This article is the first in a two-part series on cryptocurrency and climate change. Read the second part, “Can Cryptocurrencies help the planet?”, here.
Are you thinking of investing in Bitcoin? The world’s largest cryptocurrency by market cap has surged in value since the beginning of the COVID-19 pandemic, fueled by furloughed millennials and high-profile investors like Elon Musk, co-founder of Tesla. The car manufacturer revealed in February that it had invested USD 1.5 billion in Bitcoin.
With investments rocketing five-fold since October, many are wondering, “How do I get into Bitcoin?” But, given that climate change is forecasted to reduce average global incomes roughly 23 percent by 2100, we should be asking a more fundamental question: “What impact do cryptocurrencies have on the environment?”
In this first article of our two-part series on cryptocurrency and climate change, Landscape News went to the experts and put Bitcoin under the microscope.
In How Bad Are Bananas? The Carbon Footprint of Everything, professor Berners-Lee describes cryptocurrencies as “one of the most fundamentally pointless ways of using energy.” It’s a forthright statement, but the data would seem to support Berners-Lee.
A 2019 study from two sustainability researchers at Aalborg University, Susanne Köhler and Massimo Pizzol, estimated that the Bitcoin mining network in 2018 had an annual footprint of 17.29 metric tons of carbon dioxide equivalent. That is roughly the same as driving from San Francisco to New York 15,000 times, or the amount of carbon hypothetically sequestered by a forest the size of Portugal.
But Köhler and Pizzol were using data from 2018, when the market value of Bitcoin was a seventh of its value today. According to the Cambridge Centre for Alternative Finance, Bitcoin currently uses more electricity than the entire countries of Austria and Greece combined. Since the most recent surge in market price, which began in November 2020, the energy demands of the Bitcoin network have doubled.
In order to understand why this has happened, we must first understand how cryptocurrencies work.
Fundamentally, currencies only have value because a group of people believe that they have value. The only reason that we can exchange goods and services with the tap of a credit card is because everybody trusts the system. As anthropologist David Graeber wrote in Debt: The First 5,000 Years, “the value of a unit of currency is not the measure of the value of an object, but the measure of one’s trust in other human beings.”
With conventional currencies, that trust is backed up by a national or federal central bank, the government, the police and, ultimately, the military. As a result, most people have a lot of faith in the system and, most of the time, the system works. Bitcoin, in contrast, is backed by absolutely nothing: no central bank, no government and certainly no military. So why do so many people trust it?
The answer is blockchain technology, invented in 2008 by a still-anonymous creator called Satoshi Nakamoto. In cryptocurrencies like Bitcoin, the blockchain serves as a “distributed ledger,” a public record of transactions that is virtually impossible to defraud. Over the years, the Bitcoin blockchain has proved itself trustworthy again and again: to the point where a company like Tesla has trusted the cryptocurrency more than the US dollar for its latest investment.
The problem for the environment is that the Bitcoin blockchain is founded on something called “proof of work.” In proof of work blockchains, computers around the world (called “miners”) compete to add new blocks of currency transactions to the ledger by solving extremely hard mathematical puzzles. The first computers to solve these puzzles are rewarded in Bitcoin. The difficulty of these puzzles also helps keep financial transactions in the blockchain secure: it is simply too expensive to defraud the network.
The problem for the environment is that the Bitcoin blockchain is founded on something called “proof of work.”
The issue is that Bitcoin is designed to be scarce, like gold. Satoshi Nakamoto designed Bitcoin so that one block would be added to the blockchain roughly every 10 minutes. This 10-minute rule is regulated by the difficulty of the mathematical puzzles and, as computing power has increased since 2008, the difficulty of the mining puzzles has also increased exponentially.
In January 2009, the difficulty of the puzzles was 1.0. In March 2021, the difficulty of the puzzles is 20 trillion. Because the puzzles are harder, the mining computers need to work harder, using more and more electricity. In 2018, Bitcoin miners in Kosovo drained enough power from the grid to make digital clocks all over Europe lose time.
Unfortunately, as more and more investors pile in, the price of Bitcoin is rising faster than the electricity bills of the mining companies.
“I don’t think you can participate [in Bitcoin] and have zero impact,” says Susanne Köhler, a sustainable blockchain researcher at Aalborg University. “Firstly, one could attribute to your transactions the related share of the system’s impacts. Secondly, using Bitcoin adds to the miners’ revenues and likely impacts the market price, so you are perpetuating a system that has a negative impact, whether that’s you buying USD .05 Bitcoin or Elon Musk buying 1.5 billion.”
You don’t have to search hard to find arguments defending the vast energy use of Bitcoin, many of them extremely convincing, but the resounding message from researchers looking at its environmental impacts is to beware the true believers. “Having these conversations can be extremely frustrating because there are so many people that believe in Bitcoin and don’t want to look at the negative sides,” says Köhler.
Next we’ll examine some of the arguments that Bitcoin believers use to defend the cryptocurrency’s high energy cost.
Using survey data from May 2020, Cambridge University’s 3rd Global Cryptoasset Benchmarking Study found that 39 percent of global proof of work mining was powered by renewable energy. For miners based in Europe and North America, that proportion goes up to 70 percent and 66 percent respectively.
“There are some Bitcoin mining operations that are projected to positively impact the world of renewable energy, but on a large scale, that is likely not the case,” Köhler says.
Because of low energy prices, including from renewables, around half the world’s Bitcoin mining takes place in China. However, the enormous environmental cost is already putting the industry on a collision course with President Xi Jinping’s pledge to achieve carbon neutrality before 2060, and the Chinese government recently announced that all Bitcoin mining operations in Inner Mongolia will be shut down by the end of April because they were preventing the region from meeting its carbon reduction goals.
Ultimately, the question of whether the power used to mine Bitcoin is environmentally-friendly or not is somewhat irrelevant. Renewables only supply 28 percent of the world’s electricity, so the Bitcoin network’s use of green energy simply means that other areas of the economy cannot decarbonize.
“There have been multiple cases where Bitcoin mining facilities have displaced other electricity consumption,” Köhler says. “So, if they use the renewable electricity, others may not have access to [renewables] anymore.”
Some Bitcoin mining sites around the world are powered by “stranded” or “curtailed” energy – energy that, for whatever reason, cannot be connected to the grid and would otherwise be wasted.
This argument has been used to defend Bitcoin mining in places like Sichuan, China, where, during the rainy season, hydroelectric dams generate a huge excess of power. By only using curtailed power, Bitcoin is in effect preserving surplus energy in the same way that Iceland captures its surplus renewable power by smelting aluminum.
But, according to Köhler, this defense is no longer valid. “We’re not at the scale where that is possible any longer,” she says. “The Bitcoin network is increasing and cannot be covered by curtailed power alone.”
There are two further arguments against the idea of using curtailed electricity, even if it were able to cover the energy demands of Bitcoin. Firstly, as Köhler says, it “disincentivizes power plants from being integrated into international grids” and, secondly, it also disincentivizes research and development into grid-scale batteries that could store and transport the energy off-site.
Christian Stoll, co-author of another paper that estimates the carbon footprint of Bitcoin, points out that Bitcoin is currently responsible for less than 1 percent of global carbon emissions. Although Stoll agrees that proof of work cryptocurrencies like Bitcoin are “not climate conscious investments,” he also suggests that “there are bigger levers to meet the Paris Agreement goals”.
For comparison, the entire Bitcoin network currently uses about half as much power every year as all the electronic devices that citizens of the U.S. leave plugged in when they are not using them.
The entire Bitcoin network currently uses about half as much power every year as all the electronic devices that citizens of the U.S. leave plugged in when they are not using them.
Nevertheless, because the mathematical puzzles underpinning the cryptocurrency are getting harder and harder to solve, there is no doubt that Bitcoin is environmentally harmful and getting worse, despite a 96 percent increase in mining machine efficiency over the past seven years. That puts a hole in the argument that Bitcoin mining technology might somehow reduce its impact through efficiency gains.
If proof of work is the problem, the question is: are there any greener alternatives? Finally, here’s some good news.
Stephen Reid, selected as the Green Party candidate for Totnes, U.K. at the last General Election, is one of the teachers of Tools for the Regenerative Renaissance, a course that combines technology and blockchain education with climate consciousness.
“Bitcoin was the very earliest instantiation of this technology, and it is incredibly energy inefficient,” says Reid, who holds a master’s degree in physics and another in complexity sciences. “But, nevertheless, it was a stroke of absolute genius. It is changing the world as much as Einstein’s 1905 papers on quantum mechanics and special relativity.”
“Satoshi Nakamoto pieced together three or four different concepts to produce the first decentralized form of money, in a way that no one had thought before. Bitcoin is incredibly energy inefficient and cannot be defended over the long term, but, happily, people have come up with vastly more energy efficient consensus schemes.”
The most promising alternative to proof of work is called proof of stake. In proof of stake blockchains, the blocks are “forged” rather than “mined” and, instead of solving hard puzzles, the creator of the next block in the chain is chosen using a combination of randomization and how much of the cryptocurrency they hold – that’s the stake.
Don’t worry. You don’t necessarily have to understand the finer details to get the point that proof of stake is better for the environment than proof of work. If you do want to learn more, Coindesk has a great explainer.
Proof of work blockchains are designed to need computers running all day, every day. Proof of stake blockchains only need computers to run for milliseconds at a time. Because it doesn’t require hard computing work, proof of stake has the potential to massively reduce the energy needed to add blocks to a cryptocurrency’s blockchain.
“Not using proof of work would reduce the calculated footprint to zero and the overall footprint by approximately 99 percent,” Köhler says.
It is worth emphasizing that the overall energy use of a proof of stake cryptocurrency is not zero: it still needs a peer-to-peer computer network to verify transactions and secure the system. “The numbers that we calculated are 100 percent the mining process,” Köhler explains. “They don’t include the servers that host the blockchain nodes.”
Nevertheless, proof of stake still represents a huge improvement in energy efficiency over proof of work cryptocurrencies like Bitcoin. There are already proof of stake cryptocurrencies out in the world: Avalanche, Cardano and Harmony to name three of the largest – but they are all small fry compared to Bitcoin. However, the world’s second largest cryptocurrency by market capitalization, Ethereum, is midway through a complicated transition from proof of work to proof of stake.
According to Ethereum’s website, the transition to proof of stake has three phases, the first of which is already live and the third due sometime in 2022. “Everybody’s been waiting for Ethereum’s move to proof of stake for years, but it’s a slow, step-by-step process,” says Köhler.
The good news is that, should it be successful, the carbon-saving benefits of the transition will not only effect those who hold the Ethereum cryptocurrency. “Ethereum is fundamentally different to Bitcoin,” Köhler explains. “It is a cryptocurrency, but it also hosts tons and tons of applications.”
Whereas Bitcoin aims to become the world currency, Ethereum aims to become the world computer: it is a blockchain that supports a programming language. In theory, anything that can be imagined and programmed can be hosted on the Ethereum network.
Applications on the Ethereum network include numerous other cryptocurrencies and financial services including venture capital and insurance, but also smart contracts, social media and even, perhaps controversially, carbon credits. To cap it all, on 11 March, British auction house Christie’s, founded in 1766, sold a crypto-artwork hosted on the Ethereum network for USD 69.3 million. Christie’s, of course, accepted payment in cryptocurrency.
“If Ethereum manages to move to proof of stake, then, by association, all these projects using Ethereum will also be working with a more environmentally friendly blockchain,” Köhler says.
“In principle, Bitcoin could do the same,” Stephen Reid says of Ethereum’s shift to proof of stake. So why don’t they?
The problem is that the majority of Bitcoin’s miners and stakeholders, everyone from Elon Musk to the miners of Sichuan, would have to come together and agree to change the underlying design of the blockchain. That would be an almost incredible feat of decentralized democracy.
But this question also assumes that the Bitcoin community even wants to move away from proof of work. “The miners are not interested in moving to proof of stake,” Köhler says. “They make tons of money with the current system and are highly invested in it, so why would they want to move to a different one?”
The problem is that, when the price of Bitcoin rises, miners can use their higher revenues to reinvest in more mining machines, increasing both their profits and their overall carbon emissions. “This relationship needs to be studied further,” Köhler says, “but it seems to be a vicious cycle.”
Continue reading part two of this series on cryptocurrency and climate change: Can cryptocurrencies help the planet?
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