Blockchain

Why Does Bitcoin Use So Much Energy? – Forbes Advisor

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

The point of Bitcoin, according to Nakamoto’s founding white paper, was to enable instantaneous, borderless transactions without the high fees or foreign exchange barriers that exist today.

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

If Bitcoin were a country, it would rank in the top 30 worldwide for energy use. That’s roughly enough electricity to power countries with populations in the tens of millions, with an environmental burden of an estimated 34 megatons of carbon emissions or more, according to Digiconomist’s Bitcoin Energy Consumption Index.

Of course, Bitcoin isn’t unique among cryptocurrencies in terms of its environmental burden, but its high profile and uniquely inefficient transaction approval system make it an easy scapegoat. The blockchain technology that underlies it, meanwhile, 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. And we’ve had electronic networks that do much the same for other sorts of digital transactions for decades.

But it’s Bitcoin’s decentralized structure that drives its huge carbon emissions footprint. That’s because 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 verifying transactions on centralized networks.

“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 fastest computer not only certifies the transaction, but it also gets a small reward for its trouble in the form of a Bitcoin payment.

In Bitcoin’s early days, this process didn’t consume nation-state amounts of electricity. 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.

To combat this, more and more specialized computers, called rigs, are entering the fray, pouring huge amounts of computational and electrical energy into the ecosystem in the race to be the first to solve Bitcoin math puzzles and get the associated prize. That means 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,” says Brody.

This process also takes an immense amount of time: Upwards of 10 minutes per Bitcoin transaction. Other digital transactions, like those powered by Visa, take less than a second and use roughly 1/500,000 the energy because they rely on a centralized authority to verify transactions.

What Can Be Done about Bitcoin’s Energy Problem?

Solving Bitcoin’s near-continent-sized 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

Currently, an estimated 39% of proof-of-work mining is performed using renewable energy. So perhaps the most obvious path to a green future for Bitcoin is simply upping that figure.

Countless startups have emerged to address this gap, each targeting new ways to bring more environmentally friendly energy to Bitcoin. Take Hong Kong-based LiquidStack, which aims to more efficiently lower the temperature of mining rigs, or Genesis Mining in Iceland, which exclusively uses renewable energy sources.

These solutions, however, fail to address that even if all energy pumping into the Bitcoin industrial complex were green, at large scale its proof-of-work verification technology is inherently wasteful.

Transition to Proof-of-Stake Systems

Cryptocurrencies could move from proof of work to proof of stake, which doesn’t require this same mad dash to solve complex puzzles, says eToro cryptocurrency market analyst Simon Peters.

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 PoS 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 Peters.

Ethereum, the blockchain system powering Ether and most NFTs, is in the process of converting to proof of stake from proof of work. This will dramatically reduce the energy consumption of Ethereum-based cryptos and blockchains by an estimated 99.5%.

Embrace Pre-Mining

To avoid the wasteful computing involved in solving math problems quickly to earn digital coins, some cryptos have introduced pre-mining, a system that functionally works much like fiat currency or stocks. A central authority, like the U.S. government (in the case of dollars) or a company (in the case of stocks), 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.

Pre-mined cryptos work the same way.

“Several other cryptoassets like XRP [also popularly referred to as Ripple] weren’t mined at all but were instead produced algorithmically,” says Peters. “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 doesn’t always reward them. In the case of XRP, this fee is a fraction of a cent currently.

Transitioning Bitcoin to a proof-of-stake or pre-mined system wouldn’t be easy: To fundamentally 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. The last time a change of this magnitude happened, it was not accepted universally by miners, resulting in a so-called “hard fork” that created a separate cryptocurrency called Bitcoin Cash, which itself later hard forked into Bitcoin SV, among others.

Introduce Carbon Credits or Fees

Carbon credits represent the government-sanctioned ability for a company to emit a certain amount of carbon emission into the environment. They’re often securitized, meaning they can be traded to by companies that don’t need to produce a lot of emissions to other companies that do. This incentivizes a company to produce less than its allotment—as well as penalizes those that go over. In the case of a crypto mining company, this might mean it purchases carbon credits from another company to help offset the amount of emissions it creates or switches to greener energy so it can 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 Section 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, right now electricity costs eat into estimated 28% of Bitcoin mining’s profitability each year according to Digiconomist.

By creating digital coins more efficiently, though, miners will not only increase their profitability, but they also may make it more likely that a truly revolutionary aspect of Bitcoin, the blockchain, goes mainstream. Integrating blockchain technology, which is like a public ledger, into every crevice of economic life could lower the carbon footprint of many businesses, says Brody.

“For example, 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.

Though 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 better log carbon emissions or even, in a truly meta move, using blockchain-powered carbon credits to move to a carbon-neutral future.

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