ESMA vice chair seeks proof of work mining ban for European Union

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The chair of sustainable finance at The International Organization of Securities Commissions (IOSCO) says proof of work (PoW) mining should be banned in the European Union. Erik Thedéen, who is also the vice chair of the European Securities and Markets Authority (ESMA) and the director-general of Sweden’s Financial Services Authority, says he proposed a PoW ban because the energy consumed by PoW mining allegedly makes it difficult to meet the climate change goals in the Paris agreement. 

For years, the amount of energy consumed by block reward mining operations has been a topic of discussion. The House Energy and Commerce Committee recently held a hearing on block reward mining, titled “Cleaning Up Cryptocurrency: The Energy Impacts of Blockchains.”

The main problem that government representatives have with mining is that they believe the amount of energy it consumes is not sustainable. When arguing about block reward mining’s impact on the environment, they often cite statistics such as block reward mining makes up 0.6% of the world’s total energy consumption and consumes more energy annually than Norway.

To reduce block reward mining energy consumption, Thedéen suggests a PoW mining ban and a switch to proof of stake (PoS) mining.

“The solution is to ban proof of work,” Thedéen told the Financial Times, “Proof of stake has a significantly lower energy profile.”

Proof of work vs proof of stake

Proof of stake mining consumes less energy than proof of work mining because block creation is randomized among nodes rather than a competition amongst nodes. Because block creation is randomized, there is no incentive to gain a competitive edge by accumulating more computing power (hash power); the more computing power you have, the more electricity your mining rig or mining farm uses.

“PoS is a class of distributed ledger consensus mechanisms that works by selecting transaction validators quasi-randomly, as it is done in proportion to the quantity of cryptocurrency they have staked as collateral,” said Bryan Daugherty, the North American regional manager of BSV Blockchain’s association.

“PoW nodes produce blocks by receiving, broadcasting, batching transactions, and solving difficult mathematical computations-which result in high energy usage, to earn the right to add the transactions into the next block,” he added.

Although PoS mining is more energy efficient than PoW mining, it is not a direct substitute for PoW mining. Each consensus algorithm comes with unique benefits and drawbacks and accomplishes different objectives for the network.

“The PoS consensus may spread claims to be less energy-intensive than PoW but it does not achieve the goals, it does not have the capabilities, and it does not support the objectives pursued when using blockchain technology. These objectives can be summarized as a global solution for data management, a secure, stable, public, permissionless, scalable, and sustainable system. Although PoS may boast of sustainable levels of consumption, it completely lacks the security needed for a nation’s public blockchain,” said Daugherty.

“PoS consensus is achieved through the voting of the largest ‘stake-holders.’ This governance model facilitates control of the ‘truth’ by those who hold the most coins, masking themselves as distinct entities, whilst in fact, opening the network to Sybil attack and questionable record-keeping.”

How to make proof of work mining more efficient

Analysts typically use BTC as the benchmark when gauging the energy efficiency of proof of work mining. However, using BTC as the standard leads researchers to a conclusion that does not accurately encapsulate all PoW networks.

“There is a false belief that PoW consensus mechanisms are computationally unscalable and overly energy consumptive. This has been a prominent view from blockchain researchers who utilized BTC as their PoW benchmark. New independent blockchain energy consumption modeling, confirms that block size and throughput have a significant effect on PoW efficiency. BTC blocks are limited to 1MB in size, occurring on average every 10 minutes. The capped block size limits how many transactions can be included, which has a direct negative effect on its carbon footprint,” explained Daugherty.

“In comparison, Bitcoin SV (BSV), is a PoW enterprise blockchain with unbounded blocks, as well as the utility to securely share, transfer, manage, immutably-store, monetize, verify, and utilize data, enabling more than a ‘store of value.’ Hence, as the utilization and network increase, the environmental impact of this technology, including carbon footprint, decreases,” he added.

BSV does not have a block size limit. An unlimited amount of data can fit into each block. Although mining a BSV block consumes roughly the same amount of energy as mining a BTC block, on BSV, there is more data/value being transferred in each block, which ultimately makes the BSV network more efficient than the BTC network. In fact, Canadian accounting firm MNP released a report in 2021, in which it concluded that BSV is the most efficient of the BTC, BCH, and BSV group and predicting BSV would become more efficient as usage increases.

Is banning proof of work feasible?

Although proof of stake mining is an energy-efficient alternative to proof of work mining, it accomplishes different objectives for a blockchain network. It introduces new attack vectors that could prevent enterprises searching for a secure global and sustainable distributed data ledger from using a blockchain.

And even if a country or union were to ban proof-of-work mining, transitioning to proof of stake is not as easy as flipping a switch.

“To switch from PoW to PoS requires a staking protocol and rules to be established and stakeholders to participate. It would require a hard fork after implementing the PoS algorithm. Validators would need to be set up and be ready to run when the fork occurs. For an established blockchain to switch from PoW to PoS it could take many years,” said Daugherty.

Watch: CoinGeek New York presentation, A Study of Bitcoin & Blockchain Energy Consumption