Blockchain Consensus Protocols, Energy Consumption and Cryptocurrency Prices

Abstract

Cryptocurrencies employ different consensus protocols to verify transactions. While the Proof-of-Work consensus protocol is the most energy consuming protocol, Proof-of-Stake and Hybrid consensus protocols have been introduced which consume considerably less energy. We employ portfolio analysis to explore whether energy is a fundamental economic factor affecting cryptocurrency prices. Surprisingly, our results suggest that, on average, cryptocurrencies employing Proof-of-Work consensus protocols do not generate returns that are significantly different from those that incorporate Proof-of-Stake consensus protocols. Even more surprising is that our results show that cryptocurrencies that incorporate Hybrid consensus protocols generated significantly higher average return than the other groups. A possible explanation for that phenomenon may be that investors’ demand for cryptocurrencies that they perceive as offering more trust is larger than for those that carry potential risks of blockchain manipulation.

Keywords: Cryptocurrency, Bitcoin, Blockchain, Consensus protocol, Energy efficiency, Momentum

JEL Classification: G12, G14