A critical review on Hedera network's energy consumption - why it is fundamentally flawed to make such a bold claim that it is the greenest blockchain/DLT

Hi everyone.

As I'm quite interested in this matter (i.e. energy consumption of a blockchain network), I find it probably appropriate for me to give a critical review on the article published by Juan Ibanez and his team at CBT-UCL about energy consumption of major blockchain/DLT networks and Hedera in particular.

For starter, the full article (2023Paper) can be found here: The Energy Consumption of Proof-of-Stake Systems: Replication and Expansion by Juan Ignacio Ibañez, Francisco Rua :: SSRN

It's worth noting that this article presents works developed on results/findings previously done and published in 2021 by Moritz Platt and his team at CBT-UCL and other institutions. This 2021Paper can be found here: https://arxiv.org/abs/2109.03667

First and foremost, key results/findings of Juan et. al.'s work are based formula [1] estimating energy consumption per transaction of a blockchain/DLT network (fig. 1)

Fig. 1: energy consumption per transaction presented in 2023Paper

There are two key issues related to this 2023Paper that should be further addressed:

Issue #1: energy consumption of Hedera when it scales its number of validators and the correctness of the current mathematical model of energy consumption of a blockchain/DLT

As presented in [1], the energy consumption per validator, p, its ratio with throughput of the network, p/l, and the two parameters k and lambda will define energy consumption per transaction. This leads to a few potential issues:

• The energy consumption per validator of Hedera, as presented in Appendix Table 3, is significantly higher than other L1 networks such as Algorand or Ethereum. And it will have significant impact when the network scales
  • And at present Hedera is still a permissioned network with barely 29 validators.
  • If Hedera can really scale to, let’s say thousands of validators as those L1 networks, the total energy consumed by Hedera will significantly increase. For example, if tomorrow there are 1000 validators in Hedera, the network will consume at least 33 times more energy than it does today. And this is still a conservative estimate since there's no guarantee that increasing number of validators to that level, if can be done, will not lead to significant degradation in Hedera network performance (which is also indicated in the Limitations section of the 2023Paper).
• Out of all PoS networks in the 2023Paper, only Hedera has a significantly low R2 with outliers in dataset.
  • This potentially means either the assumption that Nval is a linear function of a single variable p is potentially flawed or the linear regression will need to be re-done with a better/more reliable dataset. This is also discussed in the Limitations section of the 2023Paper.

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Fig. 2: Potential issues with the current power consumption estimation model in 2023Paper (page 4)

Issue #2: The significant differences in energy consumption of different transaction types

Ignoring this issue, as stated in in 2023Paper "We have not so far distinguished between transaction

types" basically the biggest flaw of this research and its results/findings. And I'll explain why.

Different transaction types will require different work that needs to be done by a blockchain network.

Hence, depending on the transactions and their types that a blockchain network is designed to serve, the network will consume energy differently.

As a result, a comparison on energy consumption per transaction for each transaction type is highly important and much more relevant than simply assuming that all transaction types are the same and use this flawed assumption to evaluate and compare energy consumption per transaction of blockchain networks.

To understand more about the significance of this transaction type issue, think about this fact:

Sending a message through validator nodes will require significantly less energy than a making a smart contract call which requires significantly higher computing power of the network.

But how "significant" this transaction type issue is? Is there anyway to measure this?

A good/practical way to measure the significance of this transaction type and its impact on energy consumption of a blockchain issue is to simply check the fee that a blockchain network charges for services it provide: “how much you have to pay for each service provided/supported by this network?”. As we often call it, we pay to get things done.

• In Hedera, if it is a Consensus-related service/operation such as ConsensusSubmitMessage (which is 99.99% of total transactions of Hedera at the time of this writing), the cost is $0.0001 whereas if it is a smart contract call, it is $0.05. Hence for Hedera, the difference is extremely significant (500 times). For more information please refer to Fees - Hedera
• In Algorand, if it is a payment transaction (e.g. sending Algo from one account to another), the cost is 0.001Algo (i.e. ~$0.000112 at the time of this writing when 1Algo ~ $0.112) whereas if it is a smart contract call, the fee is within the range of 0.002-0.006 Algo (i.e. ~$0.000224-$0.000672) depending on how many application calls required. Hence for Algorand, even though the difference between a token-transfer and a smart contract call operation is significant (2 to 6 times), it is negligible in comparison to Hedera.

Now if we look at the Metrika report (Metrika), we'll see why the 2023Paper provides a very incomplete picture about energy consumption of Hedera and other PoS networks such as Algorand.

As one can clearly observe in fig. 3 and 4, a blockchain designed to handle financial transactions in real time based on smart contracts such as Algorand is completely different from a blockchain that mainly handle event logging and timstamping activities through its HCS service such as Hedera.

And in terms of energy consumption, reflected through the financial cost for purchasing computing power of the blockchain, if you are an individual, a design team, a company, or a government looking to build your financial products on a blockchain network which requires several smart contract calls per seconds (an AMM, an DEX, a stock-market exchange, etc.), would you really build it on Hedera instead of Algorand? The difference is simply remarkable and the answer is crystal clear.

Fig. 3: Hedera monthly transaction reported by Metrika. 99.99% of the transactions are concensus-related (i.e. event logging and timestamping in a fairly order)

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Fig. 4: Algorand monthly transaction reported by Metrika. Major transaction types are Axfer (Asset Exchange), Appl (smart contract application call), and Pay (Payment)

My final words to wrap of this critical review is, while significant works have been conducted by the research team, it is fundamentally flawed to use it results/findings to make such a bold claim that Hedera is the greenest blockchain/DLT. In fact, it is only "green" if it is and will be used mainly for event logging and timestamping as it has been used since inception.

I look forward to everyone feedback. Thank you.