5 Mar 2018

The environmental consequences of cryptocurrencies

Kozmo writes:*

Global interest in cryptocurrencies has reached an all-time high since the publication of Satoshi Nakamoto’s 2008 white paper [pdf] describing the structure of what became Bitcoin, the first decentralized cryptocurrency. Around 5.8 million people used bitcoin in 2017 [pdf], and there's no signs of slowing interest.

Don’t worry, I’m not here to give you investment advice. Rather, I would like to talk about the environmental consequence of the recent crypto-craze. Before you roll your eyes and wonder what on earth sustainability has to do with cryptocurrencies, let me tell you this; under current conditions, Bitcoin’s estimated yearly electricity requirements approximate the yearly consumption of Romania [pdf], resulting in at least 70 million tons of CO2 emissions per year. Although Bitcoin is currently the most widely used cryptocurrency (market capitalization of $174 billion), it is by no means the only one. As of 26 Feb 2018, there are 1521 cryptocurrencies with a total market cap of $453 billion, with many others sprouting up around the globe.

So, cryptocurrencies use a lot of energy, but how does it compare to fiat currency payment systems? According to the Digiconomist, one bitcoin transaction uses as much energy as roughly 400,000 VISA transactions. Moreover, Bitcoin mining is estimated to produce 6 times as much CO2 per unit of value as mining gold.

Why on earth does Bitcoin use so much energy? The answer has to do with the way in which Bitcoin decided to bring stability to their network. Since bitcoin is a peer-to-peer system with no central authority, it cannot rely on trust or major institutions to maintain stability. To keep track of transactions (and thereby account balances), every computer connected to the network stores a copy of the entire history of transactions. To achieve consensus on the network’s transaction order, members of the network compete to add new transactions to the "consensus blockchain." This process is nothing more than guessing the combination to a digital lock, but the winner is rewarded with new bitcoins. This method incentivizes users to validate each other’s transactions and keep the system running smoothly. To get rewarded, ‘miners’, as they’re called, try to increase their odds of finding the right combination by using vast computing power to perform millions of guesses every second. In fact, large-scale bitcoin mines have popped up all over the world, using specially designed machines solely built for bitcoin mining. Bitcoin’s recent price increase has increased demand for computer hardware, which will result in even more electricity use.

Why, you may ask, is it a problem for Bitcoin to use this much energy? Amidst global efforts to reduce harmful greenhouse gas (GHG) emissions under the Paris Agreement, electricity production  accounts for 25% of all CO2 emissions [pdf]. To maximize profits, large scale mines are generally located where both electricity and specialized electronics are cheap, resulting in 81% of the world’s mining power coming from China, where dirty coal remains the main source of electricity. What can we do about this? One way to use less electricity is by changing the way in which users are rewarded for validating transactions. Ethereum (the 2nd largest cryptocurrency by market capitalization) is currently working on a different method that should drastically reduce energy requirements since it doesn’t rely on physical computing power. Another option might be to build close to renewable energy sources in cold climates, where they can gobble up energy surplus and use less energy for cooling.

Bottom line: Bitcoin’s current mining operations result in significant environmental externalities that should -- and can -- be adequately addressed to reach our global climate goals.

* Please help my environmental economics students by commenting on unclear analysis, other perspectives, data sources, etc. (Or you can just say something nice :)

1 comment:

Ties Rijcken said...

Incredible! What a world we live in.. At first read i find your post well written and well documented. Keep up the good work!

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