Several weeks later, on 13 May 2021, Musk cancelled his plan. The reason? Bitcoin is a major contributor to the climate crisis.
According to Cambridge University’s Centre for Alternative Finance, the computing power required to produce the cryptocurrency uses more electricity each year than Malaysia or Sweden. Most of this is drawn from coal-guzzling furnaces in China. The colour of digital money, it seems, is a sooty grey.
For Tesla, encouraging Bitcoin’s use chafed against its green ethos.
But, like it or not – and many environmental campaigners and investors do not – the world of finance is becoming increasingly invested in digital currencies. Tesla’s handbrake turn is likely to be only a blip on their rise. The likes of Visa and Paypal are on board and the central banks of many countries are investigating their possibilities.
How, then, can these virtual greenbacks be made greener?
Researchers from the University of Edinburgh’s School of Informatics have been investigating the problem – and may have come up with a solution.
Blockchain of fools
The major issue, according to Professor Aggelos Kiayias, Chair in Cyber Security and Privacy, is the lack of green credentials of blockchain, the record-keeping technology that underpins how Bitcoin works.
When people use Bitcoin in exchange for goods or services a transaction occurs. Purchases made using traditional currencies in shops or online are documented by banks, point-of-sale systems and physical receipts. Bitcoin achieves the same thing by clumping transactions together into ‘blocks’ and adding them to a public ledger known as the blockchain.
“In order to offer a safe and responsive ledger, such protocols rely on the resources invested by all the participants,” says Professor Kiayias. “In the case of Bitcoin this resource is the computational power of those who maintain the ledger.”
Every time a transaction takes place, it is broadcast to every computer on the Bitcoin network. This system of interconnected, decentralised computers keeps a record of the currency’s use and also verifies its creation through a process known as mining.
The more Bitcoin is spent and mined – operations that rely upon evermore complex mathematical puzzles – the more computer power is needed. Ironically, as the currency becomes increasingly robust, the more it damages the environment.
“The more miners that join the system, the more secure the protocol becomes but also, tragically, the more energy it wastes,” says Professor Kiayias. “Furthermore, this happens without any other benefit in terms of functionality.”
The inefficiency of Bitcoin’s design motivated Professor Kiayias and his team at the School of Informatics’ Blockchain Technology Lab to design new blockchain protocols that can achieve a similar level of decentralisation but at a fraction of the environmental cost.
Working with industry partner IOHK, the Ouroboros suite of blockchain protocols were born. The name comes from the ancient circular symbol of a serpent eating its own tail.
Instead of relying upon a vast network of computers to verify the legitimacy of someone wishing to mine or spend Bitcoin, the Ouroboros protocols use a virtual resource – the digital coins recorded in the ledger itself. The coins contain their own digital DNA, making them impossible to counterfeit. Like the serpent nibbling itself, it relies upon itself for sustenance and support rather than something external.
“Because the resource is virtual, proving that one possesses it, is an instant and effortless operation, as easy as pointing to your account number when challenged with a list of different accounts,” says Professor Kiayias. “Compare this with Bitcoin, where one needs to prove they possess computational power, and hence they have to use electricity to power a computer so it solves a complex mathematical problem.”
By swapping the physical resource of computing power for a virtual resource, the protocol has minimum energy expenditure but retains all the benefits of Bitcoin in terms of inclusiveness and decentralized operation.
These protocols have now been implemented and they form the backbone of the Cardano ledger, an alternative cryptocurrency to Bitcoin, which has hundreds of thousands of users participating in staking – the equivalent of mining. Ouroboros has also influenced other cryptocurrencies and distributed ledgers in the industry such as Polkadot.
Do the green shoots of Ouroboros point to the future of cryptocurrency design? Prof Kiayias believes they must be environmentally friendly, otherwise they will go up in smoke.
“Digital currencies – of some form – are inevitable as a technology and will dominate the financial world in the coming years,” he says. “At the moment, the technology and the associated regulatory landscape is still maturing. It is natural that a variety of designs is being tried and as we move forward, those that fail the basic requirements will either evolve to acquire them or become obsolete. It goes without saying that a minimal carbon footprint will be a hallmark of the digital currencies of the future.”
Image credits: main picture Bulat Silvia/Getty; Bitcoin graphic da-kuk/Getty