The Development of Sustainable Consensus Mechanisms

By Gabriele Musella, CEO & Co-Founder, and Jeev Thind, Growth Specialist, at Coinrule

Increasingly within the crypto industry, ESG and sustainability are at the forefront of many discussions. These opposing viewpoints centre around the differing opinions regarding the proof of work (PoW) and proof of stake (PoS) consensus mechanisms. The purpose of these systems is to offer users a fault-tolerant mechanism that provides security, fairness, and efficiency. However, it is essential that the adopting new technologies meet functional and social needs. It is crucial that crypto businesses support mechanisms that are energy efficient and will lead to a greener future.

As of late, it has become popular to regard PoW as an inferior technology that has longer processing times and requires higher energy consumption. In particular, the use of non-renewable energy sources to power Bitcoin mining has called into question the sustainability of the mechanism in an increasingly eco-friendly world.

Steps have been taken to address these issues, such as the recent formation of the Bitcoin Mining Council in North America. This council aims to promote energy usage transparency and accelerate sustainability initiatives worldwide. Initiatives like this will only further increase the proportion of renewable energy used to power mining activity. According to the Bitcoin Mining Network Report published by CoinShares in 2019, approximately 73% of energy currently used to power mining activity is from renewable energy sources.

This is not to say that this will always be the case. As electricity is the main cost for miners, they tend to cluster in regions with extremely low energy prices such as Southwest China and the Pacific Northwest. These areas are dominated by cheap and underutilized hydropower. To keep miners in regions that rely on renewable energy, costs must be kept low. This makes PoW susceptible to fluctuating renewable energy consumption. The same report published by CoinShares also found an increased migration of miners into coal- dominated regions like Kazakhstan and Texas.

Environmental sustainability is one of Coinrule’s core values. As such, we have decided not to hold currencies that run on PoW mechanisms, such as Bitcoin, as our base currency, as there is not enough assurance to guarantee that these currencies are ‘green’. Furthermore, arguments against PoW are becoming increasingly persuasive as currencies which use PoS position themselves as greener and more sustainable.

A PoS miner is limited to mining a percentage of transactions that reflects their ownership stake. This means the computational complexity and therefore energy consumption of PoS is radically lower than PoW.

Looking forward, it is hard to fully support PoW models without considering the high energy consumption associated with mining. We believe that despite a promising renewable energy mix for PoW mechanisms, PoS offers a more sustainable mechanism for the future. This is not to disregard PoW assets like Bitcoin, but to suggest there are better, more efficient assets that are more suited to large scale adoption.

Read more from the report, Digital Assets: Laying ESG Foundations