CHANGE PROJECT: SUSTAINABILITY FOR BLOCKCHAIN TECHNOLOGY
by Zamid Aligishiev, Eric Bleys, Flavia Nuta, Julian Jarzabkowski,
Grzegorz Simków
I. Description of the challenge
In this section, we outline the context in which we operate. In the future, blockchain technology will be as pervasive as mobile phones or laptops, potentially being involved in every aspect of our daily lives. As of the 10th of April 2018, the Bitcoin industry’s value is estimated at about $150 billion (World Bank, 2018), which is approximately equivalent to the cumulative GDP of Iceland, Estonia, Latvia and Bulgaria. The rapid expansion of the Bitcoin, and the Blockchain technology it is based on, is understandable. It delivers a means to create peer-to-peer systems that do not rely on third-party governance. Blockchain technology emerged at the pick of the Global Financial Crisis of 2008, six weeks after the collapse of Lehman Brothers (The Economist, 2015). Since then, the use of Bitcoin has increased substantially, as new users saw the potential of financial incentives to join the system. For this technology to work, computer owners delegate some of the computing power of their PCs to help solve a puzzle. The first user to solve the respective puzzle receives the new Bitcoins generated. As the Bitcoin generation rate is decreasing exponentially, it is often compared to mining gold. Hence, the users of this technology are often-called Bitcoin “miners” (World Bank, 2018).
II. Aims of the Project
Our project will research bitcoins’ unsustainability and provide potential solutions to make this technology energy efficient. The most important issue (for accomplishing this energy efficiency) is to raise awareness of the current unsustainability of blockchains’ energy usage. For one, geographic distribution of miners is skewed towards countries with cheaper electricity. As mining activity is concentrated in regions with cheap unsustainable energy, it creates disincentives for the energy producer to invest into renewables. For example, mining farms in some Chinese provinces are mostly supported by coal-powered power plants (Lagarde, 2018), representing a considerable obstacle towards updating the country’s energy system. Concerns about Bitcoin’s energy sustainability were raised by the International Monetary Fund Director Christine Lagarde at the World Economic Forum in January 2018. Calling the Bitcoin mining an “angry-energy” industry, the Head of the IMF projected that it will consume as much energy per calendar year as Argentina, if the current trends persist (CNN, 2018).
III. Power Analysis
Anonymous Actors (Hackers, Anarchists, Terrorists, Drug Dealers, Money Launders) – the bad sheep of society. They are indifferent to the idea of sustainable blockchain as long as they can use it to fulfil their dirty interests, given guaranteed anonymity.
Consumers of the Technology – general public that not only benefits from any development in technology, but also values sustainability, the environment, and transparency.
• Government – regulatory bodies that are directly challenged by the cryptocurrency application of the Blockchain, as it distorts limits of the monetary policy’s power. Yet, incorporating the Blockchain technology into the public sectorrepresents a significant opportunity to benefit the Government as well.
• Media enterprises – Interested in following the developments in technological innovations which contribute to the society.
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Miners – pillars of the system, supporting blockchain technology by supplying computational power. Minders earn returns on their capital, that in this case is represented by the hardware used to generate Bitcoins or support other Blockchain-enabled products.
Traders/Speculators – market agents that speculate on cryptocurrencies and other blockchain-enabled assets. They represent the group of people that hold only short-term financial interest in the Blockchain technology.
IV . Objectives
By 2030, every user should be aware of how to act in a responsible manner with respect to the environment. Moreover, by 2030, 50% of Blockchain technology will be integrated in sustainable systems on a worldwide scale, as proposed by projects like the NRG coin.
V. Potential Solutions (Strategies + Tactics)
This paper lays out three pathways to make large scale blockchain utilization more ecological friendly. The three pathways are: (1) technological innovation in the qualities of IT systems, (2) governmental regulation as a reward and punishment mechanism for user behaviour, and lastly, (3) the introduction of an incentive based blockchain technology for the production and consumption of renewable energies.
Similar to the traditional mining of minerals like gold, cost and energy rises while reaching the resource frontier of the system. In terms of Bitcoin, various technological solutions were proposed and exist to alleviate the mining problem, and that of transaction costs. These solutions include, the increase of the block size to e.g. 20 or 8 megabytes, the introduction of side chains as a means for more energy efficiency, and the implementation of lightning networks to introduce micropayment channels off-chain (Prisco, 2015). However, while significant progress can be achieved with new innovation and process adaptation, technological advancements are only one side of the coin. The neglected and often understated catalyser for sustainability, that of end-user behaviour, is too often left out in this debate. An increased focus on end-use and output, rather than on the process itself, brings the largest leverage effect on efficiency across an infrastructure, and thus should be an important means to achieving sustainability and climate stabilization (Grubler, 2017). Hence, while all these potential solutions to decrease blockchains overall environmental footprint might be technically feasible, they do not entice users to behave more consciously in their interaction with the technology, and thus they leave out user behaviour as a key driver for sustainable change.
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Blockchain transactions are recorded on all computers using blockchain (Blockchain Definition, Investopedia). For this reason, our second suggestion is that blockchain should be regulated to incentivize users to use energy efficient hardware for participating in blockchain. This may be a difficult rule to enforce because blockchain users are anonymous. What if the blockchain recording methods were to be changed so that it only records on computers with energy efficient hardware? There are multiple methods for validating transactions some of which are more energy efficient than others (Hartnet, Sam, January 24th 2018, “Beyond Bitcoin: how to build an energy-efficient blockchain that can help the energy transition, energy post”). Our group recommends outlawing (or discouraging) the least energy efficient methods for validating transactions. This may face opposition for being a violation of blockchains laissez faire character. Cryptocurrencies which are validated through blockchain, are taxable by the IRS (www.IRS.org, IRS virtual currency guidance: Virtual Currency is Treated as Property for Tax purposes; General Rules for Property Transactions Apply). This means that, at least in the United States, taxation could be used as a means for influencing financial behaviour using blockchain digital currencies. Therefore, our group proposes that we impose high taxes on instances of digital blockchain currency transactions which are not energy efficient.
Thirdly, to leave behind our current context, where dependence on fossil fuels is portrayed as a fact that we can never fully escape, innovative mechanisms to incentivize the production and use of green energy are needed. One solution could be the incorporation of a ̋sustainable cryptocurrency ̋ in the energy grid to support a scenario in which people are actually increasing their use of renewable energy and other key stakeholders (e.g. governments, producers) are truly supporting this goal. Recently, one such cryptocurrency has been proposed, the so-called NRG coin (Mihaylov et al., 2018). The NRG coin mechanism would proceed as follows:
In general, each home will have a gateway device
that interacts with the energy installation. These gateways have sensors that quantify how much energy ‘comes in’ and ‘comes out’ of the grid. When a consumer (1) injects, i.e. chooses to use, green energy into the network – which is operated by a distribution system operator (DSO) – she (2) receives summarized information about the demand and supply for renewable energy that exists in the grid. In turn, the figures from individual households and the information from the DSO about the composition of energy (e.g. renewable, grey) in the local energy grid are interpreted by a ‘smart contract’. Essentially, a ‘smart contract’ represents a decentralized software that matches the above-mentioned numbers and triggers (3) the creation of NRG coins. Notably, the contract is programmed to respect the following rule: when the consumer injects 1 kWh of green energy, she receives 1 NRG coin. To keep the NRG coin in circulation, a market for NRG coins will be created. The NRG coin currency market shall allow the consumer to (4) sell her NRG coins and (5) buy NRG coins by using traditional currency (e.g. Euro, Dollar, Pound). In terms of (6) covering the energy expenses, NRG coins are sent from the digital wallet of the consumer to the ‘smart contract’ as a Blockchain transaction. Next, (7) all the grid costs and utility fees are paid to the DSO, with the help of the ‘smart contract’. The contract looks at whether the numbers coming from the individual gateway devices do not contradict the DSO’s figures about the local grid. If no tampering is detected, new NRG coins are minted; hence, the currency is in circulation without the help of a central authority (Mihaylov et al., 2018).
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VI. Measures of Success
Significant indicators of success may be observed as a result of implementing our solutions. Sanctioning unsustainable behaviour can incentivize market actors to change their behavioural patterns because they will face a new paradigm, i.e. ‘it does not benefit us to do business as usual’. In the NRG coin system, given the fact that the prices of non- renewable electricity tend to rise, having the stable equation ‘1 NRG coin=1 kWh of energy’ means that the price of green energy is lower for consumers. Also, having a system that matches the green energy consumption of individual households with the green energy supply on the market enables consumers to make a more educated guess regarding their valuation (in terms of NRG coins) of renewable energy. Secondly, since the NRG coin mechanism acts according to the tenets of the Blockchain technology, it cannot be changed by any central entity from one-day-to-another. Put differently, the subsidies that consumers get are set at the beginning, so neither the government nor the utility companies can default on the promise they made to support particular rewards on the NRG coin system. Lastly, compared to Renewable Energy Certificates, NRG coins ensure that entities directly buy the actual green energy that is produced on the market, not simply the right to be declared utilisers of green energy (Mihaylov et al., 2018).
VII. Potential Barriers
The strongest opposition to the regulatory proposals will likely come from the current users of blockchain who value its current deregulated and autonomous nature. However, the counter argument to these concerns should be that blockchain must come out of the shadows in order for it to gain the moral respect of the masses. If this moral respect for blockchain comes into existence then the number of people who are interested in using blockchain will surely increase. Our allies in this struggle should be organizations for ethics in finance as well as organizations advocating for a sustainable, energy efficient economy.
Regarding the NRG coin system, four
obstacles can be identified. Technical difficulties, such as complex hardware and
blockchain scalability still represent crucial impediments towards implementing this ̋sustainable cryptocurrency ̋. Secondly, concerns regarding privacy and security are still prominent because consumers are not always comfortable with the untraceable and decentralized environment that Blockchain technologies operate on. Also, people need to be assured that there is excellent communication between the entities involved in the NRG system, including energy producers, gateway devices, utility companies and currency markets. Thirdly, the major challenge facing this system relates to the social adoption of the NRG coin, as full engagement within this network is key for guaranteeing the good functioning of this system. Finally, current energy-related and market-related conditions impede the implementation of the NRG coin system. Among them, one can count regulatory difficulties, the uncertain role of consumers (as members and miners) in the energy network and the permission of being able to freely enter/leave the network (Mihaylov et al., 2018). Our allies in overcoming these obstacles could be media enterprises (e.g. may provide comprehensive information), governments (e.g. can encourage the use of sustainable alternatives by designing new regulations) and tech-
savvy individuals and firms (e.g. might develop smarter solutions for implementation).
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