Cryptocurrencies have had one of the most eventful journeys, from relative exclusivity and obscurity to garnering mainstream prominence. So while everyone is relatively busy discussing cryptocurrencies being a currency or asset or their significance in the everyday world, one question is yet to be answered: “What is the environmental impact of cryptocurrencies?”
It is fairly common knowledge that crypto mining, an essential part of the crypto-transactions consumes substantial amounts of electricity. But when the total electricity consumed starts to compete with some countries total electricity consumption, questions start to be raised.
Background
Cryptomining allows for new coins to be generated and put into circulation. The activity becomes crucial for the maintenance of the distributed ledger within the system, which is basically, the addition of a block of a verified transaction onto the blockchain.
The miners are rewarded with cryptocurrencies when they authenticate a transaction. This is extremely crucial so as to prevent double-spending of the same cryptocurrency. Taking the example of bitcoin, a miner needs to undertake two activities:
- Verify one mB of transaction data
- Be the first to verify
It is the second activity that started the race of crypto mining.
Race of Crypto-Mining
The race to generate bitcoin through mining soon shifted the miner from using a DIY rig to industrial-scale mining farms. Farms are often located in places with lower electricity costs or more relaxed environmental laws. While Iceland, Georgia, Canada, the United States are some countries with some of the largest crypto mining farms, it is China with its access to cheap hydro and coal-powered electricity that leads from the front.
One of the biggest reasons for the upsurge in the no. of crypto mining farms apart from the rising prices of Bitcoin is its low barrier of entry. An individual with his DIY rig or industrial-scale farm just needs to set up a mining rig together and connect it to the network and he is good to go. But at the heart of it, it is still a business. A business that needs to generate profit after accounting for its fixed and variable costs. Some of the costs associated with crypto mining rigs/farms are:
But this race starts to warm up when many players enter the arena trying to mine for the same no. of bitcoins. So to be the first one in the race, these miners utilize the latest and greatest equipment available in the market. As a new rig will always give you better odds at being the first one to mine cryptos every 10 mins. But these pieces of equipment may utilize a greater amount of electricity and generate e-waste in the form of older rigs that have been just replaced.
Demand for Electricity
Currently as per Bitcoin Clock every 10 mins 6.25 bitcoins are created. This pace gets halved about every 4 years. While this phenomenon was created such that only a limited number of bitcoin may be mined to keep bitcoin value in check, it also increases the competition for bitcoin mining. The competition increases their investment for additional mining infrastructure while utilizing additional units of electricity.
While the exact figures for the electricity consumption for crypto-mining are hard to estimate, the Cambridge Electricity Consumption Index and Dogiconomist are the foremost trackers for the same. According to Dogiconomist the amount of electricity used by Bitcoin mining is as follows:
To put into context how much electricity and energy bitcoin uses compared to Total Global Production vs Consumption, it can be shown as follows:
This highlights that 0.44% of total electricity being utilized all over the globe is used to facilitate Bitcoin transactions/mining. Additionally, if bitcoin mining was a country, it’s ranking on global energy consumption would be as follows:
Furthermore, the bitcoin mining total electricity consumption when compared as a percentage of total energy consumption of certain nations is as follows:
Crypto-Miner Prospective
When we consider a few perspectives from the Bitcoin mining enthusiasts, the following points are raised to justify the energy usage of cryptocurrencies:
1. Renewable as a source
According to the third Global Cryptoasset Benchmarking Study undertaken by Cambridge University, 39% of all the energy requirements are fulfilled by renewable sources of energy. A significant jump from 28% as per the second Global Cryptoasset Benchmarking Study but, the remaining 61% is still fueled by non-renewable sources of energy. This also disincentivized Non-Renewable Energy businesses to shift their energy production from Non-Renewable to renewable sources, as now they have new customers with an increasing demand for energy in the form of Crypto Mining farms.
2. Stranded Energy Generation
Stranded Energy Generation talks about the overabundance of energy being produced at places that lack demand, like Sichuan and Yunnan provinces in China. These places have been said to have an overcapacity of hydropower generation capabilities which may need to be curtailed if not used. Crypto-mining allows for them to be put to use.
The argument which an Individual needs to consider, Renewable sources of energy fluctuate in their energy generations capabilities. For example, while Hydropower generation capabilities can be at an overabundance, in periods of peak summers and drought there can be lower levels of Hydropower generation.
Like earlier stated, crypto farming is a business that requires a constant supply of energy i.e. 24*7*365. If renewable sources are not available, a miner would look at cheaper coal alternatives.
Conclusion
Bitcoin and Altcoins are new forms of digital assets. A digital asset that by the use of blockchain can transform the way we transact and allow for finance to be decentralized. A lot of discussion in and around cryptocurrencies is to understand them and imagine a real-world scenario where they can be put to use. Environmental concerns are just a question that will eventually need to be addressed, just like how its legislative concerns, legal enforceability, and debate about it being an asset class need addressals.
This article does not wish to deter anyone from using cryptocurrencies or diminish the versatility of blockchain capabilities but just highlights a point. A point where we promote their adoption while keeping in mind the effects it could have on the environment.
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Sources:
- https://www.investopedia.com/tech/how-does-bitcoin-mining-work/
- https://www.buybitcoinworldwide.com/bitcoin-clock/
- https://cbeci.org/
- https://digiconomist.net/bitcoin-energy-consumption/
- https://www.buybitcoinworldwide.com/bitcoin-clock/
- Why Bitcoin is so bad for the planet by Guardian News
- https://www.jbs.cam.ac.uk/faculty-research/centres/alternative-finance/publications/3rd-global-cryptoasset-benchmarking-study
