When the enigmatic Satoshi Nakamoto minted the world’s first cryptocurrency in 2009, the plan was to create a decentralized payment platform that would revolutionize how we buy and sell everything.
The point of Bitcoin, according to Nakamoto’s founding white paper, was to enable fast, borderless transactions.
More than a decade later, it’s undeniable that Bitcoin has gone mainstream, but perhaps not quite in the way Nakamoto imagined. Instead of facilitating day-to-day transactions, cryptocurrencies have largely become speculative assets, a kind of digital gold, attracting investors who believe they will be able to resell their holdings for huge profits in the future.
The digital gold rush has come with a catch: Massive power consumption.
It is estimated that Bitcoin uses electricity at an annual rate of 127 terawatt hours (TWh). This consumption exceeds the entire annual electricity consumption in Norway. In fact, Bitcoin uses 707 kilowatt-hours (kWh) of electricity per transaction, which is 11 times more than Ethereum.
Of course, Bitcoin is not unique among cryptocurrencies in terms of its environmental impact, but its popularity and uniquely ineffective consensus mechanism make it an easy scapegoat. Meanwhile, the blockchain technology that underpins it could be the key to a greener future.
Why does Bitcoin use so much energy?
Conceptually, Bitcoin does not seem to require huge amounts of electricity. All you have to do is point and click or tap on your smartphone to buy and sell the cryptocurrency. We’ve had technology that does much of the same for other types of digital transactions for decades.
But it is Bitcoin’s decentralized structure that drives its huge carbon footprint.
To verify transactions, Bitcoin requires computers to solve increasingly complex mathematical problems. This proof-of-work consensus mechanism is drastically more energy-intensive than many realize.
“In the case of Bitcoin, this is done by having many different competitors run a race to see how quickly they can package the transactions and solve a small mathematical problem,” says Paul Brody, global blockchain leader at EY.
The miner who completes the mathematical equation the fastest not only certifies the transaction, but also receives a small reward for trouble in the form of a Bitcoin payment.
In Bitcoin’s early days, this process consumed no more electricity than any country. But inherent to cryptocurrency technology is that mathematical puzzles become much, much harder as more people compete to solve them—and this dynamic will only accelerate as more people try to buy into Bitcoin.
More miners use electricity in competition for rewards. Although there may be hundreds of thousands of computers running to solve the same problem, only one can ultimately receive Bitcoin royalties.
“Obviously this is a waste in the sense that 99.99% of all the machines that worked are just throwing away the result since they didn’t win the race,” says Brody. Although this process provides a fair and safe result, it also creates a lot of carbon emissions. “I very much doubt it [whoever founded] Bitcoin predicted such huge success in the future, and consequently the huge amounts of power we’re talking about, says Brody.
This process also takes an enormous amount of time: upwards of 10 minutes per Bitcoin transaction. It is the time it takes for a new block to be mined.
Other digital transactions, such as those operated by Visa, are faster and rely on less energy. Visa, for example, can handle around 1,700 transactions per second (TPS) compared to Bitcoin’s 4 TPS.
In terms of cryptomining, the US has the lion’s share of the global Bitcoin mining market, with nearly 38% of global hashrate mining – which means a lot of blockchain calculations – according to the May 2022 report by the Cambridge Digital Assets Program (CDAP).
CDAP also found that China is the second largest Bitcoin mining center, despite Beijing’s crackdown to eliminate Bitcoin mining within its borders, with more than 20% of the global market share.
Other Bitcoin mining hubs include Kazakhstan with a global share of 13%, Canada at more than 6% and Russia at almost 5%, with the rest spread across the globe.
What Can Be Done About Bitcoin’s Energy Problem?
Solving Bitcoin’s gigantic energy consumption problem doesn’t require a return to centralized systems like Visa’s network—after all, the central promise of Bitcoin is the elimination of middlemen like card networks and their concentrated power over finance. Instead, Bitcoin’s advocates have more than a few options.
Switch to renewable energy
Bitcoin mining powered by renewable energy fell as China took measures to eliminate Bitcoin mining within its borders, forcing mining in that country to go underground.
Since China’s crackdown last year, the share of renewable energy powering crypto mining has fallen from nearly 42% in 2020 to 25% in August 2021.
Countless startups are set to address Bitcoin’s carbon footprint, each aiming for new ways to bring greener energy to Bitcoin.
Take LiquidStack, which aims to lower the temperature of mining rigs more efficiently, or Genesis Mining, which exclusively uses clean energy sources.
But despite these carbon-reduction efforts, experts say Bitcoin’s carbon emissions have increased and are now comparable to Greece, a country of more than 10 million people.
Transition to Proof-of-Stake systems
Proof of Stake doesn’t require the same mad dash as Proof of Work to solve complex puzzles, and it uses fewer resources.
Simply put, proof of stake requires network participants to front a small amount of cryptocurrency to enter a lottery for the chance to confirm transactions. The idea is that if you put up some value as collateral, you are less likely to approve fraudulent transactions that will devalue the currency and cost you your stake.
Because proof of stake systems remove the competing computational element, “it saves energy and allows each machine in one [proof of stake] to work on one problem at a time, as opposed to a PoW system, where a number of machines rush to solve the same problem, thus wasting energy, says eToro cryptocurrency market analyst Simon Peters.
Ethereum, the second largest crypto by market capitalization after Bitcoin, is in the process of converting to proof of stake from proof of work as part of Ethereum 2.0. This will dramatically reduce the energy consumption of Ethereum-based tokens and blockchains by an estimated 99.95%.
Embrace Pre-Mining
Some cryptocurrencies have introduced pre-mining to avoid wasting computing power. Pre-mining is a system that functionally works much like fiat currency or stocks. A central authority creates a certain amount of a commodity and carefully releases it into the economy depending on what is happening in the world or their business.
“Several other cryptoassets like XRP [also popularly referred to as Ripple] was not mined at all, but instead was produced algorithmically, says Peters. “This eliminates the need for dedicated high-speed mining equipment.”
In these systems, transactions are still verified by a decentralized network of validators before being added to the currency’s blockchain record, but those involved in the transaction may have to pay a small transaction fee to compensate the validators for their efforts since the currency system itself does not reward them always. In the case of XRP, this fee is a fraction of a penny.
Transitioning Bitcoin to a proof-of-stake or pre-mined system would not be easy: to change the Bitcoin protocol, someone would have to convince the majority of miners to agree to the new system, a difficult request when billions are at stake games and the existing system works, albeit slowly and electrically inefficiently.
Introduce carbon credits or fees
Carbon credits represent the government-sanctioned opportunity to allow a company to release a certain amount of carbon emissions into the environment. They are often securitized, meaning they can be traded by companies that don’t need to produce a lot of emissions compared to other companies that do. This incentivizes a company to produce less than the allocation – as well as penalizing those who go over.
In the case of a crypto mining company, this could mean that it buys carbon credits from another company to offset the emissions it creates or switches to greener energy to make money selling its credits.
“This is a proven method under a number of programs like the Clean Air Act to get to zero emissions for products,” said Scott Janoe, chairman of environment, safety and incident response at Baker Botts. “So I would see a move towards tying credit products to Bitcoin mining and transactions to offset these emissions.”
Brody similarly anticipates that consumers may pay to offset their crypto emissions. “I foresee a future where it will be possible to simultaneously pay a transaction processing fee on networks like Ethereum as well as a carbon offset fee, just as you have the option when traveling by plane,” he says.
Blockchain’s environmental future
Aside from environmental impact, electricity costs eat away at Bitcoin mining profitability.
By creating digital coins more efficiently, miners will also increase their profitability, but that could make blockchains more likely to go mainstream.
Integrating blockchain technology into every column of economic life can reduce the carbon footprint of many businesses, says Brody.
“I believe that smart contracts [like those enabled by Ethereum] will allow companies to automate much of their complex payment and business process systems by automatically checking that a purchase order, for example, complies with the terms and conditions of a contract, he says. This can allow a company to reduce the number of employees who need to commute to an office to process orders, resulting in fewer transportation-related carbon emissions.
While we may not know the full potential for green applications of blockchain technology for years to come, there is already talk of using it to combat big problems, such as helping companies log carbon emissions better or even, in a real-world meta move, using blockchain-powered carbon credits to move to a carbon-neutral future.
