Cryptocurrencies like Bitcoin consume too much electricity to be sustainable. However, innovative blockchain technology may have a workable solution.
Cryptocurrency is not a sustainable payment solution - not yet, anyway. With rampant energy consumption, tremendous e-waste production, and a comparison with traditional banking that sees trouble ahead, crypto should be a hard sell to the eco-conscious. This article will outline why most crypto is so bad for the planet, how it compares with traditional banking, and how some networks have cleaned up their act.
Bitcoin Alone Uses More Electricity Than Argentina
Bitcoin has a 42% market share of all cryptocurrencies. The process of validating Bitcoin transactions in return for small rewards of the cryptocurrency is called mining, and it requires 136.38TWh per year. That's more electricity than countries like Argentina, the UAE, and the Netherlands. One Bitcoin transaction alone requires enough electricity to power an American household for six weeks.
From component failure due to stress to constant hardware upgrades, Bitcoin mining produces 37 kilotons of e-waste. If you keep in mind that most cryptocurrencies operate like Bitcoin, and their expenditures and waste will grow with their value, we're in a crypto eco-nightmare.
Cryptocurrencies Require Massive Computing Power To Add New Transaction Records
Most cryptocurrencies add data to their blockchain using a proof-of-work (PoW) consensus mechanism, where nodes (i.e., computers) on the network compete to solve a math problem for the right to validate new additions to the ledger and receive a sum of currency as a reward. Unfortunately, this competition consumes a tremendous amount of electricity as "miners" use the most powerful computers they can buy for a competitive edge.
The amount of heat produced requires additional electricity for cooling systems. Furthermore, component turnover is high due to burnout. To make matters worse, as the blockchain grows, the difficulty of the math problems increases, requiring more computing power to solve. As cryptocurrencies grow, so do their consumption and e-waste.
Countries that use a higher proportion of renewable energy can mitigate some of the environmental impacts of Bitcoin mining.
The Ultimate Source of Electricity Is Partially To Blame
There are a lot of factors that determine just how damaging Bitcoin mining can be. For example, if the mining computers run on electricity from fossil fuel consumption, the carbon emissions will be massive. Since China banned cryptocurrency in 2021, the U.S. and Kazakhstan account for 42% and 18% of the world's Bitcoin mining, respectively. Both countries power most of their electric grids with fossil fuels.
Countries that use a higher proportion of renewable energy can mitigate some of the environmental impacts of Bitcoin mining. But unfortunately, many Bitcoin miners view renewable energy as less reliable than fossil fuel energy. And most cryptocurrency miners cannot just move to a greener energy grid at will.
Traditional Banking Is Worse, But Cryptocurrencies Are Growing
Cryptocurrencies do not exist in a vacuum. They came up as an innovation from the traditional banking system that has been a strain on the environment for years. The environmental impact of cryptocurrencies comes from 2 sources: electricity consumption and e-waste.
On the other hand, the traditional banking system requires energy, prints currency, mines precious metals, uses transportation, and makes waste in hundreds of subtle ways. The environmental impact is difficult to calculate. It is estimated that banking produces a whopping 1,386 megatons of carbon emissions every year, while gold mining alone adds 144 megatons.
For perspective, Bitcoin mining contributes 61 megatons of carbon emissions per year. Too much, of course, but a small fraction of the rest of the financial system, which caters to a much larger audience. However, cryptocurrencies are growing in popularity, leading to more consumption and waste.
New Ways To Add Transaction Records Require Less Power
The main problem lies in the PoW consensus mechanism. Fortunately, some cryptocurrencies have developed alternatives for validating additions to their blockchain. For example, networks like Solana, Tron, Avalanche, and Algorand operate on a proof-of-stake (PoS) consensus mechanism. Nodes will "stake" a quantity of the cryptocurrency, storing it in a virtual vault on the network, in return for validator notes that they can use to validate new data.
The network randomly chooses an extant note, setting up a lottery system. Nodes with more currency "staked" have a greater chance of winning the right to validate and therefore "mining" more rewards – stake more, make more. And if the chosen validator submits fraudulent data, they forfeit their stake.
Since a PoS mechanism involves no complex computations, the power requirements are a minute fraction of a PoW mechanism like Bitcoin. This new system is bearing fruit. For example, Algorand (ALGO) claimed in 2021 to be 100% carbon neutral and has announced a plan to become carbon negative.
Most Crypto Is Unsustainable, But New Tech May Have The Solution
At this point, most cryptocurrencies are awful for the environment. The PoW mechanism is a giant energy hog, and the world's most popular crypto, Bitcoin, is unlikely to change. Furthermore, a majority of cryptos use the same consensus mechanism.
However, Ethereum, the world's second-largest crypto by market share, may soon change to a PoS mechanism, significantly reducing emissions. Furthermore, as newer cryptocurrencies that use PoS or other innovative consensus mechanisms rise, the hegemony of PoW may shrink, paving the way for a more sustainable payment solution.
Bitcoin and other PoW-based cryptocurrencies require too much energy to be sustainable. So if you want to introduce cryptocurrency to your eco-conscious business, keep this in mind.
PoS cryptocurrencies offer a new solution that seems very promising. Moreover, several networks are explicitly designed to address the environmental issues of the PoW model and can provide a sustainable payment solution.
As the popularity of PoS and other innovative cryptocurrencies increases, they may disrupt the traditional banking system, encouraging it to clean up its act. Supporting these cryptos may be an excellent way for a business to help tip the scales towards a greener financial system.