Amid the ongoing buzz about cryptocurrencies, it’s often hard to figure out what really matters. However, if all goes according to plan, the energy-guzzling digital sector will see its biggest shake-up in years this month.
The rapid growth of cryptocurrencies in recent years is staggering. Unfortunately, that has also been their contribution to climate change, due to the enormous amount of electricity used by computers that manage the buying and selling of cryptocurrencies.
Take, for example, the world’s largest cryptocurrency, Bitcoin. At a time when the world is desperately trying to reduce energy consumption, Bitcoin consumes more energy every year than medium-sized countries like Argentina. If the Ethereum switch succeeds, Bitcoin and other cryptocurrencies will come under tremendous pressure to address this issue.
Why are cryptocurrencies so polluting?
Cryptocurrencies are digital currency systems in which people make direct online payments to each other.
Unlike traditional currencies, cryptocurrencies are not managed from a single location, such as a central bank. Instead, they are managed by a ‘blockchain’: a decentralized global network of powerful computers. These computers are known as “miners”.
The Reserve Bank of Australia provides this simple explanation of how it all works (edited for brevity):
Suppose Alice wants to transfer one unit of cryptocurrency to Bob. Alice initiates the transaction by sending an electronic message with her instructions to the network, where all users can see the message.
The transaction sits with a group of other recent transactions waiting to be compiled into a block (or group) of the most recent transactions. The information from the block is converted into a cryptographic code and miners compete to solve the code in order to add the new block of transactions to the blockchain.
Once a miner successfully solves the code, other users on the network check the solution and agree that it is valid. The new transaction block is added to the end of the blockchain and Alice’s transaction is confirmed.
This process, which is used by most cryptocurrencies, is called “proof-of-work mining”. The central design feature is the use of calculations that require a lot of computer time – and enormous amounts of electricity – to perform.
Bitcoin alone consumes about 150 terawatt hours of electricity per year. Producing that energy releases some 65 million tons of carbon dioxide into the atmosphere every year – about the same emissions as Greece.
Research suggests Bitcoin produced emissions last year that are responsible for about 19,000 future deaths.
The proof-of-work approach deliberately wastes energy. The data in a blockchain has no inherent meaning. Its sole purpose is to capture difficult but pointless calculations that form a basis for allocating new cryptocurrencies.
Cryptocurrency advocates have offered several excuses for the monstrous power consumption, but none have stood up to scrutiny.
For example, some try to justify the carbon footprint of cryptocurrency by saying that some miners use renewable energy. That may be true, but they can crowd other potential energy users – some of whom will need to use coal or gas-fired power.
But now Bitcoin’s most successful competitor, Ethereum, is changing course. This month, it promises to switch its computer technology to something much less polluting.
What is the switch about?
Ethereum’s project involves dumping the “proof of work” model for a new model called “proof of stake”.
Under this model, crypto transactions are validated by users, who deploy significant amounts of blockchain tokens (in this case, Ethereum coins) as collateral. If the users act unfairly, they lose their bet.
Importantly, the vast network of supercomputers currently used to verify transactions will no longer be necessary, as users will do the checking themselves – a relatively easy task. Doing away with the computer “miners” will lead to an estimated 99% drop in Ethereum’s electricity consumption.
Some smaller cryptocurrencies – such as the Ada coin traded on the Cardano platform – use proof of stake, but so far this has been limited to the margins.
In the past year, Ethereum run the new model on experimental blockchains. But this month, the model will be merged with the main platform.
Nowhere for cryptocurrency to hide
So what does all this mean? The Ethereum experiment could fail, for example if some stakeholders find ways to manipulate the system. But if the switch is successful, Bitcoin and other cryptocurrencies will come under pressure to abandon, or else stop, the proof-of-work model.
This pressure has already begun. Tesla founder Elon Musk’s announced last year his company would no longer accept Bitcoin payments for its electric cars, due to the currency’s environmental footprint.
The New York State Legislature in June accepted an account to ban some Bitcoin operations that use carbon-based energy. (However, the decision requires signature from the New York governor and may be rejected).
And in March of this year, the European Parliament voted on a proposal to ban the proof-of-work model. The proposal was: defeated. But as Europe enters the colder months and grapples with an energy crisis triggered by sanctions on Russia’s gas supply, energy-guzzling cryptocurrencies will remain in the firing line.
One thing is clear: As the need to cut global emissions becomes more pressing, cryptocurrencies will have no more excuses for their blatant energy consumption.
- 1 Why are cryptocurrencies so polluting?
- 2 What is the switch about?
- 3 Nowhere for cryptocurrency to hide