It is no news that from being esoteric, cryptocurrencies have now become mainstream, with 320 million crypto users worldwide, as per estimates. Security, ease in transactions, and exponential returns make these lucrative alternate currencies. However, the disadvantages are stark, one of the prominent ones being the environmental impact of crypto mining.
Energy guzzling currencies
As per a report cited by the White House, from 2018-22, the “annualised electricity use from global crypto assets grew rapidly, with estimates of electricity usage doubling to quadrupling. As of August 2022, published estimates of the total global electricity usage for crypto-assets are between 120 and 240 billion kilowatt-hours per year, a range that exceeds the total annual electricity usage of many individual countries, such as Argentina or Australia,” which is equal to 0.4% to 0.9% of annual global electricity usage. This is troubling because much of the energy is sourced from the burning of fossil fuels, such as coal, “which can result in greenhouse gas emissions, as well as additional pollution,” according to the White House. Among the global cryptocurrencies, Bitcoin and Ethereum (ETH) are the most prominent ones, making up 60% of total crypto-asset market capitalisation. As per the report, as of August 2022, Bitcoin is estimated to account for 60-70% of global crypto-asset energy usage, while Ethereum accounts for 29-39%. It has recommended switching to more environment-friendly technologies such as proof-of-stake, which “could reduce the overall power usage to less than 1% of today’s levels”.
In what was among the most anticipated events in the web3 space, Ethereum completed the merge on September 15. In it, the Ethereum blockchain switched from the energy-guzzling proof-of-work mechanism to proof-of-stake. “And we finalised! Happy merge, all. This is a big moment for the Ethereum ecosystem,” tweeted Ethereum co-founder Vitalik Buterin then. “The merge will reduce worldwide electricity consumption by 0.2%,” he said in another tweet, quoting “Ethereum researcher” Justin Drake.
Bitcoin uses the proof-of-work mechanism in which miners mine coins by solving complex mathematical puzzles using high-powered computers, which use a lot of energy. Ethereum’s event was termed merge as in December 2020 itself. It started running on two parallel blockchains — a legacy one, Ethereum Mainnet, that used proof-of-work, and a new one, Beacon Chain, using proof-of-stake. The merge combined Ethereum Mainnet with Beacon Chain to create a unified blockchain that works on a proof-of-stake protocol. In this, miners pledge an investment in the digital currency before validating transactions. For validating blocks, they need to put up stakes with their coins. Then, an algorithm chooses the validator who gets to add the next block to a blockchain, based on how much cryptocurrency she has staked. Although this does away with solving complex computers using energy-intensive fast computers, one needs considerable investment. Hence, those with the most money can have an upper hand. For example, an investor must stake at least 32 ETH to become a validator. But with one ETH trading at $1,300, it takes the total investment to $ 41,600, making it pricey. Ethereum’s complete switch to a proof-of-stake mechanism makes it more attractive to the environment-conscious as before the merge, its annual power consumption was equivalent to that of Finland, and the carbon footprint equivalent to that of Switzerland. But with proof-of-stake, the latter is expected to come down by up to 99.95%.
Although Bitcoin’s reliance on fossil fuels for mining has come down, it has happened only slightly. According to the latest available data accessed by the Cambridge Bitcoin Electricity Consumption Index (CBECI), fossil fuels made up 62% of its energy mix in January this year compared to 65% last year. While the reliance on coal fell to 37% from 47%, the crypto became more reliable on gas which rose from 16% of its energy mix last year to a quarter earlier this year. At the same time, the role of sustainable power rose by a bare minimum, from 35% to 38%. But the share of hydropower dropped from around 20% to 15%.
Ethereum has taken a step towards addressing environmental concerns. There are other cryptocurrencies too that use less energy-intensive mechanisms. These include Bitgreen, IOTA, Chia, Cardano, Solarcoin and Nano.