Environmental Technology

Why Does Bitcoin Use So Much Energy? – Forbes Advisor Canada

When the enigmatic Satoshi Nakamoto minted the world’s first cryptocurrency in 2009, the plan was to create a decentralized payments platform that would revolutionize how we buy and sell everything.

The point of Bitcoin, according to Nakamoto’s founding white paper, was to enable quick, borderless transactions.

More than a decade on, it’s undeniable that Bitcoin has gone mainstream, but perhaps not in quite the way Nakamoto imagined. Instead of facilitating everyday transactions, cryptocurrencies have by and large become speculative assets, a sort of digital gold, attracting investors who believe they’ll be able to resell their holdings for big profits in the future.

The digital gold rush has come with a catch: Massive electricity consumption.

It’s estimated that Bitcoin consumes electricity at an annualized rate of 127 terawatt-hours (TWh). That usage exceeds the entire annual electricity consumption of Norway. In fact, Bitcoin uses 707 kilowatt-hours (kWh) of electricity per transaction, which is 11 times that of Ethereum.

Of course, Bitcoin isn’t unique among cryptocurrencies in terms of its environmental burden, but its popularity and uniquely inefficient consensus mechanism make it an easy scapegoat. Meanwhile, the blockchain technology that underlies it could be the key to a greener future.

Why Does Bitcoin Consume So Much Energy?

Conceptually, it doesn’t seem like Bitcoin should require enormous amounts of electricity. All you have to do is point and click or tap on your smartphone to buy and sell the cryptocurrency. We’ve had technology that does much the same for other kinds of digital transactions for decades.

But it’s Bitcoin’s decentralized structure that drives its huge carbon emissions footprint.

To verify transactions, Bitcoin requires computers to solve ever more complex math problems. This proof of work consensus mechanism is drastically more energy-intensive than many people realize.

“In the case of Bitcoin, this is done by having many different competitors all conduct a race to see how quickly they can package the transactions and solve a small mathematical problem,” says Paul Brody, global blockchain leader at EY.

The miner who completes the mathematical equation the fastest not only certifies the transaction but also gets a small reward for their trouble in the form of a Bitcoin payment.

In Bitcoin’s early days, this process did not consume more electricity than some countries. But inherent to the cryptocurrency’s technology is for the math puzzles to become much, much harder as more people compete to solve them—and this dynamic will only accelerate as more people attempt to buy into Bitcoin.

Multiple miners are using electricity in competition for rewards. Even though there may be hundreds of thousands of computers racing to solve the same problem, only one can ultimately receive the Bitcoin honorarium.

“Of course, this is wasteful in the sense that 99.99% of all the machines that did work just throw away the result since they didn’t win the race,” says Brody. While this process produces a fair and secure result, it also creates a ton of carbon emissions. “I very much doubt [whoever founded] Bitcoin anticipated such enormous success in the future and, consequently, the enormous amounts of power we’re talking about,” Brody says.

This process also takes an immense amount of time: Upwards of 10 minutes per Bitcoin transaction. That’s the time it takes for a new block to be mined.

Other digital transactions, like those powered by Visa, are faster and rely on less energy. Visa, for instance, can handle around 1,700 transactions per second (TPS) compared to Bitcoin’s 4 TPS.

In terms of crypto mining, the US holds the lion’s share of the global Bitcoin mining market, with nearly 38% of global hashrate recovery—meaning lots of blockchain computations—according to the May 2022 report from the Cambridge Digital Assets Program (CDAP).

CDAP also found that China is the second biggest Bitcoin mining hub, despite Beijing’s crackdown to eliminate Bitcoin mining within its borders, with more than 20% of the global market share.

Other Bitcoin mining hubs include Kazakhstan with a 13% global share, Canada at more than 6% and Russia at nearly 5%, with the rest scattered across the globe.

What Can Be Done About Bitcoin’s Energy Problem?

Solving Bitcoin’s giant energy consumption problem doesn’t require returning to centralized systems like Visa’s network—after all, the central promise of Bitcoin is the elimination of middlemen like the card networks and their concentrated power over finance. Instead, Bitcoin’s advocates have more than a few options.

Switch to Renewable Energy

Bitcoin mining powered by renewable energy fell when China took measures to eliminate Bitcoin mining within its borders, forcing mining in that country to go underground.

Since China’s crackdown last year, the share of renewable energy powering crypto mining fell from nearly 42% in 2020 to 25% in August 2021.

Countless startups are to address Bitcoin’s carbon footprint, each targeting new ways to bring more environmentally friendly energy to Bitcoin.

Take LiquidStack, which aims to more efficiently lower the temperature of mining rigs, or Genesis Mining, which exclusively uses clean energy sources.

But despite these carbon-reducing endeavors, experts say Bitcoin’s carbon emissions have mushroomed and are now comparable with Greece, a country with more than 10 million people.

Transition to Proof-of-Stake Systems

Proof of stake does not require this same mad dash as proof of work to solve complex puzzles, and it uses fewer resources.

Put simply, proof of stake requires network participants to front a small amount of cryptocurrency to be entered into a lottery for the chance to verify transactions. The thought is that if you’re putting up some amount of value as collateral, you’re less likely to approve fraudulent transactions that would devalue the currency and cost you your stake.

Because proof of stake systems remove the competitive computational element, “it saves energy and allows each machine in a [proof of stake] to work on one problem at a time, as opposed to a PoW system, in which an array of machines are rushing to solve the same problem, thus wasting energy,” says eToro cryptocurrency market analyst Simon Peters.

Ethereum, the second largest crypto by market cap after Bitcoin, is in the process of converting to proof of stake from proof of work as part of Ethereum 2.0. This will dramatically reduce the energy consumption of Ethereum-based tokens and blockchains by an estimated 99.95%.

Embrace Pre-Mining

Some cryptocurrencies have introduced pre-mining to avoid wasteful computing. Pre-mining is a system that functionally works much like fiat currency or stocks. A central authority creates a set amount of an item and then carefully releases it into the economy depending on what’s going on in the world or their business.

“Several other crypto-assets like XRP [also popularly referred to as Ripple] weren’t mined at all but were instead produced algorithmically,” Peters says. “This eliminates the need for dedicated high-speed mining equipment.”

In these systems, transactions are still verified by a decentralized network of validators before they’re added to the currency’s blockchain record, but those involved in the transaction may have to pay a small transaction fee to compensate the validators for their effort since the currency system itself does not always reward them. In the case of XRP, this fee is a fraction of a penny.

Transitioning Bitcoin to a proof-of-stake or pre-mined system wouldn’t be easy: To alter the Bitcoin protocol, someone would have to convince the majority of miners to agree to the new system, a tough ask when billions are at stake and the existing system works, if slowly and electrically inefficiently.

Introduce Carbon Credits or Fees

Carbon credits represent the government-sanctioned ability to allow a company to emit a certain amount of carbon emission into the environment. They’re often securitized, meaning they can be traded by companies that don’t need to produce a lot of emissions compared with other companies that do. This incentivizes a company to produce less than its allotment—as well as penalizes those who go over.

In the case of a crypto mining company, this might mean it purchases carbon credits from another company to help offset the emissions it creates or switches to greener energy to earn a profit from selling its credits.

“These are a tried-and-true method under a variety of programs like the Clean Air Act to get to net-zero emissions for products,” says Scott Janoe, chairman of environmental, safety, and incident response at Baker Botts. “So, I would see a move toward stapling credit products to Bitcoin mining and transactions to offset those emissions.”

Brody similarly foresees consumers being able to pay to offset their crypto emissions. “I anticipate a future where it will be possible to simultaneously pay a transaction processing fee on networks like Ethereum as well as a carbon-offset fee, just as you have the option when traveling by air,” he says.

The Environmental Future of the Blockchain

Environmental impact aside, electricity costs eat into Bitcoin mining’s profitability.

By creating digital coins more efficiently, miners will also increase their profitability, but it may make it more likely that blockchains will go mainstream.

Integrating blockchain technology into every crevice of economic life could lower the carbon footprint of many businesses, says Brody.

“I believe that smart contracts [like those enabled by Ethereum] will allow companies to automate much of their complex payment and business process systems by automatically checking to make sure that a purchase order, for example, complies with the terms and conditions of a contract,” he says. This might allow a company to reduce the number of employees who need to commute into an office to process orders, resulting in fewer transportation-related carbon emissions.

Although we may not know the full potential green applications of blockchain technology for years to come, already there’s talk of using it to combat big issues, like helping companies to log carbon emissions better or even, in a truly meta move, using blockchain-powered carbon credits to move to a carbon-neutral future.

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