Exploring innovative digital solutions is among the preeminent pursuits for individuals, companies… and nations. Among these is cryptocurrencies - digital currencies known for revolutionizing online fund transfers, given their decentralized, transparent and flexible structure.
And yet, cryptocurrencies are known for their drawbacks, making them a hot potato issue in many countries. Of these drawbacks is the staggering energy consumption throughout the cryptocurrency mining – a process of earning new cryptocurrency by solving sophisticated mathematical equations via proof-of-work (PoW), which is one of the transaction validation mechanisms.
The cryptocurrency mining industry is massive, and stats suggest it broke a more than three-year record in February, as it generated almost $1.4 billion, rising 21 per cent from January. The rise is linked with the recent peak in cryptocurrency demand, which also increased the industry's energy consumption, creating a dilemma many wonder what to do about, especially when the focus is on mitigating climate change.
This poses serious questions for governments and corporations looking to curb their carbon footprints. But at the same time, they are seeking ways to adopt cryptocurrencies.
Power entire nations
Bitcoin is the perfect example. According to Bitcoin Energy Consumption Index and the Cambridge Bitcoin Electricity Consumption Index, its mining network's annual energy is more than 121 terawatt-hours (TWh), which is around 0.6 per cent of global electricity consumption. It exceeds Argentina's total annual energy consumption and would rank among the Top 30 electricity consumers worldwide if it was a country.
For a better perspective, and as per data from the University of Cambridge, one Bitcoin transaction equals the carbon footprint of 735,121 Visa transactions and 55,280 hours of YouTube streaming, which is equivalent to between 53 and 127 million megatons of carbon dioxide.
Bitcoin's extensive energy consumption is due to its core design. When it was introduced, it was able to be mined on an average computer. Nevertheless, the way bitcoin mining has evolved changed the performance and the expectations from the remaining coins.
Bitcoin has a ceiling of 21 million coins that can be mined, and the more bitcoin is mined, the more complex the algorithms become. Hence an average computer can no longer solve them to mine new bitcoin. As of today, over 18.5 million bitcoins have been mined, which means mining the coming ones will demand advanced computers - and a vast amount of electricity to run them.
Despite ongoing research on cryptocurrencies' energy consumption's dilemma and its impact, there remains some ambiguity regarding their energy sources. Since there are no official trackers to locate the cryptocurrency miners or classify the energy sources used for mining, it is still unclear whether miners are using electricity fueled by renewable energy or fossil fuels. Nevertheless, University of Cambridge estimates that two-thirds of the energy used by the network is from fossil fuels.
Cut down on energy
Efforts to make the cryptocurrency industry less energy-intensive are underway. In the interim, carbon emission reduction should be a priority, and must be sought at different levels. It can start from within, if the Bitcoin or other cryptocurrencies' core developers alter their software to reduce their computational demands.
Another option is to shift to alternative protocols for validating transfers. Currently, PoW is the most widely used verification protocol. However, others such as proof-of-stake (PoS) and proof-of-authority (PoA) could potentially accomplish validations more energy-efficiently as well.
Additional initiatives, including reforestation programmes, direct air capture, and other carbon sequestration methods to offset the negative carbon footprint could also be considered by cryptocurrency leaders. Finally, incentivizing miners to use renewable energy sources during the mining process could be considered.
Like any industry, solutions to mitigate this challenge exist.