Why Are Cryptocurrencies Such Energy Hogs?
Digital currencies seem ready to turn the world upside down—but there is a cost.
Before you dismiss them as a scam or some sort of get-rich-quick Ponzi scheme, consider that, according to estimates, the market capitalization of the almost 19,000 various cryptocurrencies that currently exist is around $1.75 trillion. That’s bigger than the GDP of Canada and comparable to the GDP of Italy which is number eight on the list of richest nations.
Cryptocurrencies got their start with Bitcoin in 2009. The concept was to create a financial transaction system that was independent of the regulation, accountability, and fees that worldwide financial institutions and banks used to control the global flow of money. Using a technology called blockchain, cryptocurrency creators use a competitive environment where “miners” use massive computer systems to solve a series of complex mathematical puzzles. Hundreds of miners work on the solution and the first Bitcoin miner to solve the puzzle is rewarded with some portion of a Bitcoin. The transactions on the cryptocurrency’s network are confirmed by the mining process and make them trustworthy.
Image used courtesy of Pixabay
In the early days, the lack of accountability attracted unsavory characters and criminals to blockchain financial systems, however, the industry has grown beyond its sometimes-disreputable origins.
As cryptocurrencies have grown, so have the complexities of the mathematical puzzles and the number of miners who compete to solve them. This has required ever faster and more powerful computing systems and the electrical power required has reached absurd levels—Bitcoin currently consumes an estimated 150 terawatt-hours of electricity annually. That’s more than the entire country of Argentina with a population of 45 million.
Consuming that huge amount of electricity also has direct consequences as it is estimated that Bitcoin mining emits 65 megatons of carbon dioxide (CO2) into the atmosphere each year. Cryptocurrency mining is especially harmful to the environment when fossil fuels power the mining computers and the search for cheaper and less greenhouse gas-emitting power grids has meant that mining computer centers are spread around the globe. Not only do the computers consume vast quantities of electricity, but cooling them also requires significant water usage, adding to the ecological burden created by the cryptocurrency industry.
Because cryptocurrency seems unlikely to go away, there is a push to find ways to make it less environmentally damaging. Using renewable energy to power computers rather than fossil fuels can dramatically reduce greenhouse gas (GHG) emissions. Currently, it is estimated that 39 percent of mining is done using renewable energy.
An area that has the potential to greatly reduce cryptocurrency energy consumption is to change the model by which transactions are verified. The current “proof-of-work” mechanism is highly inefficient as only one of the dozens or even hundreds of computer systems solving the mathematical puzzle “wins” while the work of the non-winning computers is wasted, creating tons of GHG emissions.
A Better Way?
Another way to verify financial transactions is through a concept called proof-of-stake. Instead of a competition to be the quickest to solve the mathematical puzzle, proof-of-stake requires its participants to put up a small amount of cryptocurrency in order to enter a lottery to choose which team will get to verify a transaction. Instead of the waste of vast arrays of computers working to solve the same problem most rapidly, a single array gets assigned the problem. It has been estimated that converting from proof-of-work to the much more efficient proof-of-stake could reduce the energy consumption related to cryptocurrencies by 99.5 percent.
Although cryptocurrency has proven to be highly volatile, global economists have suggested that by offering easier access to capital and financial services, especially in developing countries, major players like Bitcoin could have a role to play in accelerating the growth of economic development and reducing global poverty. Because banks and central financial authorities don’t control cryptocurrencies, there are no transaction fees and extraneous costs, allowing individuals to retain more of their wealth.
The unregulated and largely uncontrolled nature of cryptocurrencies has risks. This was amply demonstrated when the bubble burst on May 12th of this year and in one 24-hour period, more than $300 billion in cryptocurrency value was wiped out. Some currencies, like Luna, lost 98 percent of their value overnight, virtually wiping them out. Number two Ethereum lost 20 percent and even giant Bitcoin took a heavy hit with losses of more than 11 percent.
It is unclear whether the crash is due to rising inflation and increasing interest rates, which is driving investors back to more traditional, and potentially safer, investments, or if it is a reflection of the pullback of tech stocks in general that has plagued stock market exchanges since the beginning of the year. With two years worth of financial gains disappearing overnight, the world of cryptocurrency doesn’t look as appealing as it might have a week ago.