The Climate Impact of Cryptocurrencies
Cryptocurrencies have emerged as an innovative means of carrying out secure, online financial transactions. By June 2020, the daily transactions of Ethereum and Bitcoin had cumulatively reached almost 763,000. Today there are over 50 million Blockchain wallet users — a linear increase over the past half-decade.
The revolutionary aspect of cryptocurrencies is the underlying Blockchain technology, rather than the digitalisation of currency in itself, and whilst the Blockchain is an enabler of decentralisation and unrivaled data security, it is the source of significant environmental degradation due its carbon emissions.
For context, the carbon footprint for each Ethereum transaction is estimated to be around 9kgCO2e — that’s roughly the same emissions as a 40-mile car journey in a moderately efficient car. For Bitcoin the per transaction emissions are more like 285kgCO2e —that’s the equivalent of a one-way flight from JFK to London Gatwick…
Where do cryptocurrency emissions come from?
The Blockchain is a distributed ledger, which contains a record of all transactions, arranged in sequential blocks. The distributed nature means that users cannot spend any holdings twice or manipulate the Blockchain for gain.
The way that manipulation is detected and rejected is through the Proof of Work (PoW)consensus mechanism that requires network participants (or miners) to undertake complex search problems. Ethereum and Bitcoin both utilise PoW, so to add a valid block to the Bitcoin Blockchain, miners use specialised software to solve the problems and are then issued a certain number of that currency in return.
Over time, the complexity of these problems has increased in response to more miners, with more advanced hardware. Thus, as the frequency of mining has increased, the energy expended to mine each block has too.
Given the load required to undertake PoW, and the frequency of cryptocurrency transactions that we are seeing today, the total energy demand from this activity is significant. The annual power consumption from Ethereum activity in the past 12 months is estimated to be 9.62TWh, for Bitcoin, its over 7-times that 68.33 TWh.
Mining can take place anywhere that has a power outlet and an internet connection. So in reality, it is difficult to know the exact emissions intensity of the electricity that is being used to mine as this varies over geographies. However, estimates for the annual carbon footprint of Ethereum put it at around 4.8 million tonnes CO2e, and for Bitcoin around 32.3 million tonnes CO2e. So from the two technologies combined, that’s a similar level of emissions as a smallish country such as New Zealand or Slovakia!
Whilst the value of many cryptocurrencies haven’t revisited the heady-heights of late 2017, the number of registered wallets does continue to increase, new blockchain-enabled financial products (see DeFi) are attracting attention, and even some high-profile investors have made newsworthy statements on Bitcoin recently. This leads one to think that cryptocurrency transactions, and their associated emissions are going to continue to climb. Research from Mora et al., in their 2018 paper in Nature demonstrates the severity of continuing on unchecked:
“projected Bitcoin usage, should it follow the rate of adoption of other broadly adopted technologies, could alone produce enough CO2 emissions to push warming above 2 °C within less than three decades.”
But, who is responsible for managing this issue before it becomes a real problem?
The developers of cryptocurrencies have scope to be innovative when they design its underlying processes. That said any approach taken mustn’t compromise the overall integrity of the cryptocurrency, else it’ll rapidly become valueless.
Developers on the Ethereum Blockchain have acknowledged the issue of excessive power consumption, which ultimately reduces the scalability of the technology. They are currently working on plans to re-engineer the Ethereum platform to have a more efficient consensus mechanism called Proof of Stake. Proof of Stake will reward network participants that stake their tokens to validate blocks, rather than rewarding those that have the most computing power as is the case for Proof of Work (you can learn more and find this infographic at blockgeeks).
One could reasonably argue that those consuming the energy, and receiving the rewards for mining, should be the ones to clean up their act. Given the low-cost of renewable solar power nowadays, this could be a reasonable position to take. However, the reality is that much mining takes place in countries where energy costs are very low (often fueled by cheap, dirty coal); there’s little financial incentive for miners to change their power source from a cheap and stable one to a intermittent (and self-funded) one.
So, in this case, it may really down to the us, the users, to step-up and play our part to fill in the gaps where the developers can’t, or haven’t yet been able to.
The first step is to understand and acknowledge the climate impact that we are having when we use the Blockchain. This article goes some way to highlighting the issues, and some sources are outlined below. However, there is much more research to be done here to get a full and accurate grasp of the issue and impact.
If you’re a user of Ethereum and want to understand the impact from your transactions, why not check out the beta version of carbon.fyi (developed by Offsetra) to better understand the carbon impact that your transactions are having.
The second step is to mitigate our impact through our actions in the variety of ways that are available to us today. If you are a carbon offsetter, please visit our website offsetra.com to have a look at the projects we are currently supporting.
At Offsetra, we’re following developments in crypto closely, and are excited for its prospects in making financial tools more widely available globally. Concurrently, we’re working to build awareness around the environmental impacts of these novel technologies. Reach out to us to talk.
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