The The The

The future in energy-intensive proof of work looks dim

Mads Eberhardt

Cryptocurrency Analyst

Summary:  As the world is experiencing an energy crisis, the high energy consumption of the present consensus protocol - called proof of work - of both Bitcoin and Ethereum is not expected to go unnoticed. While Ethereum is moving away from proof of work this year, Bitcoin is expected to keep the consensus protocol, continuing to consume a lot of electricity - but it will likely not come without severe challenges.


Bitcoin risks the wrath of politicians amid electricity use

Since launching in January 2009, Bitcoin has used the consensus protocol called proof of work to verify transactions on its network. The proof-of-work protocol is hugely energy-intense as it revolves around countless servers keeping the network alive. In return for a great deal of electricity and server capacity, the Bitcoin network returns the availability to solely execute 6 transactions per second.

According to the University of Cambridge, Bitcoin is estimated to be consuming around 0.5 percent of the total electricity consumption worldwide—more than that of the Netherlands—even before recognising the use of resources for the production of the servers. In a worldwide energy crisis where electricity is arguably a scarce resource, consuming 0.5 percent of it will not go unnoticed. Making matters worse, Bitcoin’s electricity consumption has surged concurrently with the Bitcoin price since miners can afford to spend more on electricity and mining equipment while staying profitable. If the Bitcoin price increases in the future, the electricity consumption is expected to follow in its footsteps, effectively further worsening the matter.

Source: University of Cambridge

On the premises of individual countries

The total Bitcoin mining capacity—also known as hash rate—is often centralised around a few countries. Prior to China’s crackdown on crypto in May 2021, the country accounted for around 71 percent of the hash rate. In the month after the crackdown, the total Bitcoin hash rate roughly halved, before practically spending six months returning to its previous hash rate.

Source: Blockchain.com

After the crackdown, Chinese miners moved their mining equipment to other countries, particularly to the US and Kazakhstan; China’s share of the total hash rate is basically non-existent today. From originally accounting for a minor share of the hash rate, Kazakhstan, with a population shy of 19 million people, is today the second-largest miner, with 18 percent of the total hash rate. From typically experiencing an annual growth of 1 or 2 percent in its electricity demand, Kazakhstan witnessed an 8 percent increase last year, contributing to severe power shortages, occasionally leaving some of the population without electricity. The Kazakh government has expressed its desire to possibly put limitations on crypto mining. Earlier this month, as the Internet was shut down due to protests related to fuel costs, Bitcoin’s overall hash rate declined by 13.4 percent. This once again emphasises that the hash rate of Bitcoin is on the premises of a few individual countries, in which the mining sentiment can change quickly.

Bitcoin needs to adopt the alternative

The discussion of energy consumption would arguably be another matter if there were no alternative to the proof-of-work consensus protocol. As this is no longer the case, extreme Bitcoin advocates who have for years substantiated the proof-of-work consensus protocol primarily for its superior security and track record, fall short on further arguments to insist on proof of work compared to the primary alternative, proof of stake. 

Proof of stake is a consensus protocol where holders of the native cryptocurrencies can stake a part of their holdings, and through this validate transactions instead of miners. Over the last years, the majority of newly launched cryptocurrencies have been based on proof of stake, so the framework has arguably proved its worth.

The second-largest cryptocurrency—Ethereum—has for years prepared its transition from proof of work to proof of stake in an update known as ETH 2.0. The transition is expected to be finalised this year, and this will see Ethereum’s total energy use reduced by 99.95 percent. Ethereum’s transition demonstrates that it is not only possible to introduce new cryptocurrencies based on proof of stake but to adopt the framework while having been launched upon proof of work. Besides drastically decreasing Ethereum’s energy use, ETH 2.0 will make Ethereum significantly more scalable in terms of achievable transactional output.

In an era where the sustainability debate is much needed, while we simultaneously encounter the most heated energy crisis in decades, proof of work is a millstone around the crypto market’s neck. Bitcoin and the crypto market overall have many challenges laying ahead to genuinely evolve into more than a speculative asset class, and it does not help the case that the man in the street imagines an enormous data centre when thinking about crypto. Since the sustainability debate is expected to heat up in the future, individual investors, institutions and developers are likely to reconsider committing time and money towards Bitcoin or other proof-of-work cryptocurrencies. As we see it, the proof-of-work consensus mechanism is simply too fragile to operate harmlessly through an energy crisis spiced with an ever-changing regulatory environment and the ascending intention to be sustainable.

Explore crypto at Saxo

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.