7mins read
Published on: Aug 5, 2024
#Crypto 360
Cryptocurrencies empower a robust DeFi ecosystem but also come with environmental costs.
Key Takeaways
• While cryptocurrencies empower a robust DeFi ecosystem, it also comes with environmental costs.
• Bitcoin mining consumes 170 TWh of energy and 2,673 gallons of freshwater yearly.
• It produces 94.59 MT of CO2 and 10.52 kT of e-waste yearly.
• Industry initiatives and government actions, guided by sustainability goals, are the keys to minimise the environmental impact of crypto.
Cryptocurrency debuted in the decentralised finance (DeFi) system in 2009 and has since emerged as an alternative financial system that is not controlled by any central authority or national boundaries.
Over the years, crypto has integrated parts of the world into its financial system that aren't part of the traditional finance (TradFi) system due to structural and institutional hurdles. But crypto has its hidden costs that aren’t discussed often among DeFi enthusiasts. The negative environmental impact of crypto is manifold, much like any other enterprise.
The concern with crypto is that its environmental costs are disproportionally high compared to other financial systems. For the same reasons, crypto has often been slammed in the national parliaments and the international press. What's worse, the crypto industry's attempts to address these concerns are slow and nominal. In this blog, we will learn about the environmental impact of crypto and other hidden costs.
Cryptocurrency is a decentralised digital currency system that allows peer-to-peer (P2P) trading outside the purview of any central authority such as central banks, commercial banks, exchanges, etc. A cryptocurrency is created on-chain by a complex and energy-intensive process called crypto mining. Mining is the process through which new cryptocurrencies are made and new transactions are validated.
Each transaction on a blockchain is validated by a consensus mechanism. It is a system of nodes programmed to agree that a data set on a blockchain is the correct one. The reason crypto mining is so energy intensive is that most cryptocurrencies such as Bitcoin (BTC) use the Proof-of-Work (PoW) consensus mechanism.
A PoW-based blockchain system verifies and adds a block to the chain once it recognises that the block has been generated with effort and time. You can understand that those who are chasing high profits barely have a thought for our environment.
Bitcoin is the largest cryptocurrency in the world, and mining Bitcoin is widely criticised for its high energy consumption. But why does it happen? Miners on a blockchain compete to generate a hash that is almost similar to the hash of the block containing the correct transactions.
These miners use complex computer chips called application-specific integrated circuits (ASICs) to generate hashes and create the hash that can match the hash containing transactions. It is obvious that the process of crypto mining is complex, and it requires a lot of time, effort, and computing power. This is why miners are awarded in the form of rewards for mining a block.
There is no way that a miner can always create a matching hash as it is largely a trial-and-error method-based process. A miner’s success rate is therefore proportional to their computing power. Miners are, in fact, rewarded for the intensity and speed of their computing machines. Since the rewards far outweigh the costs, miners deploy the most energy-intensive computing machines to realise maximum profits.
More individuals join the mining community to chase high rewards and the overall energy usage due to the mining process rises. Digiconomist notes that Bitcoin mining is estimated to have consumed 170 terawatt-hour (TWh) per year as per July 2024 estimate. The power consumption is nearly the same as that of Poland.
Source: Digiconomist
What does it cost to validate and execute a single Bitcoin transaction? 724.62 kWh of energy, the same amount which can power 487,532 VISA transactions or an average U.S. household for 24.84 days. Do you know how much of energy requirements of different countries could be powered by Bitcoin’s total energy consumption?
• 3.9% of the US
• 16.7% of Russia
• 29.2% of Canada
• 29.5% of Germany
• 34.8% of France
• 51.3% of the UK
• 53% of Italy
• 67.6% of Australia
• 142.7% of Netherlands
•239.2% of Czech Republic
Bitcoin mining is very dependent on fossil fuels for its energy requirements. The biggest energy sources of Bitcoin mining are fossil fuels, with coal (45%) and natural gas (21%) leading the race. Burning these fossil fuels for Bitcoin mining or any other purpose, in fact, has a large footprint of carbon dioxide (CO2) and other greenhouse gases.
Bitcoin mining has an annual carbon footprint of 94.59 metric tons (MT). It is comparable to the carbon footprint of Nigeria. A single Bitcoin transaction has a carbon footprint of 404.16 kg. In contrast, 895,766 VISA transactions produce the same amount of carbon dioxide.
Alternative energy sources such as hydropower (16%), nuclear energy (9%), wind energy (5%), and solar energy (2%) also power Bitcoin mining. These energy sources are environmentally sustainable though even they have their environmental costs, however modest.
As mentioned earlier, Bitcoin mining involves the usage of energy-intensive ASICs. On average, each ASIC expires every 1.5 years due to the consistent rise in the Bitcoin network’s hash rate.
Now, the trouble with ASICs is that their only use case is crypto mining. An outdated ASIC cannot be used for any other purpose once it has been disposed of from a crypto mining unit. We have already mentioned earlier that it is a crypto miner’s computing power that determines their success rate. The stronger a miner’s computing system is, the higher is their chance of winning the mining rewards.
As the rewards for Bitcoin mining are so high, miners don’t hesitate to give up barely a few years old ASIC to acquire a more advanced one that is bound to be more energy intensive. So, you can see how much e-waste is generated due to such practices in the Bitcoin mining industry.
Neither the crypto mining industry nor the ASIC manufacturing industry has made any concrete or comprehensive plans for the waste management or recycling of the disposed ASICs. Bitcoin mining produces electronic waste of 10.52 kT yearly. The amount is nearly the same as the small IT equipment waste of the Netherlands.
In fact, a single Bitcoin transaction produces 44.9 kg of e-waste. 0.27 iPhones 12 or 0.09 iPads produce the same amount of e-waste.
Bitcoin mining generates a lot of heat in its immediate environment. For operations running hundreds of mining rigs, it generates such a high amount of heat that it can be unbearable even for mining equipment.
Mining companies use water cooling to keep the mining rigs cool and keep the temperature of the immediate environment down. Bitcoin mining annually consumes 2,673 gallons of freshwater, nearly the same as the total water use of Switzerland.
In fact, a single Bitcoin transaction consumes as much as 1,420 liters of freshwater. The same amount of water can be used to fill a backyard swimming pool. Oftentimes, mining operations discharge hot water into the water bodies nearby, which can even lead to water pollution.
Transitioning to alternative, environmentally conscious and sustainable practices is the best direction that the crypto industry can take to minimise the environmental damage crypto causes.
The PoW consensus mechanism used by Bitcoin and several other cryptocurrencies is an energy intensive method. The Proof of Stake (PoS) mechanism, on the other hand, is a sustainable mechanism as it asks validators to stake some of their crypto tokens instead of asking miners to solve complex mathematical puzzles by using energy intensive ASICs. Ethereum (ETH) transitioned from PoW to PoS during the Merge upgrade in 2022 which cut the network’s energy usage by 99.95%.
• BTC, Bitcoin Cash (BCH), Dogecoin (DOGE), and Ethereum Classic (ETC) are the most popular PoW cryptocurrencies.
• ETH, Cardano (ADA), Algorand (ALGO), and Solana (SOL) are the most popular PoS cryptocurrencies.
If the crypto industry decided to chase sustainable goals by taking up alternative steps to run its operations, it could be a real gamechanger. In December 2017, an environmental sustainability consortium called the Climate Chain Coalition (CCC) was established in Paris. The coalition's goals are aligned with the long-term goals of the Paris Agreement of 2015.
It aims to utilise blockchain and other emerging technologies to further the transition of the global financial system toward a sustainable and green economy. Crypto organisations such as Cardano Foundation, Blockchain for Climate Foundation, Sustainable Bitcoin Protocol, Chainlink, VeChain, and Blockchain & Climate Institute are members of the CCC.
Another sustainability initiative inspired by the Paris Agreement is the Crypto Climate Accord (CCA), signed in April 2021. Its aim is to spur the transition of all blockchains to renewable energy sources by 2030 if not sooner, and reach “net zero” emissions or become carbon neutral by 2040. Crypto organisations such as Ripple, Hut 8, CoinShares, ConsenSys, and 21Shares have signed the CCA.
Tough and strict government action that prioritises the present and future of our environment can be a major deterrent to the environmental damage caused by crypto. Governments can encourage the usage of alternative and cleaner energy sources such as solar or wind power over fossil fuels. Economic incentives, subsidies, and carbon credits are some of the most popular measures to encourage sustainable steps by the crypto industry.
Penalising crypto ventures for causing air or water pollution is also a reasonably strict action that governments can take. Governments can choose to restrict or outright ban crypto mining in regions that are facing severe energy or environmental crisis.
There are many other sustainability actions that governments across the world can pursue to minimise the negative environmental impact of crypto. In fact, a comprehensive crypto policy arrived after a global consensus is the need of the hour.
It requires a lot of energy, largely powered by fossil fuels, to mine, validate and execute cryptocurrency. Its carbon footprint is significant, making the asset class harmful for our environment. Note that it’s an industrial activity and has its negative environmental impact that can be addressed by deploying sustainable measures.
Bitcoin mining has an annual carbon footprint of 94.59 MT.
Bitcoin mining produces e-waste of 10.52 kT annually.
Bitcoin mining consumes 2,673 gallons of freshwater annually.
Bitcoin mining is estimated to have consumed 170 TWh per year.
The biggest energy sources of Bitcoin mining are fossil fuels, i.e. coal (45%) and natural gas (21%). Alternative energy sources such as hydropower (16%) and nuclear energy (9%) also power Bitcoin mining.
PoS is a more sustainable consensus mechanism than PoW as the former asks validators to stake their crypto tokens and the latter asks miners to solve complex mathematical puzzles. The latter process requires the usage of energy intensive ASICs, making PoS an energy intensive mechanism.
There are many ways through which crypto’s environmental footprint can be minimised:
• Blockchains transitioning to the PoS mechanism,
• Industry pursuing sustainability goals, and
• Strict government action.
Bitcoin, Bitcoin Cash, Dogecoin, and Ethereum Classic are some of the energy intensive cryptocurrencies.
Some sustainable cryptocurrencies are Ethereum, Cardano, Algorand, and Solana.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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