Cryptocurrency And The Environment

We often read about the vast impact of cryptocurrencies on the financial market. It is secure, private, efficient, provides transactional freedom, cuts third-party transaction fees, and increases economic activities. The economic potential is vast. Yet, rarely do we ever discuss its environmental impacts. The cruel truth is that with the use of cryptocurrencies comes the most energy-intensive production process; Bitcoin mining. It is crucial to raise the question: "Is living in a more financially and technologically advanced world the strain on our environment?" In this piece, I will dive into the negative impacts of cryptocurrencies on the planet and how we can sustainably power a cryptocurrency future.  

The main issue with a Proof-of-Work (PoW) cryptocurrency like Bitcoin is its production process. Units of the currency are generated through a process called mining. Mining is when computers must dig deep for solutions of incredibly complex math problems to validate each cryptocurrency transaction. After the cryptocurrency transaction is verified, it is added to a decentralized record-keeping system called the blockchain. The blockchain essentially is a digital ledger that stores all transactions and distributes them across all computers in the network. Bitcoin blockchain alone currently uses 204,5 TWh of electricity per year, comparable to the power consumption of Thailand. And the carbon footprint of one Bitcoin transaction is equal to two million Visa transactions, which is the same energy as 31 US households in a day. All of this hardcore computing and energy consumption could be put towards anything other than solving math problems. In addition to the absurd amount of energy cryptocurrencies like Bitcoin “waste”, a significant amount of electronic waste comes with the mining process. Computers are constantly being overused in the process of mining which causes them to go obsolete quicker than ever, often in less than 2 years. 

At this rate, cryptocurrencies are too intertwined within society for them to ever vanish. However, the future of cryptocurrencies and our environment is not entirely dark. It is possible to slow down cryptocurrency energy consumption. Cryptocurrencies’ mining energy consumption continues to excel exponentially only because of the rise in competition. As time goes by, energy demand is growing. The more people get involved in the Bitcoin blockchain, the more competition and the more computers are needed to compete and gain advancement. In 2014, Bitcoin had around 60,590 transactions per day. This number flew to 401,576 in 2021; a 662.8 % increase. One of the most commonly used mechanisms for verifying cryptocurrency transactions is Proof of Work. Proof of Work was introduced in 1997 to combat spam emails until Satoshi Nakamoto created Bitcoin and ran with the idea. The Proof of Work system works by having all nodes solve the cryptographic puzzle to compete for the miner reward. This system fosters high competitiveness among all nodes, leading to larger mining farms since individuals who are highly profitable under the Proof of Work are being incentivized to keep growing their mining farms. And these mining farms are warehouses containing thousands of rows of computers and fans stacked on top of each other. But do we have to keep using this system? No, another consensus mechanism works just as well, if not better—Proof of Stake. Validators are determined under Proof of Stake if they stake a certain amount of the underlying blockchain's native currency. This diminishes the competition because instead of thousands of nodes competing to verify a transaction, only a certain randomly selected amount is chosen to solve the math problem. Therefore, Proof of Stake requires significantly less energy than its alternative, Proof of Work. It uses about 99.95% less energy. Fortunately, one of the largest blockchain networks, Ethereum, has already switched to Proof of Stake in September 2022. 

With large energy demand comes a large carbon footprint. Bitcoin miners have emitted almost 200 million tonnes of carbon dioxide in the cryptocurrency's short history. Most Bitcoin miners were based in China since China has one of the cheapest forms of energy, coal. Though this is likely to change with the Chinese mining ban. Nonetheless, scientists acknowledge that if coal consumption escalates as expected, we could reach two degrees of global warming in 2033. The UN says if we warm up this much, we and our wildlife will be in grave danger. Ideally, we would have to be able to get renewable energy like wind and solar for cheap on a global scale. But more attainable, we could end the Proof of Work system. Proof of Stake uses less energy, and serves as a more viable option for our environment. If other blockchains follow in the footsteps of Ethereum, we will see massive improvement and even bigger adoption of cryptocurrencies by institutions who cite ESG concerns when asked about buying Bitcoin.