Why crypto is so environmentally destructive and how its decarbonization will mirror the global transition away from fossil fuels.
Crypto. Bitcoin. NFTs.
These terms are getting harder and harder to avoid. Perhaps you even dabble in crypto trading yourself. Maybe you know more about crypto than just a headline here and there; most likely, you don't know that much about this mysterious new world of virtual currency.
Whether or not you care about crypto or have a vested interest in it, you might care about the vast impact crypto has on the environment. As we look to reduce greenhouse gas emissions and set our planet on a more environmentally-friendly trajectory, it's worth understanding that impact: how it came to be, what it looks like today, and how the future of crypto might affect the environment.
Since bitcoin is about half of the global cryptocurrency market, it's a good place to start to understand crypto's gigantic energy footprint.
Just as there is a fixed supply of gold on Earth, the anonymous founder of bitcoin fixed its supply at 21 million coins. In that sense, bitcoin mining is similar to a digital gold rush. Just as every gold rush ends, bitcoin mining will end one day (likely in about a century). Except you can't just sift through river water with a pan to find bitcoin. You need expensive, specialized equipment to mine it. And that equipment consumes a lot of energy.
The University of Cambridge maintains a running tracker called the Cambridge Bitcoin Electricity Consumption Index, which estimates global bitcoin energy consumption. Recent estimates peg annual usage at 142 Terawatt-hours (TWh) of energy per year, which is about a seven-fold increase over 2015. That's comparable to gold mining, which uses 131 TWh.
142 TWh is a vast amount of energy. It's more than what many entire countries use, like Norway, Sweden, and Argentina. And a cryptocurrency analytics website called Digiconomist estimates that bitcoin mining consumes 204.5 Terawatt-hours of energy per year. Only 20 countries use more power than that. It uses about 1% of global electricity production and 0.5% of global energy production.
Additionally, since a huge chunk of bitcoin mining is powered by fossil fuels, those transactions generate major greenhouse gas emissions. Digiconomist estimates bitcoin's annual carbon dioxide footprint at 114 megatons, comparable to the annual emissions of the Czech Republic. And the estimated electronic waste footprint clocks in at 34 kilotons, comparable to the annual IT small equipment waste of the Netherlands.
Going off of Digiconomist's estimates, each bitcoin transaction might use around 2,131 kilowatt-hours of electricity. That's as much as a typical American household uses over roughly two and a half months. Each transaction, on average, emits over a ton of carbon dioxide, comparable to nearly 3 million Visa credit card transactions or 200,000 hours of YouTube viewing. And each transaction generates about a third of a kilogram of electronic waste, which is roughly the mass of two iPhone 12s.
I don't know about you, but that seems more than a tad excessive, right?
All of this data begs the question: why is so much waste and pollution generated from mining something that's virtual? Shouldn't virtual mining be much less energy-intensive than physical mining since it's virtual?
The answers lie in how bitcoin was founded, how it's mined, and how the bitcoin market has evolved since its founding. And they paint a fascinating picture of the cryptocurrency industry, with big implications far beyond the confines of global financial markets.
When you think of mining, you might conjure a mental image of someone hard at work holding a pickaxe or a shovel. Miners sometimes descend thousands of feet into the Earth to extract valuable metals that power the global economy.
In order to join circulation, bitcoin must be mined. But bitcoin mining is quite different from metal mining. It's the process of creating new bitcoins by solving complex mathematical puzzles. Through solving these puzzles, bitcoin miners verify the validity of a number of bitcoin transactions that are bundled into a block. Once a block is unlocked, it's linked to the previous block, so all blocks are chained together.
This structure prevents tampering since changing one block would change all subsequent blocks. The validation process is known as proof-of-work. Just as your math teacher demanded you show your work when you did your homework, miners must prove they put in the work to receive their digital reward.
Bitcoin's creator intentionally made these puzzles harder to solve over time as competition for bitcoins grew. This aligns with the goal of keeping the currency decentralized, which allows the market to operate without a central authority like a central bank. It's meant to be prohibitively expensive for one person or entity to control an entire crypto network. Indeed, as bitcoin prices have surged over the years, miners have required increasingly advanced technology to mine it.
Back in the day, you could mine bitcoin with normal computers. Today, you can't. Miners now use specialized computers called ASIC systems that are much more efficient per puzzle-solving attempt. But even though ASIC systems are more efficient, they need a lot more power than your run-of-the-mill computer. Since they run nonstop, they need endless electricity to keep attempting to solve the puzzles plus endless energy to prevent overheating.
The puzzle-solving process is basically trial-and-error and can take trillions of attempts before a block is unlocked. At any given time, about three million machines are generating 140 quintillion guesses every second of the day. A quintillion is a billion billions, so it's a heavy amount a lot of puzzle-solving.
And over time, the bitcoin reward for mining one block is decreasing. Every 210,000 blocks, the reward is halved. Since the bitcoin protocol aims to have blocks of bitcoin mined about every 10 minutes, this happens about every four years, which acts as a periodic dampening on bitcoin inflation.
When bitcoin was first mined in 2009, the reward was 50 coins. Two years ago, it declined to 6.25 coins. But as bitcoin prices rise, the rewards still maintain significant value (over $250,000 at current bitcoin prices). As long as bitcoin prices double faster than coin rewards are halved, bitcoin blocks will keep growing in value. This has spurred a bitcoin mining arms race with more miners and fast computers competing for a fixed supply of increasing valuable cryptocurrency.
In short, replicating a central authority in a decentralized manner to operate the network and maintain its security requires major computational power, which in turn generates lots of waste and pollution. Crypto mining overall has become more centralized over time given its growing complexity, but while this centralization should lead to energy efficiency, it's only a slight improvement for a process that's highly energy-intensive.
Until recently, China was a hotbed of cryptocurrency mining. Miners flocked to China to directly access China's large financial market and its abundant cheap hydropower, making crypto mining more cost-competitive there. Chinese renewable energy made up a large portion of cryptocurrency mining.
But in 2021, China began a crackdown that forced miners to flee elsewhere. Many went to nearby Kazakhstan as well as the United States. In 2021, those two countries made up 60% of global bitcoin mining activity. In part, because they have a highly polluting energy mix, one peer-reviewed study found that the estimated share of global bitcoin mining powered by renewable energy fell from 42% in 2020 to 25% as of August 2021.
These estimates vary largely since it's hard to pinpoint the geographic distribution of bitcoin mining and the exact power mix in those locations, but the bottom line is that bitcoin mining is a dirty business that, all else equal, is designed to get more energy-intensive over time and thus dirtier unless we transition away from fossil fuels.
Furthermore, as competition heightens for bitcoin, miners look to add more specialized machines to solve the puzzles. Since the mining technology becomes obsolete very quickly (every 1.5 years) and can't be reprogrammed to do anything else, machines are frequently discarded with no ability to repurpose them, leading to significant electronic waste.
And that arms race has spillover effects. For example, since these machines require a variety of semiconductors, they strain the already struggling global semiconductor supply chain. Those effects are hard to quantify, but when you consider the opportunity cost of those semiconductors, it's likely massive.
The Greenidge Generation power plant in upstate New York crystallizes the evolution of bitcoin mining and its environmental impact. The plant was originally built in the 1930s to run on coal, which was profitable for decades. In 2011, however, the plant stopped operating and sat idle until a private equity firm bought the plant and converted it to run on natural gas. In 2017, the plant began to operate as a "peaker plant" to provide power to the grid during periods of high demand.
Then, in 2019, the plant's owner switched gears and opted to have the plant power bitcoin mining. Between 2019 and 2020, the plant's emissions rose ten-fold. Since Bitcoin miners need lots of power, Greenidge plans to keep growing its capacity to meet bitcoin mining demand. It's now a publicly-traded bitcoin mining company with a wholly-owned power plant to keep the puzzle-solving machines running 24/7.
Greenidge emits lots of greenhouse gases since it runs on fossil fuels. And the environmental impacts don't stop there. The plant draws up to 139 million gallons of freshwater out of the adjacent Seneca Lake every day to cool the plant. That water is then discharged 30 to 50 degrees Fahrenheit warmer than the lake's average temperature, which endangers the lake's ecology and kills all sorts of wildlife.
These developments have sparked controversy both within and beyond upstate New York. Earthjustice and the Sierra Club urged the State to reject the renewal of Greenidge's permit, warning that almost 30 other power plants in upstate New York could be converted to bitcoin mining operations. This would derail New York's decarbonization plans and destabilize some of the most pristine lake and forest habitats in the world.
A recent court ruling gave Greenidge's expansion plans the green light. It's a microcosm of bitcoin's growing popularity and an economy-wide prioritization of profit over sustainability. Findings from a 2018 study indicate that bitcoin mining alone may push global temperature rise above the dreaded 2
degree Celsius threshold. If bitcoin stakeholders turn a blind eye to these scary statistics as their high-powered machines keep guzzling energy, that spells bad news for bitcoin's environmental impact.
Much of bitcoin's particularly noxious environmental impact stems from the intensive proof-of-work method described above. It's antiquated, and given the vast and decentralized existing investments in bitcoin mining hardware and software, it's unlikely that bitcoin mining will move away from the proof-of-work method anytime soon.
As such, the best way to make bitcoin more environmentally friendly is to power bitcoin mining with more renewable energy. In this respect, bitcoin's decarbonization going forward will mirror the global transition away from fossil fuels.
But other cryptocurrencies, especially newer ones, might ditch proof-of-work. Ethereum, the cryptocurrency with the second-biggest market, is transitioning toward a proof-of-stake validation method, which differs from the proof-of-work method in that it doesn't require computational power to solve any puzzles to verify transactions. Instead, proof-of-stake validation is granted based on the amount of cryptocurrency a validator has agreed to "stake" or not sell.
Practically speaking, proof-of-stake is like a digital lottery. To be considered to win coins, validators must stake Ethereum coins in blocks of 32 Ethereum, with each block worth nearly $100,000 at current prices. These coins are locked up in a smart contract, a bit of computer code that runs on the blockchain. The more coins a miner stakes, the more likely they are to be randomly selected by the system as the rightful validator.
Just as the proof-of-work system's design ensures security, the proof-of-stake system is made secure by the fact that if validators cheat or accept false transactions in the currency's network, they both lose their stake and are banned from the network. Rising prices of the underlying currency increase network security, but prices don't affect demand for the energy needed to mine coins.
Most importantly, proof-of-stake requires a lot less energy. Ethereum is on the verge of transitioning its network from proof-of-work to proof-of-stake in an event termed "The Merge," which may lower the network's energy footprint by 99% while allowing the network to scale up to 100,000 transactions per second. The Merge has been deemed imminent for many years but has suffered from delays given the complexity of building the model.
A lot hinges on the success of The Merge, given Ethereum's stature in the cryptocurrency marketplace. Ethereum is perhaps most well-known as the network where NFTs are bought or sold. Billions of dollars of assets are at stake as Ethereum seeks to lessen its environmental impact and scale-up. A successful transition to proof-of-stake could both slash Ethereum's footprint and trigger a domino event across the cryptocurrency industry that inspires a focus on sustainability. A less successful transition could dissuade other networks from thinking beyond dollars and cents (or, to be more precise, coins).
While the design of a cryptocurrency's network (by way of its chosen validation method, for instance) is likely the most effective and impactful lever for cryptocurrencies to reduce their environmental impact, there are other levers.
For example, the Crypto Climate Accord (CCA) aims to make blockchains run on 100% renewable energy by 2025 and fully decarbonize the cryptocurrency industry by 2040. The CCA is composed of over 250 so-called "Supporters" - individuals and private sector companies who participate in the crypto sector and have pledged to achieve net-zero emissions from electricity consumption associated with all of their respective crypto-related operations by 2030.
Likewise, the Bitcoin Mining Council aims to improve transparency across the bitcoin mining network, which may spawn a network-wide focus on three dimensions of environmental impact: electricity consumption, technological efficiency, and sustainable power mix. Each quarter, the Council collects and then publicizes data that reflects the State of the crypto industry, including the aforementioned sustainability statistics.
As the industry grows and more data is collected and disseminated, the reputational drawbacks of hurting the environment may increase dramatically for miners and other crypto stakeholders. Scrutiny - from social media, from more traditional media, from regulators, investors, and from other stakeholders - should enhance the crypto market's ability to go green, especially given the market's opacity and lack of transparency.
Nonetheless, issues such as cryptocurrency's generation of electronic waste and other forms of pollution have still not been addressed at scale. And human psychology is as much of an impediment to change in the crypto world as it is elsewhere; the potential to reap massive financial rewards often outweighs any good-natured desire to keep the planet in mind.
As exemplified by bitcoin's design and evolution, cryptocurrencies can generate a massive environmental impact. Decentralization is a key feature of cryptocurrency in general, but one of its main drawbacks is a lack of efficiency, which extends to its environmental impact.
There are some signs of hope that cryptocurrency may drastically decrease its environmental impact going forward, but challenges remain, from the nature of the market itself to the broader global transition towards a decarbonized future. In many ways, crypto's decarbonization efforts have and will continue to correlate strongly with society's overall decarbonization efforts.
Given cryptocurrency's growth trajectory in terms of both awareness and actual impact, the stakes of this decarbonization are massive. And while it might seem hard to believe, it's possible that something only a small fraction of the global population has even used or directly interacted with may make or break our ability to avoid an environmental catastrophe.
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