Climate change is said to be one of (if not) the defining issues of our time. This year, The U.S. National Climate Assessment and Intergovernmental Panel on Climate Change declared they aim to go net-zero on greenhouse gas emissions by mid-century. One of the most common critiques and controversies surrounding cryptocurrencies revolve around energy usage. Is this a valid critique? What's the important metric when it comes to analyzing the environmental impact of cryptocurrency, is it worth it, and how are digital asset innovators addressing it?
To understand the benefits, we must have a basic understanding of the capacity and scope of cryptocurrency. Cryptocurrency’s infrastructure is run completely online and therefore has the capacity to deliver borderless, seamless, nearly immediate investments and transactions that are accessible to all. Crypto depends on a distributed network of internet-connected computers to validate economic transactions and financial contracts, especially as defined by the PoW consensus mechanism. The more validators added to this network, the higher the energy impact as more computers are involved in mining and validating. This process can seem wasteful and energy inefficient, which is a major contributing factor behind alternative consensus mechanisms like PoS. Read more about the differences between the two mechanisms in our article on The Merge.
How much energy does it take to create and run networks that power cryptocurrency?
One statistic popular among crypto critics is that, according to the Cambridge Bitcoin Electricity Consumption Index (CBECI), Bitcoin’s energy consumption is equivalent or more than that of some countries. Even if true, it’s important to distinguish between energy consumption and carbon emissions, in the case of for instance energy consumed from fossil fuels versus clean solar power, and at that point it becomes more difficult to near impossible to accurately measure (The CBECI does try to account for the energy mix used in consumption & tries to measure emissions in its figures, but both rely on incomplete data: An incomplete set of data from Bitcoin miners, an incomplete picture of how they relate to energy mix due to different reporting standards used country-by-country, and an incomplete set of data on emissions with no global standards and different methodologies and theories used for measurement). Regardless, there are a wide range of estimates of how carbon neutral Bitcoin mining really is, but even then, the situation is getting greener - groups like the signatories of the Crypto Climate Accord have pledged to work towards 100% renewable energy for crypto sources and more. It’s also very important to recognize that other cryptocurrencies, like Ethereum, use the aforementioned Proof of Stake consensus mechanism, which cuts energy consumption dramatically: When Ethereum completed its “Merge” in September of this year, energy consumption of the network dropped a dramatic 99.99%. Finally, it is worth considering that crypto miners and validators, like most profit-seeking businesses, are always looking to reduce costs. As new innovations come to renewable energy and it becomes cheaper and more accessible while being comparable to traditional energy sources, it makes logical sense that crypto mining and validating operations will continue to switch as to reduce costs, thereby emitting less to no carbon.
Is Cryptocurrency wasting too much energy?
Given all of this, it would seem that while energy consumption for some cryptocurrencies is high, there is a lot in motion to make it green or greener. Still, is it wasting that much energy? Consider our current financial system, and the electricity, buildings, transportation, labor costs, ATMs, and payment methods like paper cash, plastic credit cards, and metal phones and computers we rely on to conduct finance today. When you really think about it, our financial systems aren’t the most energy efficient, green systems either. To accomplish what modern-day finance does, lots of energy is required. Decentralized finance, or defi, what’s behind Bitcoin and Ethereum, while it may also require lots of energy, is all online. With the forward-thinking developers and supporters behind both traditional and decentralized finance, both sectors of the industry are working towards a greener future with renewable energy initiatives and lower resource usage.
So, what’s the point?
It seems like crypto is getting greener, but what if it still takes a while? For those cryptocurrencies that do continue to run on PoW consensus mechanisms, there are many innovative ways miners are approaching the issues posed by energy consumption and waste that aren’t just “switching entirely to renewable energy.” For example, some are making use of unused or energy that would otherwise be “flared” (burnt) by oil drilling companies. Miners are able to divert the gas to help power their machinery, reducing carbon emissions by 63%. There are other projects in areas with weak power grids, where Bitcoin mining during local energy consumption low-points can actually bolster the entire grid.
Furthermore, according to a White House report, the EPA, the DOE, and other federal agencies should soon begin to provide technical assistance and develop effective, evidence-based, environmental performance standards for the design, development, and use of crypto-asset technologies that do not negatively impact the environment. Building digital assets in a sustainable way means promoting consensus processes that reduce wasteful processing and enhance customer benefits while minimizing the negative effects on the environment. The report goes on to say that the government will continue to monitor, collect data, and conduct further research to improve understanding and innovation. While until recently the federal government has been fairly hands-off in digital asset innovation, in recent months there has been reports indicating further interest in its development alongside signs of more clarity to come surrounding its use, something especially important to banks and credit unions that want to develop and offer cryptocurrency solutions on their own or with partners like CryptoFi. To address the climate challenges and bring cryptocurrency to everyone, there must be a collaborative effort on all fronts to further advance innovations that work in tandem with efforts to decrease our impact on our environment.
Sources:
Cambridge Bitcoin Electricity Consumption Index (CBECI) (ccaf.io)
Bitcoin Mining Is Reshaping the Energy Sector and No One Is Talking About It (coindesk.com)
Coinbase Institute - Climate Paper 2022.pdf (ctfassets.net)
Crypto Climate Accord (cryptoclimate.org)
