The Strategist

Bitcoin’s carbon footprint: Why crypto currencies are destroying our planet

09/19/2018 - 15:29

Despite a decrease in interest in crypto currency in 2018, the electricity consumption by crypto currency mining infrastructure has increased by up to 73 terawatt/hour since the beginning of 2017. The annual electricity costs (from the beginning of the summer of 2017 to the end of the current year) exceeded $ 3.5 billion. This carries threats to the economy, energy and even the environment.

Energy-consuming process

Why does Bitcoin, which exists only in electronic form, need so much energy? The problem is in the Proof-of-Work mechanism. Distributed systems that store information about money and their movements are protected from hackers by the fact that the information received as a result of solving complex algorithmic tasks gets to the blockchain. TO solve a problem means to create (say "close") a new block that contains information about transactions (records) of the distributed registry. After the block is closed, the finder receives a reward, namely, crypto currency. In the Bitcoin network, one closed block now brings 12.5 bitcoins. This bonus is reduced by half every four years.

The Proof-of-Work mechanism allows each node of the network to check correctness of adding a new block, in other words, to make sure that another node adding a new block to the block system actually did the necessary calculations. During the check, there is a hash (character string) of the header of the new block, which contains a link to the previous block. In March 2018, there were about 26 quintillion (billion billion) such operations conducted per second in the world.

This mechanism gave birth to the mining industry and turned it into a insatiable consumer of electricity. In 2012, total capacity of the Bitcoin network exceeded the most powerful supercomputer in the world. Computers need a lot of energy to solve algorithmic problems. They are becoming more productive, but calculations in the Bitcoin protocol are also becoming more complex every two weeks, after each of the following 2016 blocks is closed. Otherwise, the miners would generate too much of the digital currency. In terms of energy consumption, this is a vicious circle: the cheaper and more effective the crypto currency mining equipment becomes, the more complex the problems become, so as not to cause overproduction of the crypto currency.

The number of Bitcoins is algorithmically limited, but how much energy will be spent for their mining? Bitcoin evangelist Alex de Vries is worried that the cost of electricity for Bitcoin can grow from the current 0.5% of global energy consumption to 5%. According to him, with revenues of the mining industry of $ 5 billion in 2018, the cost of equipment and electricity will be about $ 3.7 billion. Opponents consider his estimate to be overestimated three-fold.

If incomes of miners cease to cover costs of equipment and electricity, crypto currency mining farms will be dismantled. If, of course, the miners honestly pay for electricity and they have to buy mining equipment. There are other cases, for example, one clever person used a supercomputer National Science Foundation to mine Bitcoins for about $ 10,000. The university's expenses in this connection reached $ 150,000. 

In August 2018, income of miners exceeded their expenditures by approximately 50%. This means that if Bitcoin does not go up, we will not see such an explosive growth in the energy capacity it consumes. But it is scary to think how much energy can be used for mining if predictions of crypto-optimists about the price of Bitcoin of $ 50,000 will come true.

Environmental problem

A significant part of electricity on Earth is produced by coal-fired power plants. Their share is particularly high in China, which in 2017 accounted for 72% of production of Bitcoins. The government even had to start ousting miners from the country. This can be explained by the fight against tax evasion and money laundering, and by the government’s plans to create its own state crypto currency.

Bitcoin is harmful for the environment. 934 kW/h of energy were spent to maintain one Bitcoin transaction in the summer of 2018. For comparison, you need 5.5 times less energy to conduct 100,000 transactions in the VISA system. The carbon footprint produced by Bitcoin is 17.7 million tons of carbon dioxide.

Looking for solution

The crypto industry has its own ways to reduce its energy intensity. One of them is replacement of Proof-of-Work with other methods of closing blocks, for example, Proof-of-Stake. In this case, the chances of generating the next block will be greater for those nodes that already have a large number of tokens and keep them longer. There is no need to build mining farms that compete in solving algorithmic problems. If the entire crypto industry switched to Proof-of-Stake at once, its power consumption would have fallen by tens of thousands of times. In the Proof-of-Stake system, keeping one unit of crypto currency in the wallet is equivalent to one vote in the fight for the right to attach the next block to the blockchain. In this case, the reward for creating new digital coins can be saved. This transition is planned for the Ethereum network. And the TON network plans to embrace a similar approach, where the emission is controlled by selected users; it also does not require mining.

Now emission of Bitcoins requires a lot of electricity and negatively affects the environment. The Proof-of-Stake mechanism will eliminate crypto-currency networks from energy dependence. At the same time, it is necessary to solve other ethical issues: in order to issue a crypto currency, you will already have to have a crypto currency. Money, in fact, will be produced by a community of people who already have money. The downside of this mechanism is that it stimulates concentration of crypto currency wealth in one hand. But such a mechanism at least will not harm the environment and load the grid.