Blockchains and the Environment

"Blockchains are bad for the environment"

When you come across commentators stating this, they aren’t wrong… but it’s not all blockchains.

Cardano is one of the newer generation eco-friendly “Proof of Stake” blockchains. In fact, it pioneered the technology and set the standard for everyone else to follow. It has proved that the harmful environmental impact of older “Proof of Work” blockchain technology can be replaced and instead be green.

When you come across commentators saying “blockchain is terrible for the enironment!!!”, they aren’t wrong… but it’s not all blockchains.

Proof of Work ("PoW") Blockchains

Blockchains that came before Cardano, most notably Bitcoin and Ethereum, have been horribly bad for the environment. To achieve decentralisation of the blockchain and a high level of security they used a simplistic model whereby the computers which provide the blockchain service solve completely pointless mathematical problems. Basically through burning electricity, with the incentive to use as much electricity as will make you the winner.

The whole motivation of an owner of one of these blockchain computers (they’re called “miners” because they “mine” new blocks) is to use the most powerful and therefore most electricity-hungry computer, before the electricity costs you more than the financial reward the winner receives. As the price of Bitcoin and Ethereum went up, their energy consumption went up accordingly!

Sounds daft? It is, but Bitcoin was the first and it needed simplistic approaches to be accepted and become trusted. As the science around blockchain evolved its community could have changed that, but haven’t.

All the newer blockchains that came later could have taken a different path, but instead many decided to ignore it and adopt the same Proof of Work approach, churning through large swathes of the world’s electricity production in the meantime.

A Proof of Stake ("PoS") Blockchain

Cardano didn’t take the same approach. Wastefully burning through huge quantities of energy was against its principles of being a force for good. It instead uses a method that it pioneered, called Proof of Stake (PoS). Much harder to design and implement correctly (it took them several extra years to do it), but it completely removes the wasteful use of electricity to run a blockchain, without sacrificing security or decentralization.

When you come across commentators saying blockchains are bad for the environment, they haven’t done their research correctly. Only some blockchains are bad for the environment.

We get into exactly what Proof of Stake is later on this page.

How much electricity does Cardano use?

Cardano is justifiably proud of its energy usage credentials. A good community resource is Cardano Blockchain Insights:

When looking at the total energy consumption figures on that page you might sit there and think “hold on, OK that’s an incredible reduction in energy usage compared to Bitcoin and others, but it’s still quite a lot of electricity!”

OK, fair comment, it is, but bear in mind that Cardano is providing a financial operating system to the whole world. There are obviously still going to be computers involved in doing that and therefore energy needed to run them. Many of them run today on renewable generated electricity and hopefully in time the whole network will. Whilst you ponder this though, ask yourself how much energy Visa and Mastercard consume to run all of their computers, your bank, your government, etc. Big systems still need some amount of energy to run, it’s just that you don’t want to incentivise vast amounts of it being needlessly wasted.

Proof of Work and Proof of Stake Deep Dive

Want to understand why Proof of Stake uses so much less energy? Below we go into a bit more of a deep dive on the subject. It’s not a level of technical detail everyone will want to know about, but if you’d like to understand it better here we go…

PoW / PoS - What's the difference?

OK, so if you’ve read through our main home page you’ll hopefully have become pretty clued up about the decentralization of blockchains and why it’s so important. If you were creating a non-decentralized blockchain, one that was instead just controlled by a big company or a government, then Proof of Stake and Proof of Work wouldn’t be needed, you’ve already decided to trust the owner of the blockchain with all decisions about it and the transactions on it (there’s really no point in being a blockchain at all in that scenario – just use a standard database!).

But with a decentralized blockchain that isn’t the case. You need a way to ensure that every transaction which gets added to the blockchain, into every block of data, that becomes part of the overall blockchain, is correct.

The catch is that not everyone is honest. If your blockchain is going to be handling transactions that have any sort of value or importance then there are going to be people who will want to try and hack it, steal from it or disrupt it.

As you sit there, as a blockchain creator, you need to assume that someone, or even a group of people, will one day try and alter blocks on your blockchain, by breaking the rules you’ve set and instead trying to force their altered data in. It might be to try and change a block that occurred in the past (e.g. change which wallet someone’s cryptocurrency got sent to), or it might be to try and alter what gets added to a new block being written to the blockchain.

You have at your disposal very clever maths, called cryptography, which lets you ensure that changes can be detected in blocks of data, both as they are being constructed and also as they were stored in the past. As long as you use good cryptography then all of that is taken care of, it’s secure and unbreakable. But your vulnerability is that bad people, malicious people, may control one, or many, of the computers that make up your blockchain.

You need a way to ensure that when that happens, the blockchain software you create to carry out all of the blockchain tasks, can automatically detect and reject these malicious users and their attempts to change things.

When Bitcoin was invented this was a task no one had tried to accomplish before.

The genius solution was to realise that if you had a lot of different computers all do the same thing on the blockchain, all produce and store the blocks of data that make up the blockchain, then you can simply let a majority decision win whenever a discrepancy occurs.

If a bad computer tries to change a block created in the past or a block being created now, when it tries to store it the cryptographical signature of the block becomes different to the correct block that should be stored. All of the other computers in the blockchain see it and switch to a majority decision wins approach.  Whichever block of data trying to be stored has the most computers agree on the same digital signature must be the correct block and that is the only one that can be legitimately stored. It’s beautifully simple.

But how do you encourage a lot of people to buy a computer and spend their own money running it so that your decentralised blockchain has lots of computers owned and controlled by different people?

Proof of Work was the solution

Proof of Work was a really simple and clever solution to the problem. Create a competition and pay a reward to the winner.

Every computer which forms part of the Bitcoin blockchain has a chance to earn money, earn Bitcoin, every time it gets selected by the network to create a new block. How do you do that? Just get the computers to do a thing that computers are really good at – solve a hard mathematical problem. It’s fair because anyone can buy a computer and therefore has the same chance to be the first to solve the problem. The only differentiating factor is how good their computer is at solving the maths problems. The winner has proved they were best at the work required, hence “Proof of Work” as the name.

All of the computers create and store the blocks, but only one computer wins the competition and gets the financial reward from the blockchain every time a new block is created.

The more computers that are added to the blockchain the less chance each has of winning the reward every time a new block needs to be created, so the owners of the computers need to buy more powerful computers to improve their chances. But more computer processing power means it uses more electricity, electricity costs money, so there is a balance between what the reward pays, how often you are likely to win it and what the overall electricity cost is to you to run your computer.

In the early days, it didn’t matter. Bitcoin was niche, the value of a Bitcoin was tiny, people would just use a computer they had lying around, the total energy consumption couldn’t get too high because the rewards weren’t very much. But then Bitcoin caught on, the price of a Bitcoin shot up and the rewards, paid in Bitcoin, were therefore worth more…much more! 

This simplistic approach with its monetary reward spurred lots of people to buy more and more powerful computers to try and win more and more of the Bitcoin rewards.

The fundamental incentive was to use better and better computers, and more and more electricity, so as to make your computer more likely to be the winner, increasing the power of it all with every rise in Bitcoins price.

Until…well until today. It’s awful. It works on a decentralisation and security level – it’s still a pretty good solution from a security perspective. But on a wasteful level, it’s atrocious. The quantity of cutting-edge computer hardware built solely for solving these pointless problems and the continuous amounts of electricity used to run them all is nothing sort of an environmental disaster.

And actually, the decentralisation hasn’t ended up being as good as it should be either. Really big sums of money lead to cutthroat businesses and there’s been a slow centralisation of bitcoin miners into a smaller and smaller number of companies that have ended up controlling large numbers of the blockchains computers.

Proof of Stake is the solution we now need

The problem with Proof of Work today is obvious. A solution was obviously needed. But it turns out it’s a really hard problem to solve when you need to ensure the security and decentralization of the blockchain remains at least the same, or ideally better than the level of security Bitcoin managed to achieve. 

Cardano set about the task and after its academics and scientists wrote several papers and spent several years on the problem they produced the solution. A Proof of Stake based solution they call Ouroboros.

The basic core concepts adopted by Bitcoin still held true, they were still seen as a really good way to achieve both security and decentralization. But the method of attracting different people to buy and run the computers that make up the blockchain needed to be changed. 

The solution was to delve into concepts such as game theory and examine all the ways you can encourage people, communities and companies to solve a problem you need solving. Proof of Stake does this by removing the need for the owners of the blockchain computers to solve mathematical problems. They instead need to attract owners of the blockchains’ native cryptocurrency, ADA, to “stake” it with them. The more ADA that gets “staked” to their stake pool, their individual computer, the more chance they have of being selected to produce a new block. When they do, the monetary reward approach is still used but with some important differnces.

The stake pool that gets chosen to “mint” each new block is chosen at random by the Cardano blockchain, but with the odds of being selected each time weighted towards pools with a higher amount of ADA staked to them. The pool that is selected receives a quantity of ADA from the blockchain as their reward. This ADA gets shared between them and all of the wallets that have chosen to stake their ADA with them. It’s a really neat solution. 

The incentive for a “stake pool” – the owner of a computer that is wanting to win the right to mint a new block (be the winner) on the Cardano blockchain is to attract lots of users to stake the ADA they own with their stake pool. These users don’t send them their ADA, they simply assign the stake pool the staking rights associated with their wallet which holds their ADA (it never leaves their wallet – its still safely theirs). A stake pool needs to share as much of the rewards they’ll win with their users as possible, to incentivise them to stake with them. The incentive for users is to make free ADA, so they want to find a stake pool that will offer them the best return – be the most sucessful at winning the chance to mint a new block and the most generous at sharing the reward with them. Finally, the incentive for the blockchain itself is to incentivise a sufficiently high number of stake pools to run the individual computers that make up the whole blockchain, so the blockchain sets rules about the maximum stake a stake pool can receive and various other parameters that ensure fair play.

It all sounds fairly complex, and it is, but at its heart its quite simple. To aid users in selecting a good stake pool various websites have popped up that offer them data on the best performers and returns being seen. Think your sunday newspaper comparing the banks in your country for you, but on the blockchain.

The result? Cardano has been running this Proof of Stake model for a few years now and has demonstrated that its blockchain that is just as secure as Bitcoin. In fact, it has proven that it is much more resilient to attacks than any other leading blockchains from malicious users who might want to compromise them by performing a 50% attack (taking control of 50% of all the computers that make up the blockchain – every blockchains’ greatest security concern). 

It has also encouraged great participation from its community. Thousands of people have decided to set up their own stake pool to help run the blockchain. Hundreds of thousands of users have staked their ADA to their favourite stake pool and earned ADA for free as a result. Everyone is happy…including the planet we all live on. Pretty neat huh 😊