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

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

According to Nakamoto’s founding white paper, the purpose of Bitcoin was to enable fast, borderless transactions.

Over a decade later, there’s no denying that Bitcoin has gone mainstream, but perhaps not quite the way Nakamoto imagined. Instead of facilitating day-to-day transactions, cryptocurrencies have largely become speculative assets, a kind of digital gold, attracting investors who think they can resell their holdings for big profits in the future.


The road to digital gold comes with a catch: massive electricity consumption.

Bitcoin is estimated to consume electricity at an annualized rate of 127 terawatt hours (TWh). This use exceeds Norway’s total annual electricity consumption. In fact, Bitcoin uses 707 kilowatt-hours (kWh) of electricity per transaction, which is 11 times that of Ethereum.

Of course, Bitcoin is not unique among cryptocurrencies in terms of environmental burden, but its popularity and particularly inefficient consensus mechanism make it an easy scapegoat. Meanwhile, the blockchain technology that would underpin it will be the key to a greener future.

Why does Bitcoin consume so much energy?

Conceptually, it doesn’t appear that Bitcoin should require huge amounts of electricity. All you have to do is point and click or tap your smartphone to buy and sell cryptocurrency. We’ve had technology that’s done much the same for other types of digital transactions for decades.

But it is Bitcoin’s decentralized structure that determines its huge carbon footprint.

To verify transactions, Bitcoin needs computers to solve increasingly complex mathematical problems. This proof-of-work consensus mechanism is considerably 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 fast they can wrap transactions and solve a little math problem,” says global blockchain leader Paul Brody. . at EY.

The miner who completes the mathematical equation the fastest not only certifies the transaction, but also receives a small reward for their troubles in the form of a Bitcoin payout.

In the early days of Bitcoin, this process consumed no more electricity than some countries. But inherent in cryptocurrency technology, mathematical puzzles become much, much harder as more people compete to solve them – and this dynamic will only accelerate as more more people will try to buy bitcoin.

Several miners use electricity in competition for rewards. Even though there may be hundreds of thousands of computers working to solve the same problem, only one can ultimately receive the Bitcoin fee.

“Of course, that’s wasted in the sense that 99.99% of all machines that have worked just throw the result away since they didn’t win the race,” Brody says. While this process creates a fair and safe outcome, it also produces a ton of carbon emissions. “I highly doubt [whoever founded] Bitcoin was anticipating such huge success in the future and therefore the huge amounts of energy that we are talking about,” says Brody.

This process is also extremely time-consuming: more than 10 minutes per Bitcoin transaction. This is the time it takes for a new block to be mined.

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

In terms of crypto mining, the United States holds the lion’s share of the global Bitcoin mining market, fetching nearly 38% of the global hashrate fetch, which means lots of blockchain calculations, according to the May report. 2022 from the Cambridge Digital Assets Program (CDAP).

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

Other bitcoin mining hubs include Kazakhstan with a global share of 13%, Canada at over 6%, and Russia at almost 5%, with the rest scattered across the globe.

What can be done about Bitcoin’s energy problem?

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

Switch to renewable energy

Renewable energy-powered bitcoin mining plummeted as China moved to eliminate bitcoin mining within its borders, forcing mining in that country to go underground.

China’s crackdown since last year has seen the share of renewable energy powering crypto mining fall from nearly 42% in 2020 to 25% in August 2021.

Countless startups are to tackle Bitcoin’s carbon footprint, each targeting new ways to bring greener energy to Bitcoin.

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

But despite these carbon reduction efforts, experts say Bitcoin’s carbon emissions have skyrocketed and are now comparable to Greece, a country of over 10 million people.

Transition to proof-of-stake systems

Proof-of-stake doesn’t require the same maddening rush as proof-of-work to solve complex puzzles, and it uses fewer resources.

Simply put, proof of stake requires network participants to present a small amount of cryptocurrency to be entered into a lottery for the ability to verify transactions. The idea is that if you put some value as collateral, you are less likely to consider fraudulent transactions that would value the currency and cost you your stake.

Since proof-of-stake systems have removed the element of competitive computing, “this saves energy and allows each machine a [proof of stake] working on one problem at a time, as opposed to a PoW system, in which a collection of machines rush to solve the same problem, thereby wasting energy,” says Simon Peters, cryptocurrency market analyst at eToro.

Ethereum, the second-largest crypto by market capitalization after Bitcoin, is converting to proof-of-stake from proof-of-work as part of Ethereum 2.0. This will significantly reduce the power consumption of Ethereum-based tokens and blockchains by around 99.95%.

Adopt pre-mining

Some cryptocurrencies have introduced pre-mining to avoid IT waste. Pre-mining is a system that works much like fiat currency or stocks. A central authority creates a fixed quantity of an item and then carefully releases it into the economy based on what is happening in the world or its business.

“Several other crypto-assets like XRP [also popularly referred to as Ripple] were not used at all, but rather were algorithmically produced,” 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 being 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 efforts from the monetary system. he himself does not always reward them. In the case of XRP, this fee is a fraction of a penny.

Bitcoin’s transition to a proof-of-stake or pre-mined system would not be easy: to change the Bitcoin protocol, someone would have to convince the majority of miners to accept the new system, a difficult question when billions are in Thurs and the existing system works, if ready and electrically inefficient.

Introduce carbon credits or charges

Carbon credits represent the ability, sanctioned by the government, to allow a company to emit a certain amount of carbon emissions into the environment. They are often securitized, which means they can be traded by companies that don’t need to produce a lot of emissions compared to other companies that do. This incentivizes a company to produce less than it is granted, and also penalizes those who do.

In the case of a crypto-mining company, this could mean that it buys carbon credits from another company to help offset the emissions it creates or switches to greener energy to make a profit from the sale. of his credits.

“This is a proven method under various programs such as the Clean Air Act to achieve net zero emissions for products,” says Scott Janoe, President of Environment, Safety and Response incidents at Baker Botts. “So I would see a move towards stapling credit products to bitcoin mining and transactions to offset those emissions.”

Brody also predicts that consumers could pay to offset their crypto emissions. “I foresee a future where it will be possible to simultaneously pay transaction processing fees on networks like Ethereum as well as carbon offset fees, just like you have the ability to travel by air,” he says.

The environmental future of blockchain

Environmental impact aside, electricity costs eat away at the profitability of Bitcoin mining.

By offering more efficient digital coins, miners will also increase their profitability, but this may make it more likely that blockchains will become mainstream.

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

“I believe that smart contracts [like those enabled by Ethereum] will enable businesses to automate much of their complex payment systems and business processes by automatically verifying that a purchase order, for example, conforms to the terms and conditions of a contract,” he said. This could allow a company to reduce the number of employees who must travel to an office to process orders, which would reduce carbon emissions related to transportation.

While we may not know all of the potential green applications of blockchain technology for years to come, there is already talk of using it to tackle big problems, like helping businesses better record carbon emissions. or even, in a true meta movement, using blockchain. carbon credits to transition to a carbon neutral future.

Leave a Comment