On the Energy Consumption of a Decentralized Financial Sector

The financial sector has seen a trend toward more decentralization, especially led by the introduction and prevalence of blockchain. However, decentralization technologies may increase energy consumption through the use of potentially less optimized hardware, replication, and consensus-related operations, as well as further cryptographic overhead when involving privacy enhancing technologies (privacy-enhancing technologys (PETs)). Blockchain technology is usually at the center of criticism related to electricity consumption, manifesting in sensationalized headlines such as “Bitcoin [or blockchain] uses more electricity than country X.” In this chapter, we focus on important distinctions that need to be made when analyzing the electricity consumption of a blockchain. We show that while for proof of work (PoW) blockchains, electricity consumption is an inherent feature and may justify such headlines; the energy intensity of blockchains with other consensus mechanisms is multiple orders of magnitude lower. We also argue that for these blockchains non-PoW blockchains and decentralized systems in general, a trade-off between the security achieved through decentralization and energy consumption exists, as the additional electricity consumption compared to centralized systems can mainly be attributed to redundant computations introduced by decentralization. Lastly, we discuss different approaches to managing the tension between decentralization and electricity consumption.