Bitcoin, Green Mining, and the Possibility of a More Sustainable Future

One of the most common topics of discussion around blockchain technology is sustainability. Blockchain networks, especially proof-of-work (PoW) networks such as Bitcoin, consume a lot of energy. It is estimated that as of April 2, 2024, Bitcoin mining produces about 85 million tons of CO2 equivalent per year. Even if new blockchain consensus mechanisms quickly gain popularity, Bitcoin's PoW architecture is likely to persist.

The PayPal Blockchain Research Group, in strategic collaboration with Energy Web and DMG Blockchain Solutions (“DMG”), presents an opportunity to accelerate the clean energy transition for Bitcoin mining. Like many other mechanisms in web3, we propose to leverage cryptoeconomic incentives to encourage desired behavior: Bitcoin miners using low-carbon energy in their mining operations. The full research paper linked below outlines an opportunity that not only rewards Bitcoin miners for operating with sustainable energy, but also increases the likelihood that participating entities will route on-chain transactions to those specific miners.

Incentivize desired activities with cryptoeconomics

Rational miners are driven by cryptoeconomic incentives. They expect to be rewarded with an asset (Bitcoin BTC) that is worth more than the resources they invested to earn that reward. Most of the work in blockchain history has focused on how to get a group of decentralized individual miners to perform their tasks honestly and responsibly in maintaining a decentralized ledger.

Since 2008, Bitcoin has achieved robust, secure, decentralized, and censorship-resistant maintenance of its ledger through its decentralized community of miners. In other words, the basic cryptoeconomic structure of Bitcoin and its proof-of-work consensus mechanism has been successful. The question now is whether additional cryptoeconomic incentives can be added on top of the basic proof-of-work mechanism to encourage more environmentally sustainable actions that we as a community desire.

EnergyWeb, a partner of the PayPal Blockchain Research Group, has developed a clean energy verification platform that allows Bitcoin miners to obtain low-carbon certification for their mining operations. These "green miners" have public keys associated with them (we call them "green keys"), and rewards can be distributed to these keys. On-chain transactions are preferentially routed to "green miners" by broadcasting with low transaction fees, but a portion of the Bitcoin rewards will be "locked" in a multi-signature payment address. "Green miners" will be incentivized to mine these mines because only they are eligible for additional "locked" Bitcoin rewards.

The PayPal Blockchain Research Group hopes to influence people’s preferred behaviors by proposing ways to reapply fundamental cryptoeconomic incentives to improve and optimize existing powerful networks. Sustainability is an important topic in almost every emerging and established industry in the world today, and our goal is to support the role of cryptocurrency in a sustainable future.

1. Introduction

Bitcoin mining can become a very energy-intensive process, raising concerns about its carbon footprint. As of April 2, 2024, some reports estimate its annual emissions to be over 85 million tonnes of carbon dioxide equivalent (MtCO2e).

The reason for such a significant impact is the "Proof of Work (PoW)" consensus mechanism used to secure the Bitcoin network. In the PoW mechanism, miners compete to find solutions to blocks (i.e., cryptographic hash values), which requires powerful computing hardware (such as application-specific integrated circuit (ASIC) machines). As more miners join the mining competition, the difficulty of finding block solutions tends to increase. The continuous need for powerful computing power by the proof of work mechanism inevitably leads to a large amount of electricity consumption. Miners' use of carbon-based energy to generate electricity contributes to the carbon footprint of the Bitcoin network.

This article proposes a solution that incentivizes miners who use low-carbon energy. The proposal would reward miners who mine using verifiable low-carbon energy in a trustworthy, third-party-independent way (i.e., without having to trust a third party to get the reward). In addition, the scheme also aims to increase the likelihood of on-chain transactions being routed to such miners. This is not only support for greener mining, but also encourages other miners to switch to clean energy. By promoting this transition, the solution aims to support the decarbonization of the Bitcoin network in the long run by rewarding miners who use clean energy, while also working to maintain a good degree of decentralization and strong security of the network.

2. Solution Overview

In summary, the solution involves identifying miners that use low-emission energy, routing on-chain transactions to these miners first, and rewarding them using a 1-of-n multi-signature script attached to the on-chain transaction (i.e. any one of the n miners can spend these bitcoins). The specific steps are as follows:

1. Identifying Green Miners : The first step is to identify miners that use a sufficient proportion of low-carbon energy in their mining operations. In this article, we will refer to these miners as “green miners.” We will explain how to identify them and how to determine whether their energy use is sufficient in Section 3 below.

2. Green Keys : Once green miners are identified, the next step is to obtain their public keys, which will be used to distribute rewards. This article refers to these public keys as "green keys", and they may be different from the keys that miners use to collect block rewards.

3. Multi-signature payment address : Green keys are then aggregated from different Green miners into a single 1-of-n multi-signature address (designated as the payment address), which is used to distribute Bitcoin-denominated rewards to miners. Therefore, if there are n Green miners, there will be n Green keys, but only one 1-of-n multi-signature payment address. This payment address will allow any one Green miner to claim the reward. Section 3 discusses the management of Green keys and payment addresses.

4. Prioritize routing transactions to green miners : To prioritize routing transactions to green miners, on-chain transactions are broadcast with a lower transaction fee (see below for details). Attached to the on-chain transaction is another UTXO containing some bitcoins locked in a 1-of-n multi-signature payment address as a reward to incentivize green miners. Due to the lower transaction fees, most miners will not be able to process these transactions profitably, but green miners will be eligible for additional rewards for looking for these transactions (which we will refer to as green transactions below, as shown in the figure below as "A").

5. Incentive mechanism for green mining : When a green miner receives a transaction in the memory pool, they identify it as a green transaction based on the multi-signature payment address. The miner needs to include this transaction when assembling a block, and include another redemption transaction in the same block (as shown in the "D" in the figure below) to consume the UTXO of the bitcoins locked in the payment address. This additional transaction will have a recipient address belonging to the green miner.

Therefore, only green miners who include green transactions, redeem transactions, and successfully mine the next block are guaranteed to receive Bitcoin rewards. As mentioned above, although low transaction fees will prevent non-green miners from prioritizing these on-chain transactions, green miners will want to prioritize these transactions because winning the block will allow them to receive Bitcoin rewards locked in the multi-signature payment address. This will increase the probability of routing on-chain transactions to green miners and incentivize them when they win blocks.

3. Identify Green Miners

To help identify green miners and onboard them to the solution, we can leverage solutions from providers like Energy Web. Energy Web is a global non-profit dedicated to accelerating the energy transition. Their Bitcoin Green Proof initiative aims to promote transparency and support alignment between Bitcoin mining and global decarbonization efforts. Miners can apply for and share their sustainable mining certification using the Bitcoin Green Proof verification platform. Miners can then selectively disclose these certifications and the underlying sustainability data to crypto market participants and business partners.

Miners can obtain Bitcoin Green Proof certification by achieving a Clean Energy Score or Grid Impact Score above 50. Details on how these scores are calculated can be found here (providing links to details is out of scope).

Energy Web will also develop a new platform for miners who want to participate in this solution. Using this new platform, green miners can register themselves and share their green (public) keys. Participants in the green incentive program can then access this information to simplify the process of collecting green keys that can be used to generate and manage 1-of-n multi-signature payment addresses.

While using Energy Web’s Bitcoin Green Proof verification platform is a pragmatic solution to identifying green miners, other solutions exist that could identify and onboard these miners in a more decentralized manner. For example, other certification bodies could be encouraged to issue interoperable certificates to Bitcoin miners as proof of the sustainability of green incentive programs.

4. Test miner participation

We successfully tested the idea behind this solution with DMG Blockchain Solutions (DMG), a Bitcoin mining company. DMG is a publicly listed, vertically integrated blockchain and cryptocurrency company that manages, operates and develops end-to-end digital solutions to monetize the blockchain ecosystem.

In our tests, we broadcast multiple low-fee transactions to see how well the solution works at different levels of on-chain transaction volume. Our expectation is that these transactions will have long confirmation times or will eventually be dropped by the network, depending on the volume. This will increase the chances of green miners picking up these transactions. We also want to test the ability of miners to identify a green transaction, include it in a block, and add another separate transaction within the same block to claim the reward. We will discuss an example test in the following section.

4.1 Test Setup

We publicly broadcast two transactions with hashes of 7c60f98157c6d9d958cc90cdf2ae30d67c237e0bb8aab03688f621004ea1a768 and 0a929ba61c72a4f3311102e7c127bb9bddabc0c652ee713a9fc791fd6fab73e1, each containing 0.0001 BTC as a green reward sent to the payment address 32orJvB4V7sxH8m6AwwLVBKKGm142UgiYg. At the time, the non-priority fee rate of the Bitcoin network was about 72 sat/vB, and the fees for these two transactions were set to 64.8 sat/vB and 67.1 sat/vB, respectively.

4.2 Test Results

The transaction entered DMG’s mempool shortly after it was broadcast. They were able to detect our low-fee transaction and included it in their block template. It took them two days to mine the next block. As we expected, no other miners picked up the low-fee transaction during this time. When DMG mined the block, they included the low-fee transaction and claimed the green reward by including transaction 8e59cf7d258e08716bfc6d4f54389495d7d62545c5950accc16ae371ab4333c3 in the same block.

This validates our belief that transactions can be preferentially routed to green miners through this mechanism and that these miners can receive the designated rewards.

5. Notes

5.1 Low Fees vs. Zero Fees

On-chain transactions can broadcast low or zero transaction fees to dissuade non-green miners from picking them up. Here we discuss the tradeoffs of each option.

• Zero Fees:

• Transactions may not be routed to any miners. Some Bitcoin nodes use fee filters to decide which transactions to relay, and they may configure the node to ignore or prioritize transactions based on fees. Transactions with low or zero fees may be filtered out and not relayed to the wider network.

• Malicious actors can flood the network with many zero-fee transactions, creating a transaction flood DoS attack.

• Pros: Can greatly discourage non-green miners from picking up our transactions.

• shortcoming:

• Sufficiently low fees:

• It can mitigate the possibility of transaction flooding DoS attacks.

• In some cases, non-green miners may still choose to pick up low-fee transactions (especially when on-chain transaction volume is low). However, in this case, non-green miners will not be able to receive rewards from 1-of-n multi-signature payment addresses, while any green miner can.

• The rewards can be seen as an additional incentive for green miners to adopt sustainable mining practices (albeit more of an indirect form of grant).

• advantage:

• Disadvantage: Non-green miners may occasionally mine these transactions.

As more green miners join the solution, the likelihood of non-green miners mining these transactions should decrease further. In addition, even if non-green miners mine low-fee transactions, green miners can earn rewards by broadcasting redemption transactions. Green miners are still incentivized to mine on their own because they are guaranteed to receive rewards themselves, rather than from another green miner in the multisig set.

Therefore, transactions should generally be broadcast with a transaction fee low enough to both dissuade non-green miners from picking up green transactions, but high enough to be relayed to the wider Bitcoin network and mitigate the possibility of a transaction flood DoS attack.

5.2 Storage Space

As more green miners join, the redemption transaction size for bitcoin locked in a 1-of-n multisig may increase. This is because (depending on the multisig implementation) the size of the redemption script may be directly proportional to the size of n. Since miners need to add additional transactions to the block to claim the reward, this solution also requires additional blockchain space. In the Bitcoin ecosystem, blockchain space is a precious resource. To make efficient use of blockchain space, we can implement the following steps to ensure that the redemption script is space efficient:

a) First organize the miners into m groups. If there are N miners, each group will ideally contain N/m miners. To achieve this, choose a suitable value of m that ensures that the remainder of N/m is minimized (ideally zero).

b) For each new transaction to be broadcast, loop iterates through the m groups to select the next set of miners, obtain their public keys, and use them in the 1-of-n multi-signature script, where n is the number of miners in the group. For example, if there are 7 (i.e. N = 7) green miners, you can choose to create 3 (i.e. m = 3) groups and adjust the remaining miner in the first group. Therefore, the first group will have n = 3 miners, and the remaining two groups will have n = 2 miners each.

This will ensure that the transaction size for redeeming bitcoins is limited to the number of miners in the group. The trade-off we need to make with this option is that it reduces the number of miners that can collect rewards from N to ceil(N/m). If the computing power of a particular number of miners in a group (i.e., n) is limited or n is small enough, this can cause transaction confirmation delays, as discussed below.

5.3 Transaction Confirmation Time

Prioritizing green miners may result in longer transaction confirmation times, as the solution is designed to prevent non-green miners from processing our transactions. The grouping method explained in Section 5.0 above may further extend confirmation times. If a transaction is not confirmed within an acceptable time frame, fee increase mechanisms such as RBF (Replace-By-Fee) and CPFP (Child-Pays-For-Parent) can be used to speed up confirmation, although the risk of non-green miners processing transactions will increase. This problem will be alleviated as more green miners join the solution.

Note that even malicious green miners may use CPFP to increase transaction fees, thereby increasing the chances of non-green miners picking up green transactions. However, such behavior can be detected on-chain and appropriate action can be taken, such as removing the miner from the solution.

5.4 Privacy

Due to the inclusion of 1-of-n multi-signature scripts, observers can identify which transactions are incentivizing miners. If there are not many participants incentivizing green miners in this way, it may be possible to tie transactions to the specific VASP that broadcasted the transaction. However, on the other hand, this trade-off would allow transparent proof that rewards were indeed paid to green miners.

5.5 Mining Pools vs. Individual Miners

Miners can either work in groups (referred to here as pool miners) to increase their chances of successfully mining a block by combining their computing power and resources, or they can work individually (referred to here as individual miners) without joining a pool. For miners working in groups, there is an entity called a pool operator that manages and operates the pool. The pool operator is also usually responsible for distributing rewards to the miners who contribute to the pool.

For our 1-of-n multi-signature script, since pool miners do not have the authority to decide which transaction will be included in the next block, the green key they contribute to the pool cannot be used. Therefore, they may not be able to claim the bitcoins locked in the multi-signature script. To solve this problem, the script needs to reference the pool operator's key, which then distributes the rewards to the pool miners. Therefore, 1-of-n multi-signature payment addresses will only be created using the green key of the pool operator, individual miners, or a combination of both, but not the pool miners' keys.

The situation may change when pool miners adopt the new features of the Stratum V2 protocol, which is an improvement and upgrade to pool mining. This will allow them to include the transactions they want to include in the block. Therefore, they will not have to rely on the pool operator to claim the bitcoins locked in the 1-of-n multi-signature script, making the solution more decentralized. The solution will then be able to use the pool miners' keys in the 1-of-n multi-signature script instead of the pool operator's keys.

6. Alternative methods

The solution outlined here aims to achieve good decentralization, ease of implementation, and independent trust in distributing rewards. There is no centralized entity that distributes rewards; instead, they are guaranteed to receive rewards when they mine the indicated on-chain transactions and include redemption transactions. However, as mentioned previously in the "Notes" section, this solution requires miners to add additional transactions to the block to claim the reward, and there is some possibility that non-green miners may pick up green transactions even if they cannot claim the reward.

While we currently consider these tradeoffs to be acceptable, alternative solutions could be designed where transactions and rewards could be sent to miners via private mechanisms rather than using a public mempool. Technologies such as the Lightning Network and smart contracts could also be alternative solutions to these issues.

However, this may come at the cost of reliance on trust and more complex implementation.

7. Conclusion

As interest in Bitcoin and the number of applications using the Bitcoin blockchain continue to grow, we should be mindful of the environmental impact that large-scale Bitcoin mining may have. One way to reduce the carbon footprint of Bitcoin’s proof-of-work consensus protocol is to increase the use of low-carbon energy sources for Bitcoin mining operations. This paper proposes a method to incentivize miners to use these “greener” energy sources that is compatible with current usage while maintaining the decentralized model inherent to the Bitcoin protocol as much as possible. We hope that this solution will contribute to further discussion and innovation around Bitcoin and its use cases, and welcome feedback from the industry on potential improvements.