The future in energy-intensive proof of work looks dim The future in energy-intensive proof of work looks dim The future in energy-intensive proof of work looks dim

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

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

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

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.