Sustainable Investing: Can Cryptocurrency Go Green?
/Cryptocurrencies have changed the way we view money and financial transactions. Since the introduction of the first viable cryptocurrency, Bitcoin, in 2009 – the valuation, media coverage, and popularity of cryptocurrencies have continued to progressively soar to new heights. Unfortunately, with the increased demand for cryptocurrencies, the environmental costs associated with mining cryptocurrencies have also soared.
As the cryptocurrency with the highest demand and largest market cap, we will be primarily focusing on Bitcoin for this discussion. At the time of writing, Bitcoin possesses a market cap of 623 billion USD, far surpassing the next highest crypto by valuation, Etherium, which possesses a market cap of 224 billion. It is a decentralized currency, with those owning Bitcoin being primarily responsible for regulating transactions and detecting fraud. You can either acquire Bitcoin through trading on the markets on which it is available, exchanging traditional currencies with another person in return for Bitcoin, or by mining it.
What Does it Mean to Mine Bitcoin?
In order to ‘mine’ Bitcoin, one must utilize a large quantity of computational power towards solving complex algorithmic problems which have a 64-digit hexadecimal solution called a ‘hash’. These hashes are used to verify the legitimacy of transactions stored on a blockchain ledger in ‘blocks’ possessed by everyone who has Bitcoin. A hash is dependent upon all of the data that went into making the transaction, so even a minuscule change to this data invalidates the block entirely as the hash will no longer be the same.
As time goes on, and as more and more people involved in mining find themselves in competition with one another to discover these hashes, the amount of energy required to discover one of these hashes increases. Mining is important to the underlying functionality and security of the Bitcoin network in that it is, in effect, the process for auditing and verifying new transactions on the blockchain, as a hash is essentially the record of a transaction and proof of its legitimacy.
Proof of Work Algorithm
Proof of work (PoW) is a blockchain-based algorithm first popularized by Bitcoin - and widely used in cryptocurrency mining - for validating transactions and mining new tokens. A block header, which is essentially a summary of data - is generated from unverified transactional data, a reference to an existing block on the blockchain, and a number chosen from a range of 0 and 4,294,967,296 (called a ‘nonce’ or a ‘number only used once’) - and ran through a cryptographic hashing function to generate a hash unique to the series of data being entered into the hashing function.
This algorithm requires that the resultant hash is lower than a set target. If it isn’t, the nonce must be adjusted, and more work is required. Once a solution is reached, it is sent out to the entire network for verification. If correct, the miner is awarded new Bitcoin as a reward for their work in solving the problem and verifying the transaction. It is through PoW that the Bitcoin network validates transactions to add to the blockchain ledger.
Proof of Work (PoW) Process:
New transactions are bundled together into a block.
Cryptominers compete to verify the legitimacy of these transactions.
The first miner to solve for an acceptable hash has their solution broadcast to the entire network.
Other miners on the network verify the legitimacy of the solution.
If correct, the block is added to the blockchain and the generator of the correct solution is rewarded.
The difficulty and amount of computational power required to solve for the correct hash is increased every time a new block is added to ensure that a new block is mined every 10 minutes. To do this, the target hash is made progressively smaller. The lower the target hash, the smaller the number of valid hashes falling into the acceptable range will be.
How Does Mining Bitcoin Impact the Environment?
As more miners join the competition to earn increasingly valuable Bitcoin, they find themselves contending with the ever-increasing complexity required to mine more Bitcoin. Operating under proof of work (PoW) necessitates having the best hardware and the most processing power in order to solve the problems faster than others and reap the rewards. All of the energy that is utilized by miners who don’t reach the correct solution first, is effectively wasted. The increasing difficulty and race to be first leads to a situation in which energy consumption must also increase to support the demands of the hardware being used.
According to Cambridge's Centre for Alternative Finance, the entirety of the Bitcoin network at the beginning of 2020 required 71.07 Tetrawatt-hours of electricity consumption annually, however, as of May 2021, this figure had increased to 141.28 Tetrawatt-hours, coinciding with its growing demand in the global crypto market and emergence into mainstream finance discussion.
Consuming this much energy would place Bitcoin’s electrical consumption higher than all but 26 countries globally, placing it nearly 10 Tetrawatt-hours above the electrical consumption of Sweden - as shown in this chart below.
Assuming a proportional increase in CO2 emissions to coincide with the increase in electrical usage, the Bitcoin network’s CO2 emissions are also increasing at an alarming rate jumping from 36.95 Million metric tons of CO2 emitted in 2020, towards an estimated 60.43 Million metric tons in 2021.
The High Cost of a Single Transaction
With the high energy demands of the entire network, one might wonder what this means for the individual. What is the environmental cost of a single Bitcoin transaction? According to the Bitcoin Energy Consumption Index, a single Bitcoin transaction produces 748.57 kg CO2, or the equivalent of 124,762 hours spent watching YouTube. A single transaction also requires 1575.93 kWh of electricity, which is enough electricity to power the average US household for 54 days. Clearly, the energy demands are steep, but what can be done to reduce the environmental impact of cryptomining and trading?
How Can Cryptocurrency Become More Environmentally Sustainable?
Two proposed solutions towards countering the negative environmental effects caused by Bitcoin mining are switching from a proof of work algorithm to a proof of stake algorithm and increasing the number of mining operations that rely on sustainable energy sources.
Proof of Stake Algorithm
Proof of stake (PoS), like proof of work, is a consensus mechanism to ensure the validity of transactions added to the blockchain. The difference is that proof of stake seeks to address the problem of increasing power demands by equating the ‘mining power’ of cryptocurrency miners to an amount of coins they’re willing to stake on a block being validated. Rather than consuming large quantities of energy in competition to solve the cryptographic problems first, miners who stake their coins are selected at random to be given the chance to propose a new block to be added to the blockchain. This effectively removes the demand for increasing energy consumption as there is no longer a competition to solve the problems first.
Of note, Ethereum, the 2nd largest cryptocurrency by valuation, has begun the process of switching to a proof of stake algorithm from proof of work. The change, called Ethereum 2.0, will be incrementally rolled out in phases.
Increase Mining Operations Using Sustainable Energy Sources
In 2020, the University of Cambridge released their 3rd Global Cryptoasset Benchmarking Study which stated that while 76 percent of cryptominers rely on some degree of renewable energy to power their operations, only 39 percent of cryptomining’s total operations were utilizing some form of sustainable energy sources. The chart below - from the same study - shows percentages of Cryptominers utilizing a given resource broken down by region.
As evidenced by the reported statistics, there is still a long way to go, but increasing the amount of renewable resource utilization, while decreasing the amount of energy produced by coal would go a long way towards combating the negative environmental effects caused by the rush to profit off of cryptocurrency mining. This would also serve to combat excess energy generation and its subsequent energy waste from sources such as solar, wind, and hydroelectric generators.
Steps Toward Reducing the Environmental Impact of Cryptocurrencies
Some companies, such as Bitfarms, have already begun to mine Bitcoin through 100 percent renewable energy utilization. While others, such as Plouton Mining, have made it a point to utilize as much renewable energy as possible. In the case of Plouton Mining, they have proposed a solar farm in the Mojave Desert to furnish a majority of their electrical usage. Furthermore, in China, where a majority of energy still comes from coal, they have begun the process of restricting mining in areas in which the primary energy source is coal, leading to an increase in mining from areas supplied through hydroelectricity.
As more efforts are being made to reduce the environmental impact of cryptocurrencies, a movement has emerged amongst crypto companies in the private sector to encourage companies in the crypto field to sign onto the Crypto Climate Accord. By signing this accord, signatories ‘make a public commitment to achieve net-zero emissions from electricity consumption associated with all of their respective crypto-related operations by 2030.’ At the time of writing, more than 45 companies have signed the accord.
KERAMIDA’s team of Sustainability consultants have a wealth of expertise and experience in helping clients find strategies to reduce their GHG emissions. Please contact us or call (800) 508-8034 to speak with one of our professionals today.
Blog Author
Alston M. Listenberger
Software Engineer
KERAMIDA Inc.
Contact Alston at alistenberger@keramida.com
