoned but yet more than initiatives haven’t been developed. That could change with Europe already facing a gas and electricity crisis and autumn around the corner.

An interesting season awaits…

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