Introduction
Cryptocurrency is a form of digital currency that is not centrally controlled or issued by a central bank. Instead, it is stored on a Blockchain. A Blockchain is an immutable network that is shared between the users of the cryptocurrency, and stores records of all currency ownership and transactions. It also usually has an associated “native” token, such as Bitcoin. This decentralised structure is appealing to many users who resent the control of banks and governments in financial markets. At time of writing, the total market cap of cryptocurrency is around 3.26 trillion USD, a figure which changes constantly. Clearly, cryptocurrency has substantial influence in modern financial markets. However, the high energy demand contributes to rising carbon emissions, which is one of the central ESG concerns faced in this industry.
Mining and Consensus Mechanisms
Decentralised blockchains operate without a trusted intermediary, like a bank, to authorise transactions. To validate transactions, such as issuing or spending coins, the networks use a consensus mechanism. This allows all nodes in the network to agree on which transactions are legitimate.
“Proof of Work” was the original consensus mechanism developed by the inventor of Bitcoin. In this process, nodes throughout the network compete to solve mathematical problems. This is referred to as “mining”. The first to solve the problems gets selected as the “validator” and is then allowed to update the blockchain. This is secure but slow and energy intensive.
Climate Damages associated with Cryptocurrency
Due to the decentralised and anonymised nature of cryptocurrency, there is no reliable data on its climate impacts. Any statistics are therefore estimated.
Around 65% of the cryptocurrency market uses proof of work, which includes the most popular currency, Bitcoin. Estimates of the energy demands of Bitcoin alone range from 100 to 200 TWh annually, which is comparable to countries like Poland. The energy consumption of Bitcoin is estimated to be 4 to 5 times greater than the energy demand of all fiat currencies combined. If cryptocurrency reaches wide scale adoption throughout the financial system, this is going to rise considerably.
Additionally, the carbon footprint is linked to the price of a cryptocurrency. A higher price provides more incentive for more intensive mining operations.
Figure 1: Left: the estimated climate damages of bitcoin mining between 2016 and 2022, measured in USD/coin. Right: Environmental damages as percentage of coin price. The outliers in 2020 and 2021 are likely related to a collapse in cryptocurrency markets. (Jones et. al)
In addition to its carbon footprint, mining also has a large water footprint. Despite representing only around 0.5% of cashless financial transactions, cryptocurrency is estimated to require double the water consumption of conventional transactions. This is because most mining takes place in countries that have high water intensity for energy production. Also, water is required to cool the computers used for mining.
Cryptocurrency also creates significant amounts of electronic waste. Estimates suggest that mining creates tens of thousands of tonnes of e-waste every year. On average, each Bitcoin transaction creates more than 300 grams of e-waste, which is approximately the weight of two IPhones. In comparison, 10,000 VISA transactions create around 40 grams of e-waste. The main cause of this waste is the large computational demand of PoW. This encourages miners to constantly replace their equipment to ensure maximum efficiency.
Transition to Renewables
The carbon footprint of crypto mining is heavily linked to the carbon intensity of energy production in the countries where miners are based. Before the country banned cryptocurrency in 2021, most miners were located in China, where much of the energy used was produced renewably through hydropower. After 2021, most mining operations relocated to the US, Kazakhstan, and Russia. As a result, the carbon footprint of cryptocurrency surged. Currently, approximately 80% of electricity used for mining is produced using fossil fuels.
Jones et.al estimated that the environmental impact of Bitcoin as a fraction of its market value is comparable to natural gas or beef production, at approximately 40%. This is an average between 2016 and 2021, which is likely higher now. In comparison, the environmental impact as a fraction of market value for coal power generation is around 95%. They also estimated that if about 88% of electricity used for mining Bitcoin came from renewables, then its environmental impact would be comparable to other commodities such as gold or solar power. Therefore, transitioning general energy production to renewables may help mitigate some of the climate damages from cryptocurrency.
Transition to Proof of Stake
The developers of Ethereum, the second largest cryptocurrency after Bitcoin, wanted to address the limitations of the Proof of Work process and introduced “Proof of Stake”. Proof of Stake (PoS) avoids the difficult and retroactively useless mining process. Instead, notes offer crypto tokens as a “stake”. Then, the validators get selected randomly, with a probability weighted by the size of each stake. The network then rewards them with its native tokens, such as Ether, for correctly validated transactions. This creates a financial incentive for users to keep the network secure because nodes will be rewarded with tokens. Most blockchains still operate with PoW, although many are switching to PoS because of its better scalability, lower emission, and lower barrier to entry.
In 2022, Ethereum switched from PoW to PoS. The Cambridge Centre for Alternative Finance estimates that the switch resulted in a 99.97% reduction in carbon emission, in spite of a significant increase in the number of nodes on the blockchain.
Figure 2: Graph of Ethereum energy consumption between 2017 and 2025. A steep drop can be seen in 2022, where Etherium transitioned from PoW to PoS. (EtheriumEnergyConsumption.com)
The switch to PoS has been very successful for Ethereum. However, other cryptocurrencies such as Bitcoin remain committed to PoW. A fundamental tenet of crypto is decentralisation. However, the security of PoS is dependent on the value of a network’s native token, which can be seen as a centralising factor.
Switching to Proof of Stake on a wide scale would significantly reduce the carbon intensity of cryptocurrency by forgoing mining entirely.
Conclusion
Overall, the energy demands of cryptocurrency urgently require more sustainable practices to mitigate global carbon emissions. Alternative consensus mechanisms like Proof of Stake offer promising reductions in emissions. The environmental impact remains tied to the energy sources powering mining operations. Transitioning global energy production toward renewable sources is essential to reduce carbon footprints and mitigate damage. Therefore, widespread adoption of renewable energy will be the most effective measure to enhance cryptocurrency sustainability and secure a greener future for digital finance. Ultimately, renewable energy ensures a cleaner crypto ecosystem.
References:
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