Blockchain Technology: Defining and Consolidating The Concepts of Crypto Mining and Sustainable Cryptocurrencies.
This article aims to simplify everything about cryptocurrency, including the concept of crypto mining, Bitcoin, and altcoins. The concept of crypto mining is at the centre of all that is happening later, especially related to the important consequences of crypto on the environment. But first of all:
Blockchain technology: what is blockchain?
Blockchain technology was born from the need for decentralised authority instead of a centralised one like a bank, for example. It is safer, easier to use, and does not depend on one entity or one government. Blockchain technology is similar to a digital ledger where people record their transactions. The ledger, or blockchain, is a chain of blocks. Each block contains information on the transaction, a "hash", which resembles a serial number and is unique to every block, but also the "hash" of the block before. The security mechanism is such that when someone wants to tamper with a block, the hash gets changed, which does not affect the block that comes after that one.
Cryptocurrency explained: what you need to know
Cryptocurrencies are a form of digital currency. It could be described as having coins in your pocket, but only, they are virtual and can be added to a virtual wallet. These currencies are bound by a cryptographic system. Therefore, they are supposed to be easy to use, more secure, and offer the possibility to exchange value and money independently from financial institutions. However, some disadvantages need to be taken into consideration, such as the volatility of the value of cryptocurrencies, the increase in the number of scams and illegal activities, or to a greater extent, their impact on the environment.
There are many types of cryptocurrency. The crypto coins which are not Bitcoin are called "Altcoins" to mean “alternative coins." Each one of them is expected to have unique characteristics and benefits.
Bitcoin is one of the most popular and valuable cryptocurrencies. According to Investopedia, "as of May 2022, there were over 19 million bitcoins in circulation with a total market cap of around $576 billion." Another cryptocurrency to invest in could be Ethereum or even Cardano and Solana, which are sustainable cryptocurrencies -.
Crypto mining and mining profitability
For starters, Let's explore the concept of "Proof of Work". The Proof of Work consists of a complex mathematical problem that needs to be solved by the person who seeks access to the blockchain in order to be able to update the ledger. Doing so allows them to get a reward in cryptocurrencies.
Adding a new block to the chain also takes enormous amounts of computation power and energy, and the complexity depends on how long it takes the miners to add a new block. The average time for every new block should be around 10 minutes. If the solving capacity is lower than 10 minutes, then the complexity of the mathematical problem is adjusted automatically and gets more difficult. Sometimes miners work together to increase their chances of winning access to the blockchain and split the reward.
Blockchain is represented by a network of computers from all over the world that have access to a copy of that ledger once they pass the Proof of Work. Every time a new transaction is made, the block can be verified by the network, based on all the existing copies, and then can be added, if qualified as safe.
That is the way they are "chained". If we were to change the content of one block, then all the information contained in the other blocks would have to change as well. However, there needs to be someone behind this system to allow verification, creation, and update of the transactions; therefore, everybody can do it.
Can cryptocurrencies be considered sustainable?
Multiple attempts are made to promote more sustainable finance. It is for this reason that the decision to make blockchain mining more sustainable turned out to be even more relevant.
An environmentally-friendly cryptocurrency is a currency with low energy consumption and a small carbon footprint. As we know, the mining of cryptocurrencies takes enormous amounts of energy.
The Proof of Stake principle is considered a sustainable alternative to the Proof of Work. However, one famous phenomenon related to PoS is called "hoarding." It refers to when the owners of cryptocurrencies hold on to them and avoid selling and exchanging them in order to accumulate them—because you need more of them to be selected—
From what we know so far, the transition from one system to another is possible. According to the website, Coindesk, Ethereum is one of the most relevant examples of a cryptocurrency that is shifting from PoW to PoS. The goal is to reduce its overall energy consumption by 99.95%.
The fact that miners have to use such an enormous amount of power to be able to overcome, among other things, the Proof of Work, has led them to turn to more sustainable sources of energy. This means that cryptocurrencies could boost and encourage the use of renewable energy resources. In a CNBC interview, an Ark Investments analyst confirmed that 76% of bitcoin miners are using renewable energy.
A report published in May 2021 by Galaxy Digital calculated how much energy was needed to power up Bitcoin for one whole year—Bitcoin being the most power-draining cryptocurrency—and discovered that it was approximately half the power consumed by the banking system. The results recorded are 113.89 terawatt-hours (TWh) per year versus 263.72 TWh per year for the banking system.
"All forms of technological innovations, by virtue of being computer-based, are always going to have a significant carbon footprint," says Barney Tan, Head of School and Professor of Information Systems and Technology Management at UNSW Business School. "But this is not to say that all of them should be stifled in the name of environmental protection, but rather that sustainability should be one of the foremost concerns alongside the economic benefits that they can generate, "he says.
Most eco-friendly cryptocurrencies according to the consensus mechanisms
The Delegated Proof of Stake
It is the same concept as PoS. However, users vote for a delegate who will be allowed to add a new block to the chain. The delegate is elected democratically, and bidders can stake the amount of crypto they would like to engage in the pool. The higher the bid, the greater the weight in the vote. The winner is selected among a limited group of potential delegates whose number is usually between 20 and 100—for the purpose of not having the same candidates for the next block. The delegate who adds the next block will get the reward and share it with the successful bidders who participated in his election.
Since it is still considered Proof of Stake, it is still allegedly considered to be sustainable.
The Proof of Capacity
Considered an improved version of the PoW, it is about stocking "plot" files on the personal hard drive of the miner; they contain pre-calculated hashes and are the ones difficult to calculate generally. The higher the storage capacity, the more chances a miner has to match the required hash value from his list and be able to add a new block. It takes 4 minutes to form a block instead of 10. The Proof of Capacity is known to be more efficient in energy consumption than the PoW because the plot files saved on the hard drive help use less energy at every session.
The Proof of Elapsed Time-PoET-
It was made by Intel Corporation and chooses the next user who can add a block based on how long they have been waiting. According to Investopedia, the Proof of Elapsed Time prevents the excess usage of energy, which could make this crypto sustainable.
Proof of Authority
This consensus is based on the reputation of the validators: their identity needs to be proven thanks to their official documents. Their number is limited. Only these validators are the ones allowed to add a new block. With their identity at stake, they are motivated to maintain the network.
This type of proof is considered environmentally friendly since it does not require high computational power.
Proof of Activity
A combination of proof-of-work (PoW) and proof-of-stake (PoS), Proof of Activity works as follows:
It starts as a PoW with enough computational power to be able to find the solution that will lead the miners to add a new block. Once that solution is found, the block is not directly added and the system switches to PoS. The block needs to be validated by a group of validators who are chosen according to their cryptocurrency ownership, similarly to the Proof of Stake concept. They need to be able to sign the new block for it to be able to get added to the blockchain. The reward is split between the validators and the original minor. Proof of Activity still requires PoW to work, which means that it is considered less sustainable than other alternatives.
What we think about green crypto
Sustainability is a concept that is gaining more and more notoriety in the different fields - finance, binance, supply chains, etc.- and creates new challenges to tackle. For years, sustainability was overlooked and the impact on the environment was ignored; no one could ever believe that we would be facing such a catastrophic situation. As our activities are affecting climate change, climate change is also affecting the lives of many populations and will soon enough be felt in all we do. According to official sources, there are still as few as approximately 10 years left before reaching +1.5 °C in the earth's temperature. This will induce sea level rises, life-threatening heat waves, or the extinction of the fauna and flora.
As mentioned above, crypto is here to stay and we must find ways to make it more sustainable. The enormous computational power that is required to be able to overcome the Proof of Work is participating dramatically in the impact of climate change. However, some alternative consensus mechanisms are available to be able to avoid this phenomenon. For instance, some miners are relying on renewable energy to power up their mining computers.
It's also worth noting that sustainability embraces more than just the environment. And since the "ESG" definition stands for "Environmental, Social, and Governance impact," we hope to expand our work in areas such as transparency, tax, and regulatory factors, among others. Stay tuned to knowesg.com or follow us on our social media.