The March 2022 executive order entitled “Ensuring Responsible Development of Digital Assets” mandated the White House Office of Science and Technology to produce a report on digital assets. The report was recently published and the recommendations related to bitcoin could undermine its existence.
The White House claims that global electricity consumption from digital assets like Bitcoin and Ethereum is estimated at “120 and 240 billion kilowatt hours per year,” or 0.4% to 0.9% of annual global electricity consumption.
To minimize their ecological footprint, the Biden White House is offering drastic measures on the existing cryptocurrency framework.
One of the key findings from the 46-page report was a recommendation for bills and congressional executive orders that “limit” or “eliminate” proof-of-work (PoW) mining. Instead, the White House wants to introduce a proof-of-stake mechanism to reduce Bitcoin’s power consumption.
PoW mining is a consensus mechanism used to secure its network and validate blockchain transactions. PoW is only successful because crypto miners use computers to “solve complex puzzles that consume enormous amounts of energy.”
“An alternative, less energy-intensive consensus mechanism called Proof of Stake (PoS) is estimated to consume up to 0.28 billion kilowatt-hours per year in 2021, less than 0.001% of global electricity consumption,” the report said. “Current discussions about reducing the power consumption of crypto assets are mainly focused on PoW blockchains, especially Bitcoin. There have been growing calls for PoW blockchains to introduce less energy-intensive consensus mechanisms. The most prominent reaction was Ethereum’s promised launch of ‘Ethereum 2.0’, which uses a PoS consensus mechanism.”
The White House Fact Sheet suggests that PoS would “dramatically” reduce power consumption to less than 1% of current consumption levels. But is such a drastic move from PoW to PoS justified and would it result in significant energy savings? Hardly.
First, let’s be clear that both types of technologies play a role, and it should be left to those studying the networks to determine which consensus mechanism – POS or POW – is best for them. Ultimately, this pros and cons analysis comes down to purpose.
For digital money and the safekeeping of value, PoW tends to be the preferred mechanism due to its “hardness” (i.e. security) and low barriers to entry. One only needs access to globally available energy to be part of the PoW network. For smart contracts and other distributed computing product development, PoS tends to be the preferred consensus mechanism.
There is now a regulatory consideration that will feed into the analysis. PoW is considered a commodity and is regulated by the Consumer Financial Trade Commission while PoS is considered a security and is regulated by the Securities and Exchange Commission.
The energy talk, while important, is largely a distraction. University College London’s Center for Blockchain Technologies examined the environmental impact of Distributed Ledger Technology (DLT), PoS in particular, and concluded that “the precise energy consumption characteristics of PoS-based systems and the difference between them are not widely known.” .
IMF senior policy analyst Mandy Gunasekara explained that bitcoin mining, for example, accounts for only a tiny fraction of total global energy consumption, providing a better point of comparison.
Bitcoin mining is no different, however the network is far more efficient and arguably has greater social benefits compared to games, for example. Bitcoin mining consumes 188 terawatts of energy worldwide every year. While this number may sound extreme at first glance, it is statistically insignificant, accounting for just 0.122 percent of global energy consumption. For even better context, Christmas lights (201 terawatts) and computer games (214 terawatts) consume more energy than the entire Bitcoin network.
The White House has acknowledged that crypto mining is important, but can only be accepted if fully aligned with the Biden administration’s net-zero agenda. The reality is that bitcoin mining has already proven to be an effective tool in reducing emissions, including methane emissions, by capturing otherwise flared or leaked gas to power miners and working alongside renewable energy projects to offset disruptions.
Since the federal government designs digital assets in the US, it would be very short-sighted for the White House to undermine the existence of either consensus mechanism, especially so early in their development. To learn more about the upcoming White House plans for digital assets, read the report here.