We live on an increasingly fragile planet, where generating the massive amounts of energy needed to sustain our lifestyles is taking a heavy toll on our environment. With this in mind, one can understand why cryptocurrencies and blockchain are coming under intense scrutiny. If Iceland is using more energy to power Bitcoin mining than it is to power its homes, then the question of cryptocurrencies’ impact on our environment is both unavoidable and justifiable.
Powering the Crypto Machine
Why do cryptocurrencies require so much energy? It’s all due to mining, a fundamental part of how most cryptocurrencies work and how transactions are verified and added to the blockchain – the distributed ledger holding all the transactions.
Each cryptocurrency network runs slightly differently, but taking Bitcoin as an example, every 10 minutes on average all the cryptocurrency’s transactions are grouped together, a miner ensures the authenticity of information in them, and adds the transactions to the blockchain. In return the miner gets a reward that consists of the transaction fees and an pre-determined allocation of coins. For Bitcoin, this reward is currently worth around $85,000 per block.
To keep things fair, the mining process itself involves competing with other cryptominers to solve complicated mathematical problems. It’s the miner that solves the problem first that gets to add the block to the blockchain, earning the reward. Solving the problems requires two things – a specialised piece of computational hardware and electricity.
Thanks to the value of the rewards at stake, the amount of energy consumed to facilitate the process is staggering. According to digiconomist, the Bitcoin network alone consumes about 71 TWh of electricity per year, while the Ethereum network uses about 20.5 TWh. This means that together they account for energy consumption on a par with the United Arab Emirates (~96 TWh per year).
It is clear then that sustaining Bitcoin and other cryptocurrencies demands tremendous amounts of energy, simply because of the computational power necessary to solve these increasingly cryptic puzzles.
Bitcoin and other cryptocurrencies are running a consensus algorithm called Proof of Work (POW), which is used to confirm transactions and produce new blocks to the chain. As the price of the cryptocurrency increases, more miners begin mining and the difficulty of the proof-of-work algorithm increases. As a result, greater amounts of energy are used for mining because the price is higher, requiring more computational power.
Renewable Energy Overlooked
Bitcoin’s immense expenditure of energy could be overlooked if it was powered by renewable energy, but instances of this are few. Iceland, for example, is powered by geothermal energy, so at least crypto mining in this region of the world has less of an impact. Unfortunately, roughly 60% of mining power stems from China – a country where the majority of electricity is still being generated by non-renewable sources such as coal.
Considering what has previously been mentioned, it can seem cryptocurrencies and blockchain technology are far more environmentally destructive than traditional methods of currency, but this would be misleading.
Big banks deplete massive amounts of energy to sustain their entire infrastructure (e.g. ATMs, branches, headquarters, etc.) not to mention the environmental damage caused by fiat currencies, due to the physical mining and minting of metals for small coins. However, there is hope for the crypto community.
A Greener Future with Crypto and Blockchain
Fortunately, initiatives from various companies are using blockchain technology to encourage better energy consumption or indirectly counteract the environmental damage caused by rampant cryptocurrency mining. Even celebrities are opening their wallets to support these initiatives. William Shatner threw his considerable backing behind Solar Alliance, a Canadian company building a three-megawatt solar farm that can be rented out to cryptocurrency miners.
Other answers use the underlying Blockchain technology to drive energy-saving practices. Energi Mine has created EnergiTokens (ETK) as a peer-to-peer exchange model that allows you to buy energy from your neighbour in preference to the utility companies - completely cutting out the middle man.
It also encourages broader environmental sustainability by providing ETK to consumers when they exhibit energy saving behaviour, such as using public transport or buying energy-efficient appliances to reduce energy consumption. The ultimate goal of this is to reduce global energy demand and carbon emissions by creating a system of financial incentives, which will subtlety shift positive energy decisions to become unconscious reflexes.
However, what about the actual cost and energy required to sustain cryptocurrencies in and of themselves? As established, Bitcoin runs on the POW algorithm, yet there are cheaper, more energy-efficient consensus algorithms that may displace it in the future.
Proof-of-Stake (POS) is an exciting development in the crypto space. It is still a consensus algorithm like POW and serves the same purpose, but the difference is in its execution. Unlike POW, where the miners are chosen to validate blocks after solving computationally intensive tasks, with POS the miners are chosen based on the coins (or “stake”) they hold.
Ethereum is already planning on implementing POS by introducing a hard fork at some point, to make the transition from POW to POS. From an environmental perspective, this is a bold and welcomed move. Adopting a POS system will greatly reduce the energy costs required to facilitate cryptocurrencies and make distributed blockchain updating greener and more sustainable.
The crypto community must reduce the impact of its damage to the environment. Ensuring the energy consumed by crypto mining is coming from renewable energy resources, investing in green initiatives powered by blockchain technology and working on alternatives like the POS system are steps in the right direction. If cryptocurrencies and blockchain represent our future, then the crypto community must ensure this future minimises its impact on the environment.