Crypto and the Environment

Crypto and the Environment

According to many experts, blockchain technology is the future of finance – the distributed ledger technology that powers every blockchain network and the cryptography that protects them have combined into a powerful financial product. And while the technology is still in its infancy, it’s already clear that cryptocurrencies and blockchain networks they’re based on will have a major impact on all industries in the future.

In fact, they already have an impact now – but despite the growing enthusiasm for crypto technology, not all of its impact is necessarily great. For instance, many environmental scientists and FinTech experts point out that while cryptocurrencies are digital – they’re actually quite energy-intensive. And in a world that’s desperately trying to wean itself off fossil fuels and find alternative energy sources, the high blockchain energy consumption might not be such a great thing.  

So, how big is this problem – and what can be done about it? We’ll explore those critical questions below.

Cryptocurrency Mining – How Does It Impact The Environment?

We’ve heard much about cryptocurrency “mining” as a way of obtaining any crypto. In practice, that’s not the only method, and different blockchain networks have different methods for generating their own cryptocurrencies. However, mining is used by Bitcoin, the largest, first, and most influential network in the world. Also, it has been used by Ethereum up until recently – the second-biggest cryptocurrency. 

So, how much energy does cryptocurrency mining use in practice? Considering the network’s encrypted nature, there’s no way to calculate the electricity levels directly – however, experts have been able to make estimates based on the number of mining rigs sold and constructed in the world, their power consumption, and the network’s hash rate. 

According to some indices of Bitcoin energy consumption, this blockchain network alone uses around 0.13% of all the electricity produced in the world. This may not seem like a lot, but it actually is – those consumption levels are on par with some developed countries, like Finland, Sweden, and Belgium. 

This isn’t the only estimate either – according to some, a single transaction on the Bitcoin blockchain requires around 1400 kW h of energy. To put that in perspective – that’s roughly the amount of electricity an average US household uses over an entire day. And considering the growing number of Bitcoin holders worldwide, that’s a concerning statistic. 

The second-biggest blockchain, Ethereum, used less energy – in comparison, one of its transactions only used around 160 kW h. And that blockchain is also a positive example of innovation and potential solutions to the blockchain energy problem. In September 2022, the developers rolled out an update that changed Ethereum’s method for generating coins from proof-of-work to proof-of-stake. Explaining the technicalities of the transition would require an entire article of its own – but the end result is what matters here. And that result was Ethereum’s energy requirements going down to just 0.03 kW h per transaction! 

However, even though such a change is commendable, Bitcoin and Ethereum aren’t the only two cryptocurrencies in the world. As of 2022, over 500 online exchanges provide trading services in over 20,000 various cryptocurrencies. These transactions use a lot of energy, and as any of those coins become more popular, they’ll require even more.

Also, it’s worth pointing out that the reports on blockchain energy use don’t consider the energy required to administer various blockchain-related services – like online trading. 

Of course, the amount of electricity used by cryptocurrencies will continue to vary – depending on, among other things, user adoption and coin prices. But the competitive nature of the process means that higher prices result in higher energy expenditures. 

Why Does Blockchain Require So Much Energy? 

So, the question is – why does crypto mining need that much energy? To understand that, you need to understand what crypto mining is in the first place. In the simplest possible terms: it’s the automated process through which Bitcoin transactions – and the generation of new BTC – is validated. 

A mining rig is just a computer with a powerful GPU and CPU. And it needs to be powerful because the validation process is ultimately just solving extremely complex mathematical equations. Once the process is done, you receive BTC as a reward.

While we’ve used Bitcoin as an example here, the procedure is practically identical with any blockchain that runs on a proof-of-work consensus method. 

The Environmental Issue

With all of this in mind – what’s the actual carbon footprint of blockchain technologies?

Well, that’s hard to calculate precisely – but we know that fossil fuels are the prevalent power source in almost every country in which crypto miners operate. And that’s no wonder because fossil fuel is still the biggest energy source in the world. So, when you introduce a technology that uses the energy equivalent of a medium-sized developed nation, it’s bound to generate a lot of carbon emissions.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.