Long reads

Cryptocurrency sustainability: how do we solve a problem like Bitcoin?

Níamh Curran

Níamh Curran

Reporter, Finextra

Bitcoin uses significant amounts of energy, more than any other cryptocurrency. If cryptocurrencies are to be taken seriously in the wider financial world, it is important that the energy consumption of Bitcoin is not conflated with all cryptocurrencies.

While estimates on this vary, the Cambridge Centre for Alternative Finance (CCAF) has found that approximately 199.65 million tonnes of carbon dioxide equivalent (MtCO2e) can be attributed to the Bitcoin network since its inception, with 92% being emitted since 2018. CCAF reports that this level of greenhouse gas emissions is an estimated 0.10% of global emissions, and equivalent to the total emissions of Nepal (48.37 MtCO2e) or the Central African Republic (46.58 MtCO2e).

Mining accounts for the vast majority of Bitcoin’s energy consumption. Mining is an essential part of Bitcoin exchange and is how the currency is made, albeit not the only way to get Bitcoin. Bitcoins cannot be created automatically; creators require effort, or computer power, for this cryptocurrency to be made available.

Bitcoin’s whitepaper describes this as, “ the process of making computer hardware do mathematical calculations for the Bitcoin network to confirm transactions and increase security. As a reward for their services, Bitcoin miners can collect transaction fees for the transactions they confirm, along with newly created Bitcoins.” This is otherwise known as Proof of Work (PoW)

Miners require a complicated computer set-up across several hard drives, which is where a large amount of this energy consumption comes from. In removing that system, you lose a lot of the energy consumption. On this subject, Kirsteen Harrison, an environmental advisor on the board of Zumo, said to Finextra Research that, “when the value of Bitcoin is high, it's in miners’ interests to put more and more computational power in which is electricity intensive.” 

Not all cryptocurrencies: Maria is a little different

Beyond Bitcoin, cryptocurrencies do not have to operate on a PoW model. At Singapore Fintech Festival 2022, Ethereum co-founder Vitalik Buterin took to the main stage to highlight the successes of The Merge, which migrated Ethereum from PoW to proof-of-stake (PoS).

PoW and PoS are both consensus mechanisms used by cryptocurrencies to validate transactions made on the blockchain and add new tokens. A key difference between the two is that PoS uses significantly less electricity than PoW.

Harrison explained the reason for this: “With PoW, the more computational power you put into solving an algorithm, the more likely you are to mine that Bitcoin or cryptocurrency. The more work you put in, the better your chances are of success. It is in the miners’ interests to use more and more computational power, which is electricity intensive. PoS uses a completely different model. It looks at the amount of stake, you have in a particular cryptocurrency and then allocates on that basis, so it doesn't incentivise on the basis of electricity used.”

Ethereum, now on the PoS mechanism, has had a significant decrease in energy usage, and this has been perceived as a success. According to a White House report, before their switch to PoS or The Merge, Ethereum accounted for 20% to 39% of global electricity consumption by a crypto asset.

Further, according to the Crypto Carbon Ratings Institute (CCRI), The Merge reduces the electricity consumption and carbon footprint of the Ethereum network by over 99.988% and 99.992%, respectively. Many believe that this low energy usage makes PoS the future of crypto, with Buterin even going to the extent of writing a book on the subject entitled, ‘Proof of Stake: The Making of Ethereum and the Philosophy of Blockchains.’

The effectiveness of PoS in reducing electricity is clear. However, CCAF told Finextra that they are continuing their research on PoS’s long-term effectiveness. This might seem like an easy solution for resolving energy issues across all cryptocurrencies, but there are a number of roadblocks stopping PoS from taking traction.

For those who are against PoS, it removes one of the core benefits and the philosophy behind blockchain for digital currencies: decentralisation. Some have argued that under this PoS mechanism, centralisation is inevitable as centralised intermediaries will have to verify transactions. With PoW, anyone is able to anonymously join the network, which is what many see as a benefit, but PoS puts this under strain.

There are some concerns over the security of PoS, however, Ethereum argues that it is ultimately more secure. PoW is believed to have a more robust security system due to its upfront requirements, whereas PoS involves security through community control. Ethereum explains how the community protections work through an example of a 51% attack which is when a group owns more than 50% of the total hash point or energy usage of a cryptocurrency.

Ethereum’s blog post explains: “An attacker would need 51% of the staked ETH. They could then use their own attestations to ensure their preferred fork was the one with the most accumulated attestations. The 'weight' of accumulated attestations is what consensus clients use to determine the correct chain, so this attacker would be able to make their fork the canonical one. However, a strength of proof-of-stake over proof-of-work is that the community has flexibility in mounting a counter-attack. For example, the honest validators could decide to keep building on the minority chain and ignore the attacker's fork while encouraging apps, exchanges, and pools to do the same. They could also decide to forcibly remove the attacker from the network and destroy their staked ETH.”

However, the main roadblock to moving Bitcoin from PoW to PoS is Bitcoin itself. Bitcoin is not owned by anyone specific. There is no central board to appeal to for a change in the system, they don’t have one, and we don’t know who Nakamoto is.

Additionally, there doesn’t seem to be much want to change for the users themselves, especially miners. Harrison stated, “At the moment, there is no appetite within the Bitcoin mining community to change the consensus mechanism.”

Sustainable future: keeping the hills alive

With all that has happened within the cryptocurrency market in 2022 -especially in the past few weeks with the implosion of FTX - for many, the future of cryptocurrency is unclear. However, what is clear is that if it is to have a future, it must be a sustainable one.

It is worth pointing out that while Bitcoin is the largest user of PoW, other cryptocurrencies use it also including Dogecoin, Litecoin, and Monero.

Many of those involved in cryptocurrency are aware of its impact and have made significant changes over the past few years. Harrison shared on her experience of this: “When we first started our journey a couple of years ago, there was nothing in the way of industry guidance, there weren't any industry bodies looking seriously at decarbonisation. Within maybe six months or so of us starting our decarbonisation journey, there was the Crypto Climate Accord shortly followed by the Bitcoin Mining Council. More recently, we've had GBBC; Global Digital Finance, who have set up an ESG working group; the World Economic Forum have set up a working group too. There's all this activity, there's all this guidance that's either been published or in the process of being published, which is fantastic.”

Bitcoiners need to weigh up the reality of the environmental situation and consider if decentralisation is a step in the right direction when considering the climate crisis. According to the sixth Assessment Report by the Intergovernmental Panel on Climate Change, we only have a budget of 500 Gigatons of CO2 to have a 50% chance of limiting warming to 1.5°C. Every group producing a large amount of carbon needs to take accountability for their actions. This includes the organisations using cryptocurrencies.

Harrison concluded: “Ethereum and The Merge have shown us what is possible, but the Bitcoin blockchain and the Ethereum blockchain are very different. There's some nuances that mean that we need to consider the fact that we're not dealing with apples and apples.”

 

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