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Crypto Carbon Footprint: Minimising the Environmental Impact
The environmental impact of cryptocurrency is increasing rapidly. What can you do to minimize your crypto carbon footprint?
While the value of Bitcoin has skyrocketed over the last decade so has the crypto carbon footprint. This is due to the amount of electricity it takes to operate the blockchain network that drives Bitcoin. The decentralized Bitcoin consumes a staggering amount of power that has captured a significant amount of criticism over the potential environmental impact of digital currencies.
The Bitcoin network is maintained through the efforts of miners, who use dedicated hardware to crunch vast amounts of math in order to secure the Bitcoin ledger and process transactions. This method, referred to as “Proof of Work,” isn’t only used by Bitcoin — it’s the primary consensus method in the cryptocurrency industry and is rapidly becoming an environmental concern.
What is the environmental impact and carbon footprint of cryptocurrency, though, and how can it be overcome?
Bitcoin’s Increasing Carbon Footprint
The amount of electricity consumed by Bitcoin has increased dramatically since the Bitcoin network was launched in 2009. There aren’t any centralized institutions or parties in control of the Bitcoin network — Bitcoin is managed in a collaborative manner by hundreds of thousands of “miners” around the world, who commit computing power to the blockchain.
As demand for Bitcoin increases, so too does the amount of computing power necessary to secure the Bitcoin network. This, in turn, increases the amount of electricity used by the mining hardware.
The carbon footprint of the energy consumed by the Bitcoin network is as large as the entirety of New Zealand. Data published in Digiconomist’s Bitcoin Energy Consumption Index reveals that the Bitcoin network produces over 36.95 megatons of CO2 every year, and consumes over 77.75 TWh of power — more than the entire electricity consumption of Chile.
Estimates of the power consumed by the Bitcoin network vary, however. The Cambridge Bitcoin Electricity Consumption Index, managed by researchers at Cambridge University, estimates the total power consumption of the Bitcoin Network as 110.53 TWh, which is roughly equivalent to the total power consumption of the Netherlands.
The enormous power consumption of the Bitcoin network accounts for almost 0.5 percent of the total energy consumed worldwide, revealing a significant issue.
The Problem with Proof of Work
Proof of Work, used by the Bitcoin network to secure the Bitcoin blockchain and process transactions, isn’t solely used by Bitcoin. Most major cryptocurrencies, including Ethereum, use Proof of Work as a consensus method.
While the power draw of the Ethereum network is not as large as the power draw of the Bitcoin network, it’s still significant — as of 2021, the Ethereum network currently consumes 30.84 TWh, which is comparable to the power consumption of Nigeria. The carbon footprint of the Ethereum network is similarly high, accountable for 14.65 Mt of CO2 every year — the same carbon footprint as the entirety of Tanzania.
Both the Bitcoin Network and Ethereum network operate on Proof of Work. This consensus method isn’t the only way to secure a blockchain network, however. While Bitcoin developers have no plans to alter the method used to secure the Bitcoin network, Ethereum has concrete plans to move to a more sustainable model.
The Future of Proof of Work
Bitcoin and other Proof of Work blockchain networks currently rely heavily on mining farms that use application-specific integrated circuit (ASIC) hardware. This hardware is specifically designed to perform the intensive computing work required to secure Proof of Work blockchains, and is primarily responsible for the extremely high power draw of these networks.
While this consensus method is suitable for securing the Bitcoin blockchain and other Proof of Work blockchain networks now, projections of Proof of Work data consumption as adoption grows reveals a severe scalability issue.
The Bitcoin network currently processes an average of 300,000 transactions per day, with a comparatively low user base of 100 million people worldwide now using cryptocurrency on a daily basis. While the number of Bitcoin users has increased dramatically over the last decade, Bitcoin adoption rates are far from the use rates of major payment processors such as VISA.
VISA currently manages over 850 million cards worldwide, processing 1,700 transactions per second on average — roughly 150 million transactions per day. In order to keep up with the demand of a VISA-size user base, the Bitcoin network would need to scale 5000%.
So what could the cryptocurrency carbon footprint look like? Worldwide mass adoption of Bitcoin at the same level as the VISA network would see the energy demands of the Bitcoin network reach a staggering 38,875 TWh. In comparison, world total electricity final consumption reaches only 22,315 TWh. A VISA-scale Bitcoin network would consume nearly twice as much electricity as the entire world does today.
There are a number of second-layer solutions designed to increase the transaction throughput of the Bitcoin network without increasing energy costs in parallel. The Lightning Network scaling solution promises transaction throughput up to 3.7 million times more energy efficient than VISA, but has remained in active development for several years.
While scaling solutions such as Bitcoin’s Lightning Network promise energy efficiency and enhanced transaction throughput, they’re not here yet. Despite slow development in the optimization of Proof of Work networks, the blockchain industry is currently working on a broad range of solutions that address the Proof of Work energy problem in different ways.
Proof of Stake and Sustainable Cryptocurrency Networks
The Ethereum network is set to change from the Proof of Work algorithm to a highly energy efficient consensus algorithm called Proof of Stake. Unlike Proof of Work, which incentivizes miners to do the right thing by forcing them to spend money on electricity, Proof of Stake directly monetizes participation.
Miners that participate in a Proof of Stake network “lock up” a specific amount of digital currency as stake, which is then used to determine the frequency at which they are able to assist in processing transactions or securing the blockchain network. Higher stake means greater participation — bad actors run the risk of losing their stake, incentivising positive interaction with the network.
Proof of Stake blockchain networks eliminate the need for extremely high power draw while retaining the same level of security as Proof of Work blockchains, but they’re not without issue. Complex problems such as the “nothing at stake” issue or the rapid accumulation of stake within these networks can create imbalances and potentially centralize networks that are designed to be decentralized.
Cryptocurrency Carbon Footprints in the Real World
While the amount of electricity used to power the Bitcoin or Ethereum networks is astoundingly high, the excessive carbon footprint of these networks becomes apparent when compared to traditional payment processors.
Both Bitcoin and Ethereum function primarily as a means of value storage and transfer. An individual Bitcoin transaction, however, has a carbon footprint of 359.04 kg CO2. This carbon footprint is equivalent to over 800,000 individual VISA transactions. Ethereum isn’t much more efficient, with each Ethereum transaction currently equivalent to almost 70,000 VISA transactions.
These calculations, however, take into account only the cumulative power draw of the Bitcoin or Ethereum networks and fail to account for the technical elements of electricity use within blockchain networks.
Bitcoin Mining & Clean Energy Innovation
The cost of crypto carbon footprint has catalysed a rush toward renewable energy sources in the Bitcoin network — the lower the cost of electricity, the higher the profit margins of Bitcoin miners. A large portion of the computing power directed toward the Bitcoin network is based in the Sichuan region of China.
Sichuan experiences frequent overcapacity in power production due to a centralized state-driven program spearheaded by the Three Gorges Dam. The resulting glut of electricity has created an ecosystem in which Bitcoin miners establish temporary mining facilities during heavy rain periods in order to leverage low-cost hydroelectric power.
Hydroelectric power isn’t the only renewable energy source used to power cryptocurrency networks. Enigma, one of the world’s largest Ethereum mining enterprises, is located outside of Reykjavik, Iceland. The Enigma facility uses a combination of geothermal and hydroelectric power to mine cryptocurrency.
Cost efficiencies in cryptocurrency mining force miners to seek progressively cheaper means of accessing electricity. Renewable energy is, in almost all cases, far cheaper than non-renewable energy. Hydroelectric energy averages a cost of $0.05 per kWh, while solar, geothermal, and offshore wind power average between $0.10 and $0.13 per kWh.
Compared to the average cost of fossil fuel power plants, which range between $0.10 and $0.15 per kWh, it’s clear that cryptocurrency miners pursuing renewable energy sources benefit from higher profit margins than those operating on non-renewable power.
Carbon-Efficient Cryptocurrency Networks
The widespread criticism of Proof of Work blockchains has created a development ecosystem in which environmentally efficient cryptocurrencies are gaining traction. Platforms such as ECOcoin have existed within the crypto market for several years, but lack the use cases and market cap of major cryptocurrencies, functioning primarily as proof-of-concept networks.
More effective solutions designed to minimize the crypto carbon footprint caused by cryptocurrency mining target the mining industry rather than attempt to redesign the security protocols that drive blockchain networks.
Terra Pool, a new initiative created in partnership between UK-based mining company Argo and blockchain tech platform DMG, will see the creation of a new carbon-neutral crypto mining pool powered exclusively by renewable energy.
Chia Network, founded by BitTorrent protocol creator Bram Cohen, aims to disrupt the unstainable consensus model that drives most modern blockchain networks with a new cryptographic technique based on storage space rather than power-intensive electricity cost incentivization.
The Proof of Space and Time, or PoST protocol that drives Chia network is designed to replace Proof of Work with a sustainable, cost-effective algorithm. Chia delivers scalable virtual machine driven smart contracts in a similar manner to Ethereum with cryptographic security on par with the Bitcoin network, potentially offering a solution to the rapidly growing problem of crypto energy consumption.
Blockchain-Powered Carbon Neutrality
While environmentally-efficient consensus algorithms such as Ethereum’s impeding Proof of Stake algorithm change hold the potential to significantly reduce the carbon footprint of cryptocurrency in their future, there are a number of initiatives that are able to affect real-world change in the present.
The high average carbon footprint of the average cryptocurrency transaction has led many cryptocurrency exchanges to offset the carbon impact of the transactions they process.
Mercado Bitcoin, one of the largest cryptocurrency exchanges in Latin America, partnered with carbon offset platform MOSS in January 2021 to create the world’s first carbon neutral cryptocurrency exchange, offsetting the entire carbon impact of the trading platform.
Mercado Bitcoin’s carbon offset initiative is driven by the MOSS MCO2 token, a blockchain token that represents a single carbon credit from a VCS certified environmental project such as forestry, energy, or biomass.
MOSS isn’t the only environmental initiative aiming to bring carbon credits onto the blockchain. The Universal Protocol Alliance, an industry group that includes Uphold, Bittrex Global, Infinigold, and Certik, has announced the creation of a Universal Carbon (UPCO2) blockchain token that can be used to offset an individual or company crypto carbon footprint.
How Can You Minimize Your Crypto Carbon Footprint Right Now?
While the ability to offset individual cryptocurrency transactions via a crypto exchange doesn’t yet exist, the inclusion of major cryptocurrency exchanges such as Bittrex in carbon neutrality initiatives that tokenize carbon credits could soon create a market environment in which investors and traders are able to offset transactions on an ad-hoc basis.
One carbon credit is equivalent to 1 metric tonne of CO2 emissions. With the carbon cost of a Bitcoin transaction averaging at 0.35904 metric tonnes, it’s possible to calculate the average offset cost of a Bitcoin transaction.
Universal Carbon token prices average at $10 USD — by purchasing and holding UPCO2 tokens or MOSS Carbon Credit tokens for every transaction, cryptocurrency traders and investors could offset the cost of the average Bitcoin transaction for an average price point of $3.50 USD.
With the Bitcoin transaction costs averaging at $15 USD, a few extra dollars on top of each individual transaction holds the potential to significantly reduce the overall environmental impact of cryptocurrency networks.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, agencies and entrepreneurs.