Cryptocurrency’s Environmental Cost: Is There a Way Out?

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Amid increasing scrutiny of cryptocurrency’s environmental cost, here’s a look at the possible solutions.

Last month, Elon Musk announced on Twitter that Tesla has “suspended vehicle purchases using bitcoin” due to concerns over the “rapidly increasing use of fossil fuels for Bitcoin mining and transactions.” Tesla had started accepting Bitcoin for payments in March.

“We believe it [cryptocurrency] has a promising future, but this cannot come at great cost to the environment,” Musk said. These remarks were in stark contrast to Musk’s earlier support and enthusiasm for Bitcoin and cryptocurrencies in general.

The Tesla and SpaceX CEO added that Tesla, which bought US$1.5 billion worth of Bitcoin in February, won’t be selling any Bitcoins. Instead, it would resume transactions with Bitcoin once mining “transitions to more sustainable energy.”

In the first five minutes since Musk’s tweet, Bitcoin’s price dropped about 5%. Since then, Bitcoin’s price has plummeted, reaching a three-month low of $30,000 in mid-May. Along with Musk’s tweet, regulatory concerns and speculations in financial markets also played a role in the fall of Bitcoin as well as other cryptocurrencies’ prices.

Amid increased scrutiny of bitcoin’s carbon footprint, let’s evaluate its exact environmental cost and ways to address the problem.

Cryptocurrency’s Environmental Cost

To produce new coins, a large network of computers solve complex mathematical algorithms or puzzles—a process known as mining. The system is fully decentralized and individual “miners” solve the puzzles to verify the transactions on the blockchain. The puzzles are intended to prevent hackers from invading the network, while the fact that anyone can become a miner prevents power from concentrating in the hands of a few.

A miner who solves the puzzle first is rewarded with coins and transaction processing fees. The miners confirm a group of transactions and add them to a new block on the bitcoin blockchain. As miners use powerful systems for mining, the process uses massive amounts of electricity, which is why miners are attracted to places with abundant cheap electricity like China’s Inner Mongolia.

When the price of cryptocurrencies such as Bitcoin goes up, so does energy consumption. The rising prices mean more incentives for miners, which attracts more people into mining. While the mining of all cryptocurrencies is energy-intensive, Bitcoin consumes the most.

“Bitcoin alone consumes as much electricity as a medium-sized European country,” Professor Brian Lucey at Trinity College Dublin told Financial Times. “This is a stunning amount of electricity. It’s a dirty business. It’s a dirty currency.”

According to Cambridge University’s Bitcoin Electricity Consumption Index, Bitcoin mining is estimated to consume 115.54 terawatt-hours (TWh) of electricity annually (at the time of writing). To put things in perspective, this is slightly higher than the electricity consumption of the Netherlands (110.68 TWh per year) and just under that of the United Arab Emirates (119.45 TWh per year).

As discussions around crypto’s environmental cost rise, we take a look at the possible solutions.

Adopting the proof of stake model

Currently, cryptocurrency mining largely relies on the ‘Proof of work (POW)’ validation method. Under this, the miner who solves the intensive puzzle the fastest is rewarded. This model depends on the computing power of miners—the higher the system’s power, the higher will be the mining power. This, in turn, means higher energy consumption.

The ‘proof of stake (POS)’ model, on the other hand, is less energy-intensive. A model developed to address the issues of POW, it gives mining power to individuals who hold the maximum number of crypto coins.

To participate in POS’s verification process, users have to surrender a certain amount of crypto coins—a process called staking. The method prevents any fraud as the individual loses their coins in the event of a fraudulent verification.

In addition, unlike POW, the POS model does not require specialized computing systems to verify transactions. Instead, it can be run on laptops as well.

“Proof-of-stake is a solution to the [environmental issues] of Bitcoin—which needs far less resources to maintain,” Ethereum founder Vitalik Buterin said at the recent StartmeupHK virtual festival in Hong Kong.

In a recent blog, Ethereum noted that it will complete the transition to POS in the coming months. Once the transition is complete, Ethereum aims to reduce its energy use by up to 99.95%.

Currently, blockchain platform Cardano is a major player that uses the POS model. Some of the cryptocurrencies that use the model include Polygon, EOS, Polkadot, and Tezos.

Switching to renewable energy

Energy consumption doesn’t always equate to carbon dioxide emissions. For example, one kWh of electricity generated by a power station running on coal has a “substantially different environmental footprint” compared to one kWh of electricity produced by a solar park.

Mining’s environmental impact comes from the fact that it often relies on fossil fuels such as coal. As of April 2020, China accounted for 75% of mining, of which an estimated 40% of mining operations were powered by coal.

In a bid to go greener, several individuals and companies are shifting to renewable energy sources for mining. According to a 2019 Cambridge survey of 280 companies in 59 countries, 39% of POW mining was powered by renewable energy.

While 79% of all miners used renewables as part of their energy mix, renewables took up only 39% of their total energy consumption. These renewable energy sources include hydro, solar, and wind power.

However, Cambridge added that these estimates vary widely from around 20% of the total energy mix to over 70%. The reason, it notes, is that while some mining facilities reveal their energy sources, “the exact energy mix of the majority of mining farms remains unknown.”

As cryptocurrency critic and Dutch economist Alex De Vries noted, “I put one solar panel on my power plant, I also have a mixture of renewable energy.”

Meanwhile, some companies are also moving to locations with cheaper renewable energy. For instance, Genesis Mining, one of the world’s largest cloud-based cryptocurrency mining companies, is building data centers in colder regions with abundant geothermal and hydroelectric sources.

Places like Iceland and Sweden have cheap power, said Genesis’s Regional Manager for North America, Tillmann Korb. According to him, “renewables are the natural future for cryptocurrencies.”

As mining can be carried out anywhere due to the decentralized nature of crypto, companies and individuals alike should move to regions with abundant cheap renewable energy, he noted.

Meanwhile, in some countries like China, mining operations shift locations seasonally. For instance, in summer, the operations make use of low-cost hydropower and in winter, they shift back to coal.

Another way in which miners try to be energy-efficient is by using energy that may go unused. Russian natural gas company Gazprom, for example, has a unit that uses power generated by flare gas (a by-product of oil extraction which is normally burned off) for mining, reported Reuters.

“It’s not so much bitcoin that is the problem,” Yves Bennaim, Founder of cryptocurrency think-tank 2B4CH told the media. “People are saying it’s energy intensive therefore it’s polluting, but that is just the nature of the energy we are using today.”

“As bitcoin goes up there will be more incentive to make investments in renewable sources of energy,” Bennaim added

Regulations by policymakers

In order to tackle the damaging effects of cryptocurrency mining, economists like De Vries suggest that policymakers across the globe should put pressure on the miners. This includes steps such as taxing mining device manufacturers or limiting their access to microchips.

“Although bitcoin might be a decentralized currency, many aspects of the ecosystem surrounding it are not,” De Vries said. “Large-scale miners can easily be targeted with higher electricity rates, moratoria or, in the most extreme case, confiscation of the equipment used.

Such regulations have already been undertaken by some governments. For instance, the Energy Board of Quebec, Canada, had imposed a moratorium on new cryptocurrency mining operations in June 2018. The decision came after a surge in requests of companies from other counties looking to utilize Quebec’s low power rates.

Last month, Iran banned mining of all cryptocurrencies during the summer amid increasing outages across the country attributed to cryptocurrency miners. In January, the country, which is the sixth-largest market for bitcoin mining, confiscated around 1,000 Bitcoin mining machines due to a spike in electricity consumption.

Early last month, a bill proposing a three-year-ban on cryptocurrency mining was introduced in the New York State Senate. The bill was introduced after months of protests from residents about the environmental effects of mining operations.

Similarly, late last month, in a stringent crackdown on cryptocurrency mining, China’s Inner Mongolia proposed punishments for individuals and companies involved in mining. Inner Mongolia, a Bitcoin hotspot, began the crackdown in March to cut down on energy consumption.

However, such sanctions do not guarantee a halt in mining activities. Miners can move to friendlier regions and continue their operations unhindered.

Meanwhile, inspired by the Paris Climate Agreement, a coalition of crypto firms and organizations announced a self-regulating Crypto Climate Accord in April. The accord aims to transition all blockchains to renewable energy by 2025 and has set a 2040 target to reach net-zero emissions.

However, experts say that such an accord could prove to be a hindrance to effective government regulations.

“To stop the climate disaster that Bitcoin is causing, governments need to ban PoW mining,” Pete Howson, environmental researcher at Northumbria University, told Al Jazeera. “The Crypto Climate Accord, by representing the interests of Bitcoin miners, puts the brakes on that sort of effective regulation.”

Amid the growing scrutiny over cryptocurrencies, a semiconductor chip shortage, and increasing crackdown of governments, the crypto industry has some tall orders to meet. As stricter government regulations loom, the industry is bound to resist.

It is imperative that governments, private players, and individuals alike work together to curb crypto’s environmental impact. Additionally, individual miners and organizations should take a responsible approach to mining by adequately researching various solutions and their energy impact. As De Vries noted, the key is “making the community realize this is something we need to address.”

Header image by Dmitry Demidko on Unsplash

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Reethu Ravi
Reethu is a Staff Writer at Jumpstart.

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