The March 2022 Executive Order titled “Ensuring Responsible Development of Digital Assets” mandated the White House Office of Science and Technology prepare a report on digital assets. The report was recently published and the recommendations pertaining to Bitcoin could undermine its very existence.
The White House claims the global electricity usage from digital assets like Bitcoin and Ethereum are estimated to be “120 and 240 billion kilowatt-hours per year” or 0.4% to 0.9% of annual global electricity usage.
To minimize their environmental footprint, the Biden White House offers drastic measures to the existing cryptocurrency framework.
One of the key takeaways from the 46-page report was a recommendation for Congressional bills and executive orders that “limit” or “eliminate” Proof-of-Work mining (PoW). Instead, the White House wants to adopt a Proof-of-Stake mechanism to reduce Bitcoin’s electricity use.
PoW mining is a consensus mechanism used to secure its network and validate blockchain transactions. PoW is only successful due to crypto miners using computers to “solve complex puzzles, expending vast amounts of energy.”
“An alternative, less energy-intensive consensus mechanism, called Proof of Stake (PoS), was estimated to consume up to 0.28 billion kilowatt-hours per year in 2021, less than 0.001% of global electricity usage,” the report said. “Current discussions about reducing crypto-asset electricity usage primarily focus on PoW blockchains, particularly Bitcoin. There have been growing calls for PoW blockchains to adopt less energy-intensive consensus mechanisms. The most prominent reaction has been Ethereum’s promised launch of ‘Ethereum 2.0,’ which uses a PoS consensus mechanism.”
The White House Fact Sheet suggests PoS would “dramatically reduce” electricity usage to less than 1% of present usage level. But is such a drastic change from PoW to PoS warranted and would it result in significant energy savings? Hardly.
First let’s be clear, there is a role for both types of technologies and it should be left to those engaging in the networks to determine which consensus mechanism—POS or POW—works best for them. Ultimately, that pro and con analysis comes down to the intended use.
For digital money and securely storing value, PoW tends to be the preferred mechanism given its “hardness” (i.e. security) and low bar for access. One only needs access to energy which is available all over the world to be a part of the PoW network. For smart contracts and the development of other distributed computing products, PoS tends to be the preferred consensus mechanism.
There is now a regulatory consideration that will play into the analysis. PoW has been deemed a commodity and will be overseen by the Consumer Financial Trade Commission, while PoS has been deemed a security and will be overseen by the Securities and Exchange Commission.
The energy conversation, while important, is largely a distraction. University College London’s Centre for Blockchain Technologies studied the environmental impact of Distributed Ledger Technology (DLT), specifically PoS, and concluded “the exact energy consumption characteristics of PoS-based systems and the difference between them are not widely understood.”
IWF Senior Policy Analyst Mandy Gunasekara explained Bitcoin mining, for instance, accounts for a minute amount of total global energy consumption, which offers a better point of comparison.
Bitcoin mining is no different, however, the network is by far more efficient and arguably has more social utility when compared to gaming for example. Globally, Bitcoin mining uses 188 terawatts of energy annually. While this number may sound extreme on first blush, it’s statistically insignificant accounting for only 0.122 percent of global energy consumption. For even better context, Christmas lights (201 terawatts) and computer games (214 terawatts) use more energy than the entire bitcoin network.
The White House has conceded crypto mining is important but can only be acceptable if it fully aligns with the Biden administration’s net-zero agenda. The reality is that bitcoin mining has already proved to be an effective tool in cutting emissions, including methane emissions by capturing otherwise flared or leaked gas to power miners, and is being deployed alongside renewable energy projects to balance out intermittencies.
As the federal government shapes digital assets in the U.S., it would be very short sighted for the White House to undercut the existence of either consensus mechanism, especially this early in their development. To learn more about the White House’s upcoming plans for digital assets, read the report here.