Does crypto really consume a lot of energy?
The energy consumption of any given cryptocurrency depends on the design of the underlying blockchain, which governs the type of resources needed to run it. The two dominant models are proof of work, used by Bitcoin, Litecoin, and a few other older blockchains, and proof of stake, used by Ethereum, Cardano, Solana, and most newer networks.
Proof of stake networks are run by validator nodes, each of which must lock up a minimum stake of the blockchain’s native cryptocurrency to participate. In contrast, proof of work networks require participants to contribute physical energy to the mining process by solving computational problems. In both cases, the design is intended to ensure that participants have invested enough that they’re incentivized to act in the interests of the network. The key difference is that proof of stake requires the staking of resources intrinsic to the network, while proof of work requires the investment of external energy resources.
As a result, proof of stake consumes a relatively low amount of energy compared to proof of work. To illustrate the extent of the difference, Ethereum reduced its energy requirements by over 99% following the switch from proof of work to proof of stake in 2022.
How is crypto’s energy consumption measured and evaluated?
Crypto’s energy consumption is typically measured using a standard measurement of electricity usage: kilowatt-hours. This can be applied to the entire network or calculated per an average transaction.
Since most people find it difficult to visualize electricity consumption, it’s commonplace to find crypto’s energy consumption illustrated using comparisons; however, this practice is subject to debate because there are so few direct comparators. For instance, comparing Bitcoin’s energy consumption to that of a country like Ukraine doesn’t make much sense unless we compare other payment or financial services in the same way.
Another practice is to compare the energy consumption of crypto transactions to payment networks such as Visa or to services such as YouTube. However, there are always arguments for or against any comparison. For example, while the networks may have a comparable total energy use, the cost per Visa transaction is superficially far lower than that of BTC, as it has a far larger user base. However, Visa cannot operate independently of the broader banking network, which also consumes a significant amount of energy.
It’s also typical to see crypto’s energy consumption compared to YouTube, which also fails as a direct comparison, as Bitcoin isn’t a streaming service and YouTube has more users, meaning hours viewed isn’t analogous to a BTC transaction.
What is the environmental impact of crypto’s energy usage?
Due to its high energy consumption, Bitcoin comes under heavy criticism from environmental campaigners for its high carbon footprint. However, the precise environmental impact is difficult to quantify for several reasons.
Firstly, Bitcoin mining is at least partly reliant on renewable energy sources, although the permissionless nature of the network makes it difficult to quantify the extent of renewable use. Furthermore, mining activity has been in a state of flux over recent years. China outlawed Bitcoin mining in 2021, resulting in an exodus to other countries. However, energy inflation combined with depressed BTC prices could also have impacted mining activity and movements. Currently, it’s thought that around half of Bitcoin mining uses renewable energy. In 2022, a non-peer-reviewed commentary published in Joule estimated that Bitcoin mining accounted for 0.2% of global greenhouse gas emissions, comparable to the level of emissions of Greece.
Secondly, there are other environmental impacts of crypto’s energy usage. For example, Bitcoin’s water consumption has more recently come under scrutiny. Bitcoin mining depends on cooling systems to prevent overheating, which uses water, while the electricity generated for Bitcoin mining also consumes water for cooling purposes. Local campaigners in Seneca Lake, New York, claim that a mining facility has caused the lake waters to warm, damaging freshwater ecosystems.
Can crypto’s energy consumption or environmental impact be reduced?
The most effective way for a crypto network to reduce energy consumption is to adopt the proof of stake consensus. However, in the case of Bitcoin, this is extremely unlikely to happen. The overwhelming consensus among the Bitcoin community is to preserve Satoshi Nakamoto’s original design, which has proved so effective in securing the network since genesis.
Currently, the only ways to mitigate Bitcoin’s energy consumption are through the ongoing transition to renewable energy sources and the less effective method of carbon offsetting. Policymakers often attempt to introduce measures that incentivize the use of renewables and/or penalize the use of fossil fuels in Bitcoin mining. With conservative estimates putting renewable adoption rates at 50%, Bitcoin still has one of the highest take-ups compared to other industries.
In the context of energy use, grid rebalancing is one area where the Bitcoin network could support the transition to green energy. A key challenge with renewables is that their supply can be volatile according to conditions, meaning the grid must be able to adapt accordingly to maintain a steady supply. Bitcoin mining could be operated on a flexible basis to help absorb excess unused renewable energy during times of excess, while scaling down operations during times of high grid demand. Furthermore, by providing a sustainable source of demand for excess energy that would otherwise be wasted, Bitcoin could help renewable energy providers maintain stable revenues and thus promote further investment and innovation.
Are there any positive benefits to offset crypto’s energy consumption and impact?
The energy and environmental impact of Bitcoin mining is perhaps its biggest challenge to solve and a significant source of consternation among environmentalists. However, Bitcoin was the first crypto to demonstrate the potential of decentralized digital currencies and their potential for financial good, such as providing a more stable store of value than local currencies in volatile economies like Argentina.
Cryptocurrencies also represent a growing asset class, with a total market capitalization in excess of $1 trillion.
Crypto energy consumption essentials
- Bitcoin’s proof of work accounts for the vast majority of crypto’s total energy consumption, while proof of stake currencies such as ETH consume substantially less.
- Evaluating Bitcoin’s energy consumption and environmental impact is still subject to significant debate; however, the network has made substantial strides in renewable energy adoption.
- Reducing the environmental impact will require further adoption of renewables, along with innovative ways for Bitcoin to support the broader energy grid, such as rebalancing.