Pursuant to President Biden’s March 9, 2022 Executive Order “Ensuring Responsible Development,” the Office of Science and Technology Policy (OSTP) issued a September 8, 2022 report on the impact of distributed ledger technology on climate change and the U.S. environment A report on the impact of the policy. or digital assets. The OSTP report, titled “Climate and Energy Impacts of Crypto Assets in the U.S.” (Report), is the first in a series of reports issued by various government agencies required by the executive order.1
In the report, OSTP recognized the importance of cryptoassets to U.S. financial innovation and the significant climate and energy impacts of distributed ledger technology (DLT) and the use of cryptoassets, and emphasized encouraging responsible development. The release of the report coincides with Ethereum’s transition from a proof-of-work to a proof-of-stake consensus mechanism — a move that will significantly improve the energy efficiency of the Ethereum blockchain’s method of verifying transactions.
Tasks of OSTP
The Biden executive order aims to support responsible digital asset development in line with U.S. policy goals. It instructs OSTP (along with various other federal agencies) to analyze DLT’s impact on the environment, their role in driving global climate change efforts, and the links between DLT and economic and energy transitions.
To advance this mission, OSTP’s report examines concepts including DLT’s environmental impact (including the energy impact of cryptocurrency consensus mechanisms), potential alternatives, and the associated trade-offs that may arise; DLT and the Economic and Energy Transition linkages (including the impact of such technologies on grid management, energy reliability and energy efficiency initiatives); and the industry changes needed to further mitigate global climate change.
Crypto Assets and Climate
According to the report, crypto assets use a lot of electricity and have a significant carbon footprint, creating tensions between U.S. efforts to reduce “climate damage” and the financial and other benefits crypto assets promise. OSTP cites U.S. commitments to reduce greenhouse gas emissions by 50% to 52% from 2005 levels by 2030; achieve a carbon-free grid by 2035; achieve net-zero emissions by 2050; and prioritize among those goals Environmental justice issues. However, “[d]Depending on the energy intensity of the technology used, cryptoassets could hinder broader efforts to achieve net-zero carbon pollution in line with U.S. climate commitments and goals. “2
The report states that crypto-asset technologies typically require large amounts of electricity for asset generation, ownership, and transactions. The OSTP states that the energy needs of a cryptoasset network stem from four major functions — data storage, computing, cooling, and data communications — where computing uses a considerable amount of electricity. In turn, the consumption of electricity to support these functions leads to greenhouse gas emissions and pollution, as well as other local impacts, including stress on electricity infrastructure, grid instability, and higher energy prices for local consumers due to increased demand from crypto asset miners.
OSTP also noted in its report that the use of cryptoassets and DLT continues to expand rapidly, leading to an increase in mining and computing activity, along with a corresponding increase in energy consumption. The U.S. electricity use for crypto asset mining is estimated to have tripled since January 2021, while globally, the annualized electricity use of crypto assets is expected to double between 2018 and 2022 Double or even quadruple.3
In the report, OSTP also compared the energy consumption of cryptoassets with those associated with other traditional financial transactions. The report concluded that while it is difficult to directly compare crypto-asset transactions with Visa, Mastercard or American Express transactions, the three agencies together reported electricity use of around 500 million kilowatt-hours in 2020, including all businesses ( including electronic payments), while Bitcoin is expected to use 68 billion kWh in the same year and Ethereum will use 8 billion kWh:[I]In other words, the three entities consumed less than 1% of the electricity that Bitcoin and Ethereum used in the same year, despite processing several times as many on-chain transactions and supporting their broader enterprise operations. “4
Consensus mechanism and different electricity usage
As mentioned earlier, the report states that energy use in cryptoasset networks is primarily focused on computational functions, but acknowledges that within the computational space, energy use depends on the consensus mechanisms used by cryptoassets to verify transactions, and has the advantage of being a fraudulent Trading sets high barriers and achieves overall system reliability.
For example, the report explains that under the proof-of-work (PoW) consensus mechanism, crypto-asset transactions are verified through mining. PoW requires participants in the network (miners) to compete to perform and solve energy-intensive computations, with “winners” allowing new blocks of transactions to be proposed to other participants for consensus. Winning miners are compensated in the form of newly minted cryptoassets. While this process ensures that miners are willing to spend a lot of computation and energy verifying transactions, and makes it more difficult for malicious actors to verify inaccurate transactions, it means that miners use large and energy-intensive data centers to perform this work. According to the report, as of August 2022, Bitcoin and Ethereum PoW blockchains are estimated to account for the majority of global crypto asset electricity usage (60% to 77% for Bitcoin and 20% to 39% for Ethereum).5
Compared to PoW, under the Proof of Stake (PoS) consensus mechanism, participants stake a certain amount of cryptoassets for the chance to be selected to validate new transactions, and likewise add them to the blockchain and receive rewards. The more crypto assets a participant stakes, the greater the chance of becoming a selected validator. Since the initial equity investment may be relatively high, individuals can join the equity pool to participate in the PoS network without having to contribute full equity.
PoS blockchains consume significantly less energy than PoW blockchains because they do not require miners to compete to solve energy-intensive complex mathematical formulas.6 OSTP states that the global electricity usage of the PoS crypto-assets analyzed is estimated to account for less than 0.001% of global energy usage (compared to 0.4% of global annual electricity usage in 2022 for all crypto-assets-enabled blockchains to 0.9%), accounting for about 0.25% of global energy use. Percentage of total global PoW electricity lower bound.7 The report includes positive statements regarding the transition of the Ethereum blockchain from PoW to PoS.8
Recommendations and Alternatives
The report recommends that, in order for the United States to achieve its climate policy goals, cryptoasset policy during the ongoing energy and climate transition should focus on the following key factors: reducing greenhouse gas emissions and pollution, and avoiding operations that affect local communities by increasing consumer electricity costs, reduce grid reliability or negatively impact underserved communities that suffer varying degrees of climate damage. The report recommends that federal agencies provide technical assistance and initiate a collaborative process with various stakeholders in and around the DLT and cryptoasset spaces “to develop effective, evidence-based approaches for the responsible design, development, and use of environmentally responsible cryptoassets. performance standard technology.”9 OSTP further recommends that these standards include very low energy intensity, low water usage and noise, and deployment of clean energy.
If federal agency involvement proves ineffective in reducing the impact of cryptoasset innovation on U.S. climate and energy goals, the report states that “the government should explore executive action, and Congress may consider legislation to limit or eliminate the use of high-energy cryptoasset mining intensity consensus. mechanism,”10 Once again bringing PoW applications (especially the Bitcoin blockchain) to the heart of the cryptoasset energy reform discussion.
The report comes after other jurisdictions discuss blockchain technology, particularly the energy consumption of PoW. For example, there were news reports earlier this year that Sweden’s financial regulator and the European Commission discussed the possibility of outright banning Bitcoin’s PoW mechanism due to its impact on the environment.11 The report does not recommend such a ban, but instead focuses on the costs and benefits associated with DLT and cryptoasset development relative to the environmental burden: “Responsible digital asset development will encourage consensus mechanisms that minimize energy use and environmental impact while maximizing Profitable customers.”12
1 OSTP’s mission is “to maximize the benefits of science and technology to advance the health, prosperity, safety, environmental quality, and justice of all Americans.” To this end, OSTP coordinates interagency science and technology policy and provides science and technology analysis on federal programs and policies. For more information click here.
2 Report, p. 4.
3 Report, p. 4.
4 Report, p. 16.
5 Report, p. 14.
6 The report includes a table summarizing recently published electricity usage estimates for selected proof-of-work and proof-of-stake blockchains. ocean Report, p. 31.
7 Report, p. 6.
8 Report, p. 8. 14. Other consensus mechanisms besides Proof of Work and Proof of Stake include Proof of Capacity and Practical Byzantine Fault Tolerance, both of which are reported to be more energy efficient than Proof of Work (but not widely adopted). Except In addition to the associated electricity burden, factors such as security, decentralization, and scalability may affect the adoption or revision of consensus mechanisms.
9 Report, p. 7.
10 Report, p. 7.
11 sea, really., Billy Bambrough, “‘Targeting Bitcoin Price’ – Internal Documents Reveal How EU Is Cracking Down on Bitcoin and ‘Securing’ Ethereum,” Forbes.comApril 24, 2022.
12 Report, p. 11.