Why we should ban/tax Proof-of-Work technologies

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I know, many articles have been written on the topic, but none of them completely satisfied my taste. For that reason, I felt it was my turn to write about it.

Info: You can read more about Proof-of-Work here, and Proof-of-Stake here.

Recently, I’ve been exploring Blockchain technologies and have started developing Dapps on them. The technology and future prospects are fascinating, but my biggest concern is the persistent hype surrounding Proof-of-Work (PoW) systems like Bitcoin, Kadena, Ethereum,… to name a few (even though Ethereum will likely switch to Proof-of-Stake in the near future).

But, why should we ban (and tax) Proof-of-Work technologies?

About Bitcoin

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The transition from PoW to PoS is analogous to the transition from the Stone Age to the Metal Age. Even so, we still use stones for many things (since rocks are, in the end, technically useful).

Bitcoin is a bit different. The scarcity of Bitcoins and its deflationary nature resulted in a positive feedback loop that keeps pumping its price, and it is difficult to stop (and in order to stop a positive feedback loop, it requires a lot of control action). There is currently an arms race to mine and buy more Bitcoins.

Usefulness of Bitcoin

But what are the benefits of Bitcoin? Is it really comparable to rocks?

In its original form, Bitcoin was supposed to serve as a peer-to-peer electronic cash system [1] using Proof-of-Work to validate cash transactions. Bitcoin only supports cash transactions, that is, simple money transfers.

That’s all there is to it. That’s what makes Bitcoin useful. However, the technology has already advanced, and there are Blockchains out there (e.g., Algorand [3], Solana [4], and many other chains), which support millions of transactions per day compared to Bitcoin’s mere 300000 daily transactions [2].

Nonetheless, the scarcity effect and the deflationary dynamics of Bitcoins have led people to believe that Bitcoin is a store of value.

Store of value

In the digital world, however, anything can be a store of value, either due to regulations or because people start to believe so (creating a positive feedback loop, as mentioned previously). Even assets created on Proof-of-Stake blockchains can become a store of value.

Nevertheless, Bitcoin’s value can only be sustained by the positive feedback loop created by investors. Bitcoin has no regulatory framework.

Gold (#1 comparison) is a similar example. How is Gold priced? Mostly by its scarcity and by its technical properties.

In the same way as Gold, also Bitcoin is a limited resource. Apart from that, it does not offer any benefit or technical advantage. I have already mentioned that there are better technologies out there.

On the other hand, gold is widely used in electronics, computers, aerospace, and medicine. Do you ever use Bitcoins to save lives?

Bitcoin’s price is purely speculative since it has no regulations and no technical property that can explain its price.

However, should we care? Is this a negative thing?

Major drawbacks of using Bitcoin

There are several drawbacks to using Bitcoin. It is not only an inefficient payment method (as I already mentioned), but it also has two major drawbacks:

  1. Bitcoin is extremely energy inefficient
  2. Bitcoin is contributing to the problem of electronic waste. Moreover, it is one of the reasons why there is a shortage of circuits (which could be used for other purposes)

Energy consumption

Bitcoin is widely perceived as being energy-intensive. In general, this is not a bad thing. As our society progresses, we will use more energy.

Using energy inefficiently is bad. Furthermore, a large part of the energy is produced using fossil fuels, which emit CO2. We must remind ourselves every day that our society has not yet reached energetic independence. Today, it is a luxury to be able to turn on a light simply by pressing a button.

While society shouldn’t dictate what individuals do with electricity as long as they pay for it, the current energy crisis is no excuse to waste energy.

It is generally true that increasing the demand for electricity beyond what is necessary increases our costs, directly (electrical bills) and indirectly (environment). This holds true regardless of whether the energy is renewable.

Table taken from [5], “Energy Footprint of Blockchain Consensus Mechanisms Beyond Proof-of-Work”, Platt, Moritz, et al., 2021. For other metrics check also [11]

In comparison to Proof of Stake methods, Bitcoin is extremely energy inefficient. This is reflected in a recent study [5] discussed in the “UCL Centre for Blockchain Technologies — Discussion Paper Series” (see the table above). Several articles have been written on the subject, but in general, we estimate an annual consumption of 40TWh to 400TWh (TeraWatt hour) at the current rate.

To put things in perspective, let’s assume the average annual consumption of Bitcoin is 200TWh (which is in line with the current average estimate of Bitcoin Energy Consumption [7],r[11]). We could supply energy to New York with 200TWh per year [6].

A nuclear plant produces 750 W/m² [6], so we would need 304 km² of land to power Bitcoin (per year). We could also use 1000 km² of solar panels. Not to mention that Bitcoin will require even more power if the mining continues.

Source [8]: Harald Vranken, in Current Opinion in Environmental Sustainability, 2017. Daily revenues for mining bitcoins [white], in US dollars per unit of computational power, are generally somewhat higher than the daily energy costs [red] of running the computers.

Bitcoin has no technical benefits that explain the cost of supplying energy to mine Bitcoins.

Energy waste causes problems for society as a whole. Think about what would happen if we said things like “Any free society that permits land ownership should permit nuclear waste disposal on private property”. That doesn’t work out because society as a whole ends up paying.

There may be an incentive for miners to build more solar panels, but at the cost of producing more waste. Solar panels are expensive to make, and, in general, they are not yet an efficient technology. Solar energy is the most material-intensive source of energy [6]. Solar panels require approximately 16000 Tons of material per TWh, of which roughly 25% is concrete (1 Ton of carbon is emitted per ton of concrete), 50% is steel (1.8 Tons of carbon are emitted per ton of steel), 13% is glass and the remaining is other materials [6].

Not only that, but we also need to consider all the energy that is put into maintaining the solar panels and the grid infrastructure. Moreover, the land taken up by mining operations could be put to more productive use, even if unmaintained (acting as a carbon sink).

Because of this, even off-grid mining utilizing renewable energy sources is not a practical solution for a technology that provides no technical benefit.

Data taken from https://app.electricitymap.org/, publicly available.

Our energy crisis cannot be solved by renewables alone. The image above shows Germany’s energy production on November 28, 2021. Despite spending billions of Euros on renewables, most of their power is generated by coal. It is just one data point, but take any day during the year and you will see that on average, they primarily use coal as a source of energy.

However, for argument’s sake, suppose that we had unlimited access to free electricity. Perhaps someone constructed thousands of nuclear reactors.

Put aside the argument that Bitcoin is technologically old, that it is energy inefficient, that there is no regulation behind Bitcoin, and that the price is merely the result of speculation.

Can we now mine Bitcoin without problems?

Electronic waste and Shortage of circuits

There’s an additional issue with Proof-of-Work systems. They require lot of computational power and dedicated hardware (in particular GPUs).

The demand for mining hardware has already today disrupted the global semiconductor supply-chain, and contributed to the recent chip shortage [9]. As a matter of fact, this summer almost became impossible to buy a PS5 console, and many car/phone manufacturers had to slow down production.

Proof-of-work systems require powerful mining devices that put significant pressure on chip manufacturers. Consequently, this pressure drove up prices for many electrical devices, including electric vehicles, phones, computers, and advanced medical equipment [12].

Image taken from [8] that shows the Electronic waste generated by Bitcoin per annum in kt (kilotons)

On top of that, a recent study [8,10] shows that the electronic waste of Bitcoin is comparable to the IT waste produced by a country like the Netherlands, 30.7 metric kilotons per year.

Always in [8] they mention

Bitcoin’s increasing energy consumption has triggered a passionate debate about the sustainability of the digital currency. And yet, most studies have thus far ignored that Bitcoin miners cycle through a growing amount of short-lived hardware that could exacerbate the growth in global electronic waste. E-waste represents a growing threat to our environment, from toxic chemicals and heavy metals leaching into soils, to air and water pollutions caused by improper recycling.

So, I wonder, is it really worth it? Can we afford to be unsustainable?

Conclusions: on banning/taxing Proof-of-Work methods

Photo by Alina Grubnyak on Unsplash

It is difficult to ban decentralized technologies in general. What would be the best way to enforce a ban? How can mining be taxed?

Analyzing network data may be the easiest way to determine who is currently mining. Telecommunication companies would perform this task. This, however, would not completely solve the problem (e.g., see the onion protocol).

It is also possible to shut down the main mining pools, or to stop any connections that attempt to connect to one of them.

Last but not least, mining rigs require a lot of energy, space, and computer components. We could use this information to find out who is mining.

Thank you for reading!


[1] Nakamoto, Satoshi. “Bitcoin: A peer-to-peer electronic cash system.” Decentralized Business Review (2008): 21260.

[2] Daily transactions of Bitcoin, URL: https://www.blockchain.com/charts/n-transactions. Accessed on the 28th of November, 2021.

[3] Algorand daily transactions, URL: https://algoexplorer.io/top-statistics. Accessed on the 28th of November, 2021.

[4] Solana daily transactions, URL: https://explorer.solana.com/. Accessed on the 28th of November, 2021.

[5] Platt, Moritz, et al. “Energy Footprint of Blockchain Consensus Mechanisms Beyond Proof-of-Work.” arXiv preprint arXiv:2109.03667 (2021).

[6] Gates, Bill. How to avoid a climate disaster: the solutions we have and the breakthroughs we need. Knopf, 2021.

[7] De Vries, Alex, and Christian Stoll. “Bitcoin’s growing e-waste problem.” Resources, Conservation and Recycling 175 (2021): 105901.

[8] Harald Vranken, in Current Opinion in Environmental Sustainability, 2017.

[9] BBC, Why is there a chip shortage?, August 2021. https://www.bbc.com/news/business-58230388

[10] BBC, Bitcoin mining producing tonnes of waste, September 2021.https://www.bbc.com/news/technology-58572385

[11] Bitcoin Energy Consumption Index, https://digiconomist.net/bitcoin-energy-consumption/

[12] Bloomberg, Chip Shortage Spirals Beyond Cars to Phones and Consoles, 2021. https://www.bloomberg.com/news/articles/2021-02-05/chip-shortage-spirals-beyond-cars-to-phones-and-game-consoles



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