Bitcoin and other cryptocurrencies have a reputation for consuming a large amount of energy during the mining process. This results in a poor environmental balance and consequently has a negative impact on our ecosystem.
Are these facts true and what is the carbon footprint of traditional financial systems and other industries? Furthermore, what can we do to promote the sustainability of digital currencies?
Cryptocurrencies get plenty of bad criticism in terms of their environmental impact. Some statistics even show that in 2021 alone, bitcoin mining consumed as much energy as the entire state of Norway. The comparison is misleading! It is important to put the energy consumption of cryptocurrencies in relation to a comparable system, i.e. the classic financial system.
Energy consumption in the financial system
Crypto currencies
Crypto assets based on the Proof of Work consensus mechanism are indeed major energy guzzlers. This is because huge amounts of electricity are consumed in the so-called "mining" process. Mining is a process in which "nodes" - extremely powerful computers - compete to be the fastest to solve a complex calculation task during the validation of transactions.
This can only be done through trial and error, with the computers trying out countless combinations of numbers until a miner finds the right solution. In other words, masses of computers are working on the same problem, and in record time (read more about mining here). However, it should be noted that, for example, in the case of Bitcoin, the oldest and most established cryptocurrency, 19 million of the 21 million Bitcoins have already been mined and the corresponding energy consumption is steadily decreasing.
The decisive factor for the assessment is not only the consumption, but also the associated CO2 footprint. Depending on how the electricity is generated, high CO2 emissions are produced. Increased emissions lead to global warming.
Cambridge University's "Cambridge Bitcoin Electricity Consumption Index" gives real-time estimations of current consumption. In 2021, mining consumed around 135 terawatt hours. Norway, in comparison, consumed about 125 terawatt hours in the same year. The current annual estimate is at 132.49 TWh (see https://ccaf.io/cbnsi/cbeci). Sounds like a lot. But how big is the CO2 footprint?
The evaluations of this index show the impact of Bitcoin's energy consumption and put it in relation to global greenhouse gas emissions:
This shows that while cryptocurrencies need to work on their energy efficiency, they are far from being a significant cause of environmental impact.
Traditional financial market
The traditional financial market is equally a significant consumer of energy and requires a great deal of resources.
A good example is the production of paper money and coins. High-performance machines are needed to produce physical money. These printing presses require a lot of electricity, water, paper, metal, ink and chemicals. To be able to guarantee counterfeit protection, the production of security features is needed, which also require special materials and technologies. Furthermore, physical money needs to be transported and stored securely.
In addition, traditional financial markets require large amounts of energy to run the servers and data centres that process transactions and payments and store financial data. Depending on their size, modern data centres have an annual energy demand of 350 to 400 gigawatt hours. This means that a single data centre requires as much as ¾ of the energy required by the canton of Schaffhausen. There are several 100,000 data centres worldwide just to secure payment transactions. In addition, large amounts of exhaust heat are generated for cooling the data centres. This energy balance is often kept from the public because these processes take place behind the scenes and are not as easily identifiable as with the decentralised nature of the blockchain.
The "Cambridge Bitcoin Electrcity Consumption Index" also recently published an interesting comparison across different industries. The following graph impressively shows how much megatonnes of CO2 (MtCO2e) Bitcoin emits in relation to other industries.
How does crypto trading become more environmentally friendly?
The technology is still young, but the industry is learning fast. Blockchain has great potential to become more and more energy efficient in the coming years. The industry is aware of the problem and there are already energy-efficient alternatives, such as the Proof of Stake consensus mechanism, on which amongst others the entire Ethereum Blockchain is based.
With Proof of Stake, validators buy the right to confirm the transaction - in other words, they have invested in a stake. This removes the time pressure and only one validator works on solving the mathematical problem.
Furthermore, there are already new approaches to solutions, such as the Tangle Protocol. The Tangle Protocol is a decentralised technology used by the cryptocurrency IOTA. It uses a different method to validate transactions. Unlike proof-of-work, this algorithm is resource-efficient and does not require energy-intensive computing power.
The blockchain has the potential to create sustainable systems for energy management and its distribution. By using smart contracts and creating decentralised energy grids, electricity can be distributed efficiently. In other words, exactly where it is needed. This can reduce electricity consumption and conserve resources.
Other possibilities for blockchain and crypto to manage our energy efficiently are:
Renewable energy: Promoting the use of renewable energy sources such as wind and solar power for mining cryptocurrencies can reduce the carbon footprint.
Energy efficiency: Improving the energy efficiency of mining hardware and data centres can reduce electricity consumption.
Carbon offsets: Cryptocurrency exchanges and mining companies can support initiatives that offset carbon emissions from their operations.
Green cryptocurrencies: Some cryptocurrencies are being developed specifically with environmental sustainability in mind.
These are just a few approaches to how blockchain technology is becoming more energy efficient. Even Rome was not built in a day.
How can you personally contribute
Buy and hold strategy for energy-intensive currencies such as Bitcoin. As the market matures, Bitcoin's volatility will continue to decrease and, like gold, it will serve as a store of value.
Invest in cryptocurrencies based on the consensus mechanism "Proof of Stake", such as in the Ethereum, Cardano, Solana, Polkadot.
Before investing in a coin, check which project is backing it. Is it a project that actively promotes environmentally friendly resources?
Conclusion
It is important to be aware of the energy consumption of cryptocurrencies and of traditional financial systems, as our resources are limited. There is potential to increase energy efficiency in both areas, with cryptocurrencies exploring alternative consensus algorithms and renewable energy sources, and blockchain technology creating better systems for energy management and distribution.
What is your opinion on the subject?
- Cryptocurrencies are energy guzzlers.
- Cryptocurrencies are on their way to becoming sustainable
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