...by Daniel Szego
quote
"Simplicity is the ultimate sophistication."
Leonardo da Vinci

Saturday, February 9, 2019

Blockchain and sustainability

Blockchain and sustainability
In terms of blockchain algorithms and platforms, sustainability can be interpreted in many ways. On the one hand, anyone who has ever heard about the energy demand of the Bitcoin network can rightly think that the system is pretty far from being considered as sustainable or environmentally friendly. This extreme energy requirement is not necessarily similar however with other blockchain platforms. On the other hand, a number of initiatives have been taken over the past few years to address sustainability or environmental issues with decentralized applications. In this article, we analyze the topic of blockchain and sustainability from these two relatively different point of views.

Consensus and energy consumption

One of the most important components of decentralized platforms is the consensus mechanism. The consensus mechanism is responsible for ensuring that the system is always in a consistent state, meaning that all nodes contain the same information. With other words when someone creates a new transaction, the consensus mechanism ensures that the entire system reaches a single state: either each node finds the transaction valid, or each node finds it invalid.


In public blockchain algorithms, the implementation of the consensus algorithm may be particularly difficult. With such systems, there is always the possibility of a so-called sybil attack, where an external attacker creates a large number of hacked nodes and tries to influence the consensus of the system. Therefore, in such systems, the consensus algorithm is not based on the number of nodes, instead on some other economically scarce or expensive resource. Early day consensus algorithms implemented this resource with computational power (Proof of Work). As a participant in such a consensus compete with each other on a market basis, the total computing power can grow to an extremely large extent to maintain the system and the consensus.



Figure 1, the computational capacity needed to maintain the Bitcoin consensus
(source: https://www.blockchain.com/de/charts/hash-rate?timespan=all)


Of course, the computational capacity that might be extremely high in some places has significant energy consumption, which does not affect the sustainability or the environment positively. It is difficult to explicitly measure this energy consumption, but it can be estimated in  two ways. The so-called bottom-up estimation calculates the energy consumption, cooling, and production energy requirements of computing hardware in detail. The other, so called top down approach, takes into account that the participants in the consensus receive profit or reward for their activity. Given that there are many players on the market and that market is pretty competitive, participants can only realize an estimated normal profit and the rest of the revenue can be considered as direct or indirect energy cost. In both cases however, the total amount of  estimated energy is significant.


Figure 2. Energy consumption of the Bitcoin network compared to countries.(source: https://bitcoinist.com/huge-wind-farm-to-power-bitcoin-mining-will-be-built-in-north-africa/)


Fortunately, the Bitcoin consensus mechanism was merely the first working mechanism and it is almost certainly not the last. Many research and development focuses on developing faster and more efficient consensus mechanisms that require less energy. In one solution, the critical resource involved in the consensus is not the computational capacity but directly the cryptographic currency. In such so-called proof of stake systems, nodes intercept a certain amount of cryptocurrencies, which is lost if it turns out that they tried to hack the system. Other approaches, called layer 2 scaling solutions, execute most of the transactions not directly on the blockchain but on a separate off-chain transaction channel. Considering that usually every hundreds transaction is executed or synchronized with a blockchain, the overall efficiency is enormously increased.


The area of ​​consensus mechanisms is very actively researched area. Even if the currently most widespread solution are energy demanding, this will most likely not a problem for future blockchain platforms and consensus mechanisms.

Sustainability applications on the blockchain

There are on the other hand a lot of applications and initiatives that try to support or solve  sustainability and environmental issues with the help of a blockchain. Of course, many of these initiatives are still in the early stage, so it is too early to evaluate which of them is will be real killer sustainability application. Most of these initiatives can be summarized by the following categories:


“Green” energy distribution: One of the applications sustainability and blockchain focues on the  efficient distribution of locally produced “green” energy. Suppose that some residents in a local community install solar cells, and in the case of overproduction of energy they share the extra energy with their neighbors. The blockchain can be used here to accurately and automatically accounting the distributed energy. From a technical point of view, early implementations use Ethereum integrated with local energy IoT devices, creating a so-called smart meter.


Figure 3, “green” energy distribution in a local market


Supply chain trancparency: The next major area of ​​sustainability applications is to improve the transparency of supply chains and value chains. The first applications come from the area of ​​food production and food distribution, where it is particularly important to keep track of the exact lifespan and raw materials of a food product. For example, if it is found that an agricultural area has been sprayed with harmful substances, all the products directly or indirectly affected should be withdrawn. The technology also provides the opportunity to aggregate certain properties in the supply chain and display them on end products. For example, it is possible to say about a food product that it is made from vegetable ingredients or does not contain gluten, considering the entire production chain. In addition to properties directly related to food, other sustainability parameters can be also measured and aggregated along the supply chain, such as greenhouse gas emission or the proportion of recycled materials used.


Incentivies: Blockchain-based incentive systems generally reward some kind of environmentally conscious activity. A classic example is getting a token reward for collecting and recovering recyclable materials. The environmentally conscious activity can be glass recycling, plastic garbage collection or the purchasing services that have an positive overall environmental impact. The motivational token can also be implemented in different ways. It can function as a collectible token, it can work as a local currency to buy different special products, or it can also be a full scale cryptocurrency.

There are a number of other examples and initiatives how blockchain can be used in sustainability or environment protection. Examples include a transparent "green" point system for companies, or a transparent block chain accounting system that tracks charity cash flows. Of course, it is not yet possible to see which application will be a real “killer app” in the area. However, there is a strong chance that many sustainability issues canl be better solved with transparent global blockchain systems and decentralized automated organizations than in the current system, which is usually dominated by short-term financial decisions and other local political interests.