Long reads

The real price of the bitcoin gold rush

Hamish Monk

Hamish Monk

Reporter, Finextra

With international focus on sustainability sharpening, the energy consumption of the world’s first ever popular virtual currency, bitcoin, is being put under the microscope. Its most vehement detractors argue bitcoin uses an unjustifiable amount of energy, and represents a thorn in the side of the wider green transition. Bitcoin’s advocates, on the other hand, claim this is an oversimplification, and measures can be taken to ensure the blockchain network becomes sustainable long-term.

Due to climate concerns, Elon Musk today announced that Tesla will no longer accept Bitcoin. But how much energy does bitcoin actually use? And can anything be done to ensure cryptocurrencies-at-large scale sustainably?

Bitcoin is the world’s oldest and best-known cryptocurrency, invented in 2008 by an unknown entity under the alias, Satoshi Nakamoto. The virtual coin started to be used in 2009, once it was released via open-source software. As a decentralised form of currency, bitcoin is not tied to any central bank or administrator, meaning transactions must be verified by a network of nodes, or machines, distributed across a public ledger – otherwise known as a blockchain.

As a reward for validating bitcoin transactions – and therefore maintaining the integrity of the system – the peer-to-peer network gives the node that completes the job first, 6.25 bitcoins (correct as of May 2020). This process, also known as bitcoin mining, requires miners to run a time-consuming Proof of Work (PoW) procedure, whereby a new block – or transaction – is added to the chain once an anti-fraud, cryptographic hash puzzle is solved, via bitcoin’s Secure Hash Algorithm 256 (SHA256) function.

Naturally, PoW involves a considerable amount of mathematical calculations, computational power, and therefore energy. When they first emerged in late 2014, the machines used to mine bitcoin – application-specific integrated circuits (ASICs) – had an efficiency of around 0.77 Joules per Gigahash (J/Gh), according to the Cambridge Centre for Alternative Finance (CCAF)’s Cambridge Bitcoin Electricity Consumption Index (CBECI), although this figure has since dropped considerably. Together, this network of machines is estimated to consume 146.38 terawatt hours (TWh) per annum (correct as of May 2021) – more energy than Sweden uses in a year.

Against a backdrop of the sharpening focus on sustainability, and initiatives such as the Net-Zero emissions agreement, this has led some to criticise bitcoin, and call for tighter regulations around the virtual currency, in order to mitigate its environmental impact. Others, however, argue the issue of bitcoin’s energy consumption is not as black and white as it may appear, and can be resolved in time.

So, how brown is bitcoin? And what can be done to decarbonise this controversial cryptocurrency?   

Making cents of the issue

Arguably, since miners are rewarded for completing PoW processes first, the bitcoin network naturally selects computers that are bigger, faster, and more powerful than others on the system.

In an interview with Finextra, Michel Rauchs, research affiliate, CCAF – responsible for helping to develop the CBECI – noted: “In 2009, you could mine bitcoin on a central processing unit using your desktop. A year later, miners already needed a graphics card. After 2013, specialised chips started to be manufactured exclusively for bitcoin mining, known as ASICs. During these early days, hardware replacement cycles tended to be between 2 and 6 months. If miners did not upgrade their inventory, they’d be put out of business.”

Today, the Dalian Mining Farm – currently one of the largest bitcoin mining centres in China – boasts a computational power of 360,000 TWh, and makes up 3% of the entire bitcoin network.

In this tragedy of the commons model, ever-increasing energy consumption seems built into bitcoin’s evolution. According to a Forbes article, Chinese researchers revealed that “by 2024, bitcoin mining could be responsible for 130 million tons of carbon emissions annually – about the same as the Czech Republic.”

The potential environmental impact of this upward trend is deeply concerning. In a Ted Talk on the future of cryptocurrencies, Tara Shirvani noted that if energy-intensive technologies such as bitcoin continue to expand at their current rate, “we could reach 2 degrees of global warming as soon as 2033.” This is 0.5 degrees above what the UN says will engender irreversible climate catastrophes.

The wallet is half full

Bitcoin’s proponents, however, would argue there are more nuanced ways to look at this issue.

Projections that show bitcoin’s energy consumption increasing ad infinitum seem to be erroneously extrapolating on the current footprint of mining activity. This approach can be misleading, as it fails to consider bitcoin’s ‘halving model’, whereby every four years – or every 210,000 blocks mined – the reward given to miners for validating a transaction is reduced by 50%. This form of synthetic inflation serves to gradually reduce the amount of bitcoin in circulation.

As such, all available 21 million bitcoins will eventually be mined. According to Nic Carter, founding partner at Castle Island Ventures, we are currently around 88% of the way through that process – meaning miners’ revenue will soon be sourced from fees, as opposed to the more energy-intensive PoW process. 

In the long-term, this essentially means the energy consumption of the bitcoin network is likely to drop – or at least plateau.

Milking the cash cow: increasing efficiencies

What is more, bitcoin mining seems to have been getting increasingly energy efficient – and at a faster pace when compared to any other method of value transfer in the world, notes Carter. This observation is borne out in the CCAF’s figures, which reveal that the efficiency of equipment used to mine bitcoin has gone from 0.77 J/Gh in July 2014, to 0.04 J/Gh in February 2021.

However, the most notable efficiency improvements may be behind us, argued Rauchs: “In the first two to three years after the first ASICs came out, there were big equipment efficiency improvements – often by two or three orders of magnitude. Computer chip sizes were being slashed from around 100 nanometers (nm) to 10 nm. The efficiency of mining machines continued to increase in this way until around 2018. Since, improvements have been marginal – we are reaching the limits of physics.”

When it comes to discussions of bitcoin’s efficiency, it is also important to be aware of the pitfalls of comparing bitcoin’s energy consumption to nation states’, argues Lawrence Wintermeyer, executive co-chair, Global Digital Finance in a Forbes article. Indeed, while bitcoin uses more energy per year than Sweden, the cryptographic network considerably more efficient: “It is logical to ask whether the energy required by bitcoin should rival that of an entire nation, but doing so must take into account value. The GDP of Ukraine, for example, is around $150 billion. The value of all mined bitcoin is $940 billion – greater than the combined GDP of Ukraine and the next biggest energy consumer, Sweden, with a GDP of $530 billion.”

We must also acknowledge the lack of a true benchmark for bitcoin, in any comparison to a country’s energy consumption, noted Rauchs. “There is nothing you can directly compare bitcoin to. It is a synthetic digital commodity that is at the moment, held mainly for investment purposes – a unique thing in and of itself.”

So, while comparisons to the energy consumption of nation states, for instance, are in a sense arbitrary, they are a necessary evil, in order to put this debate into perspective. Either way, bitcoin is clearly greener – in terms of value – than its critics let on.

Change in the weather: scaling sustainably

If we are worried about the environmental impact of bitcoin, which is the crux of this debate, it would be remiss to not examine bitcoin’s energy mix, as opposed to just its energy consumption. Indeed, consumption can go up, but bitcoin can, in theory, decarbonise. Promisingly, a recent Global Cryptoasset Benchmarking Study revealed that 39% of PoW mining is already powered by renewables.

“According to what we observe”, said Rauchs, “although bitcoin’s energy consumption has been increasing, the actual carbon emissions may have not increased proportionately. This is because miners are seeking out the cheapest form of energies, which is often renewables. This source of stranded energy asset is in high demand among bitcoin miners.”

In China, for example – one of the most prolific bitcoin miners in the world – provinces such as Sichuan and Unan have adopted seasonal practices, whereby hydropower is utilised more during wetter periods of the year, due to the overabundance of green energy.

This is a promising trend. And, aside from the obvious environmental benefits, the strategy serves to use surplus renewable energy that would otherwise go to waste. This is particularly convenient in Sichuan and Unan, added Rauchs, where hydropower plants have only been built in the last decade, and the necessary battery storage capacity and transmission lines needed to distribute the green energy to distant demand centres, is lacking.

The anonymised founder of a large mining operation in the United States, Pylon Finance, points out: “Companies often rely on miners to utilise unused electricity – especially during the pandemic…Hydro companies in Washington and Canada, for example, practically give away electricity due to excess production and low utilisation, in addition to not being in a favourable location for retail; miners, however, set up in front of power plants, saving transmission costs.”

This energy arbitrage could be leveraged by regulators, argues a paper, published on 6th April 2021, by Nature journal: “Miners should be encouraged to shift their operations to regions that provide abundant low-carbon electricity.” Under this ‘site regulation’ model, Nature’s study found only 20% of bitcoin miners remained in coal-intensive energy regions – resulting in lower carbon emissions per dollar earned, compared to the alternative higher taxation scenario.

Interestingly, the CBECI demonstrates that there is, in fact, already enough renewable energy to power the entire bitcoin network. For instance, the globe’s current stock of hydro stores – which produce 4,164 TWh – could power the entire bitcoin network 28 times over.

So, it seems the path of decarbonisation for bitcoin is clear, albeit logistically challenging.

Note-worthy improvements

Until the infrastructural challenges of distributing this energy are met, the world’s most popular cryptocurrency will have to find ways to considerably reduce its energy consumption, in order to limit its environmental impact in the short-term.

Possibly the most widely discussed of these methods is shifting bitcoin from the PoW model, to a Proof of Stake model (PoS). Instead of rewarding the first miner that solves a cryptographic hash puzzle with new coins, the PoS model maintains the integrity of the blockchain by selecting one person to mine according to how many coins they hold, and penalises them if an infringement against the laws of the system takes place. By eliminating the competitive element, the energy demand of the network is limited, and the tragedy of the commons principle is circumvented. Thus, in theory, what is good for the environment is good for miners, under a PoS model.

There are promising movements to this end. Altcoins such as Ethereum have announced their intention to move to the greener PoS model, while others, like Nxt, are already there.

Proof of Harvest

Although PoS is far less resource intensive than PoW, it has some concerning flaws.

Not only does PoS incentivise miners to hoard tokens, it comes with a greater chance of a 51% attack – particularly for smaller altcoins. Indeed, Ethereum-based apps that use PoS in their backend have fallen victim to numerous security hacks and coin thefts.

Another consensus mechanism contender is the Proof of Harvest (PoH) model, invented by RubiX, which is cryptographically 1,000,000 times more secure than the ECDSA 256 system used by Bitcoin, and represents an enterprise-level, zero carbon blockchain alternative.

XRP Ledger Consensus Protocol

The altcoin XRP, meanwhile, which is issued and managed by Ripple, uses a proprietary XRP Ledger Consensus Protocol (XLCP), whereby only validators on Ripple’s centralised unique node list (UNL) are trusted by the network.

While XRP sacrifices the security of bitcoin for the speed that comes with centralisation, the kicker is that Ripple’s altcoin is not mined. “Ripple minted the entire supply when the network was launched, and intermittently releases portions of the supply from an escrow, and sells them on the open market.”

This model means ultimately XRP consumes less energy than the bitcoin network. In a FinextraTV episode, Monica Long, general manager of RippleX, said “the energy use of this method, versus mining, is 120k times more energy efficient. The energy used is the same as running an email server. Ripple uses XRP ledger in its product offering for that reason – it is sustainable at scale and green by design.”

Despite the promising alternative models out there, there is always a trade-off involved – be it in terms of security, network speed, or energy efficiency.

Either way, “co-ordinating bitcoin’s shift to an alternative consensus mechanism will be very challenging for several political reasons – let alone the fact it is decentralised and represents hundreds of billions of dollars”, said Rauchs. “Any fundamental change to the bitcoin model would take years, if it was ever actioned, and past attempts have shown that a general resistance to change is structurally engrained in the community.”

Dimes are changing: Industry decarbonisation initiatives

Clearly, the environmental impact of bitcoin and altcoins is being addressed through decarbonisation and increasing renewables usage. These efforts are receiving strong backing, but more needs to be done, argues Long: “What is holding back wider assent to the decarbonisation of cryptocurrencies is an industry-wide, concerted push. Key industry players need to commit to work toward a carbon neutral future.”

With this in mind, RippleX recently partnered with non-profit organisation, Energy Web Foundation, and co-developed a tool called EWZero. “It is completely open source, meaning any blockchain can use it to evaluate its carbon footprint, and either identify greener energy sources, or adopt offsetting tactics. It is free for anyone to use, and we hope others in the industry will take it up”, said Long.  

Since Finextra’s interview with Long, further steps have been taken, on an industry-level, to mitigate the environmental impact of cryptocurrencies-at-large. According to Forbes, “an alliance of research groups and private firms announced [in February 2021] they are pooling resources with the intention of completely decarbonising all cryptocurrencies by 2040. The bodies that formulated the proposal, known as the Crypto Climate Accord, say the transparency that is by definition built into cryptocurrencies makes them ideal tools to bring trust to decarbonisation efforts.”

Wherever you sit in this debate, the Crypto Climate Accord spells good news for the ability of bitcoin and altcoins to scale up sustainably.

My two cents

The discourse surrounding bitcoin’s energy consumption has been heated and muddy since the get-go. With each commentator owning a horse in the race, a plethora of contradictory perspectives on the issue seem to surface daily. The invaluable role of organisations such as the CCAF is to cut through the noise, and present the raw data with which stakeholders can respond to.   

While bitcoin does indeed appear to be consuming a large amount of energy, those who campaign for its elimination are falling victim to a stagnation fallacy, by failing to recognise that the peer-to-peer network will improve in both efficiency and sustainability in the long-term.

In practice, bitcoin miners are increasingly committing to carbon neutrality because the cryptocurrency’s footprint is becoming an existential threat to the industry. The negative press bitcoin is receiving in this area is causing some institutional investors to reconsider their capital allocation plans, and remove bitcoin from their balance sheets. This impacts bitcoin’s price, which spells bad news for miners. Thus, it is in the long-term interest of the bitcoin network to decarbonise.

Ultimately, bitcoin is not going anywhere – the virtual goldrush is far from over. Today, the job of the financial services industry is to be informed by the data, and steer the development of digital currencies down a path aligned with the all-important Net-Zero target.

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