Lack of scalability has been the biggest setback for Bitcoin since its inception - as the original cryptocurrency has grown in popularity, the network has become increasingly congested and transaction fees have soared. There is another facet to this issue that needs to be addressed urgently - inherent energy inefficiency of Bitcoin. In the present article Zichain's CEO Christopher Gukasyan delves into the core of the problem and looks for possible ways to solve it.
A quarter of the century has passed since world leaders convened in Rio de Janeiro to sign the UN Convention on Climate Change - yet this problem today is more pressing than ever. Recent extreme weather events, from wildfires in California to floods in Vietnam, were made more likely by rising global temperatures. Could Bitcoin mining be the next threat to the planet? Or could it be turned into an eco-friendly endeavor?
Lack of scalability has been the biggest setback for Bitcoin since its inception - as the original cryptocurrency has grown in popularity, the network has become increasingly congested and transaction fees have soared. There is another facet to this problem that needs to be addressed urgently - inherent energy inefficiency of Bitcoin.
Since Bitcoin is based on proof-of-work consensus, it relies on a distributed network of computers to validate and timestamp transactions by solving cryptographic puzzles - this process is known as “mining”. Bitcoin mining is an energy-intensive process and the cost of electricity is the chief determinant of its operational costs. Thus, this relatively new kind of business venture has been thriving in locations with low electricity prices. Today China is the undisputed leader when it comes to bitcoin mining, consolidating more than 71% of the network’s hash rate. Yet its energy production is still mostly reliant on fossil fuels, with 75% of the nation’s electrical supply produced from coal. The pattern is evident in other countries - crypto mining is drawn to cheap electricity that rarely comes from renewable sources like wind or solar power (with the notable exception of Iceland and its geothermal energy plants).
Beyond any doubt, Bitcoin mining has a carbon footprint - that is, it produces CO2 emissions. National regulators today are increasingly wary of crypto mining and its environmental effects. For example, the government of Norway has recently scrapped all subsidies on electricity for crypto mining, stating the industry’s high levels of greenhouse gas emissions as the main reason behind this move.
But how much electricity is actually spent on mining operations? There is no straight-forward answer to this question. While we know the total hash rate of the entire Bitcoin network at any given time, we cannot calculate the precise amount of electricity used as we do not know what kind of equipment was used by every farm in the world - and different mining set-ups have different power efficiency. We can only estimate - and the most convincing model of Bitcoin energy consumption today is the Bitcoin Energy Consumption Index, calculated by Alex de Vries. While its methodology has been a subject of many heated discussions, it is the only currently existing model that is supported by peer-reviewed research and it correlates well with recently disclosed sale figures of Bitmain equipment. The index estimates the current energy consumption of the entire network to be around 52 billion kWh per year (after a significant decrease from 73 billion kWh in November 2018). To put these colossal figures into perspective - the Bitcoin network currently consumes more electricity than most of the countries on the planet. Its energy usage is 2 times bigger than that of Nigeria - a country with a population of 186 million. Before you panic at the thought of Bitcoin mining bringing about environmental apocalypse, think about this - in the USA alone, more than 6,6 billion kWh per year are spent on Christmas lights - a heart-warming yet economically pointless and wasteful endeavor.
All of the aforementioned facts should not be viewed as reasons for cryptoscepticism - but in order for Bitcoin to realize its full potential, these issues need to be addressed. While looking for ways to remedy this situation, it is crucial to understand what drives energy consumption beyond any reasonable measure if we hope to address this problem in the future. Blockchain energy consumption depends on the following factors:
There are currently several possible ways to make Bitcoin network more energy-efficient and eco-friendly. Let us examine each one in more detail:
As you can see, there already exists a number of ways to reduce the carbon footprint of Bitcoin mining - or even to offset it completely. It will probably take a mixture of all the aforementioned measures to achieve this goal. Yet without finding means for sustainable development of the crypto industry, there cannot be any development at all, as the issue of energy efficiency is only a facet of the bigger blockchain scalability issue. Crypto community should stop trying to deny that the ecological problem exists and concentrate instead on solving it.