The environmental impact of cryptocurrencies has been a widely-discussed topic in recent years, with many believing that the underlying technology is inherently bad for the environment – notably, the process of crypto mining. To address this misconception, it is essential to understand the reasons behind this belief, how blockchain networks compare to other systems on energy consumption.
The Origins of the Misconception
One of the main reasons people associate crypto with environmental harm can be attributed to the energy-intensive nature of the mining process. Bitcoin, as well as many other established and widely used projects, rely on the proof-of-work (PoW) consensus mechanism for maintaining the distributed ledger of transactions. This method of validation involves miners using powerful computers to solve complex mathematical puzzles. The process is thought to consume a significant amount of electricity.
However, critics often focus on the energy consumption of cryptocurrencies, particularly Bitcoin, without providing full context or comparison. This selective representation can lead to the perception that crypto is inherently harmful to the environment. A balanced perspective is crucial to understanding the scale of the environmental impact of crypto and putting it into context.
Understanding the Crypto Energy Debate: A Deeper Dive
While proof-of-work (PoW) blockchains, such as the Bitcoin network, do consume significant amounts of energy, it would be unreasonable to claim that crypto is inherently bad for the environment.
According to a 2021 Galaxy Digital research report, the energy footprint of the top 100 global banks’ data centers is more than 2 times that of the Bitcoin network. Furthermore, the World Bank and International Energy Agency’s estimates of the amount of electricity lost in transmission and distribution annually are 19.4 times greater than what the Bitcoin blockchain uses over the same period.
This point is aptly summarized in a paper published by the World Economic Forum’s Crypto Impact and Sustainability Accelerator (CISA): “Crypto provides economic freedom to people in developing countries and consumes less energy globally than tumble driers or domestic refrigeration.”
Advancing the Use of Sustainable Energy
The idea that all Bitcoin mining is immediately damaging is a fallacy in and of itself. A Q2 2022 report from the Bitcoin Mining Council revealed that 59.5% of global energy used for Bitcoin mining is derived from renewable sources, indicating a shift toward sustainability of the process. Furthermore, the organization reported a 46% year-on-year increase in mining efficiency resulting from advancements in semiconductor technology and the implementation of modern mining techniques. These dynamics result in a decrease in the network’s emissions. There is evidence suggesting that, even as hashrate and the overall electricity consumption of the BTC network go up, emissions are decreasing as miners opt for more sustainable energy sources.
Consensus Mechanisms and Energy Efficiency
Another key point to consider in relation to the “environmental” myth is that it almost always focuses on Bitcoin and other PoW-based systems. However, blockchains rely on different consensus mechanisms, other than PoW to verify transactions.
Recent years have seen a spike in the popularity of proof-of-stake (PoS) solutions, which rely on a limited number of nodes, selected based on their stake in the network, to validate transactions. PoS mechanisms are more energy-efficient, thereby significantly reducing the overall electricity consumption of cryptocurrencies.
Ethereum, the second-largest blockchain network in the world, has undergone a switch from PoW to PoS in September 2022, one of the major drivers for the change being the superior energy efficiency of the latter consensus mechanism. Crypto Carbon Ratings Institute (CCRI) has examined the impact of Ethereum’s transition and found that its annualized electricity consumption went down by more than 99.9%. Accordingly, Ethereum’s carbon footprint also decreased by 99.9%.
Research from the Cambridge Centre for Alternative Finance shows that Ethereum’s annual electricity usage is now equivalent to the yearly consumption of 587 air conditioners and is smaller than that of many global companies and famous buildings. For a system that has processed upwards of 400 million transactions at an average transaction time of just a few minutes, such a level of energy consumption is nothing short of remarkable.
Blockchain’s Role in Solving Sustainability Challenges
Blockchain technology’s role in sustainable development goes far beyond the carbon footprint of its financial services applications. For instance, blockchain can be used to track and verify the origins of goods, ensuring that they are produced sustainably and ethically. This level of transparency can incentivize companies to adopt more environmentally friendly practices and help consumers make informed choices.
Using blockchain technology to enable peer-to-peer energy trading also allows consumers to sell excess solar power directly to their neighbors. This innovative approach not only promotes the use of renewable energy sources but also decentralizes the energy market, reducing reliance on large-scale power plants and inefficient energy distribution systems.
Crypto and blockchain hold the potential to not only be part of, but also heavily contribute to a more sustainable future. By fostering energy-efficient consensus mechanisms, driving innovation in renewable energy, and promoting transparency and accountability across various industries.
