Cryptocurrency is a hot buzzword in our financial landscape today. Even most of us who don’t use digital currencies have a basic understanding of what they are. Every year, the spotlight of crypto grows bigger.
Yet, one of the major issues surrounding cryptocurrency, such as Bitcoin, is the high carbon footprint it carries. The fact is, Bitcoin’s energy consumption is massive. When a bitcoin transaction takes place, computers all around the world are tasked with its verification.
Why Does Bitcoin Consume So Much Energy?
To understand why these tasks require so much power, let’s take a look at how bitcoins are generated in the first place.
To acquire bitcoins, computers across different networks must solve complex mathematical equations, grouping transactions into blocks. These blocks constitute “proof of work” that, like gold-mining, produces a unique and valuable asset, a cryptographic file that represents value that can be turned into money. During Bitcoin’s inception, bitcoins were mined using simple, store-bought computers. But with a finite number of minable bitcoins out there, the mathematical equations necessary to score a bitcoin becomes increasingly difficult each time a bitcoin is created.
Today, the specialized software required for mining require huge machines that consume large amounts of electricity. The people most likely to mine own companies and warehouses to support that computer infrastructure.
According to the Bitcoin Energy Consumption Index, a single bitcoin transaction pulls the same amount of energy it takes to power roughly 31 homes in the United States for one day. And every day, hundreds of thousands of bitcoin transactions take place. Currently, annual energy consumption levels sit at 61.56 terawatt hours. To put this into perspective, that’s enough energy to power every home in Switzerland for a year.
With the rise of Bitcoin, awareness of its effect on the environment is growing. Not only is this unsustainable, but it’s also ineffective. Cryptocurrencies like Bitcoin are victim to fluctuating value, and sharp declines have hurt mining companies that rushed to build facilities to compete and meet demand.
A Trend Towards Sustainable Digital Currencies
According to the 2017 Global Carbon Budget, the Earth has 32 years left before carbon emissions peak — rendering our planet unlivable.
But it’s important to note that not all cryptocurrencies are harmful — conversely, some forms of digital currency can actually help the environment by factoring in carbon offsets or tree-planting programs that sequester CO2 over the long term.
Already, financial technology companies have begun tackling bigger environmental and social issues, incorporating sustainable development goals and designing innovative solutions towards clean energy and climate action. Today’s big forward-thinking businesses are focusing on economic capital while supporting the greater good of our Earth.
Digital currencies backed by commodities offer a prime example of this. These currencies, which can be backed by a myriad of different commodities, may be both environmentally beneficial and secure for investors. The diversification of digital currency allows these coins to be more stable, absolving them from the volatility of cryptocurrency like Bitcoin.
Some Greener Cryptocurrency Solutions
The following are just a few examples of digital currencies that are striving to be more environmentally friendly as well as sustainable and stable.
Ven currency is a stable coin backed partially by carbon. The coin is 100 percent backed by issuance; that is, it is tied to a currency to minimize inflation risk. Unlike Bitcoin, trading with Ven offers some environmental benefits. Because trees store carbon and soak up high amounts of pollution, they can be tied to a financial instrument, a carbon credit that ensures retirement of CO2 in stable storage. A single carbon credit allows the holder to legally emit one metric ton of carbon dioxide. Each time that Ven currency is issued, my company, Hub Culture, purchases carbon credits to offset the transaction. Carbon credits can also be purchased through its Hub Culture platform. This protects forests — whose high absorption of carbon dioxide create “carbon sinks” — from further degradation.
Carbon credits represent roughly 7 percent of Ven’s overall value, and as of 2016, Ven currency has helped protect 25,000 acres of Amazon rainforest. Increased demand and financial support for environmental assets like carbon help ensure those assets remain protected. After all, the ultimate goal of carbon credits is to reduce the amount of greenhouse gases released into the atmosphere by limiting permissible emissions. Other big businesses like IBM have followed suit, partnering with third-party organizations to tokenize carbon credits and reduce their footprint.
Other types of green crypto solutions are also making a difference to our planet.
Australian-based startup Power Ledger is built upon a modest goal of helping consumers transact energy, trade environmental commodities, and invest in renewables. Through the software, people can buy and trade electricity in real time. For instance, a household that uses solar panels on their rooftop could sell excess energy to a neighbor. Conversely, you could use its blockchain technology to track energy from various renewable sources to offset emissions and trade renewable energy credits.
Another company called Hydrominer strives to replace the traditionally power-heavy mining process with a more sustainable alternative via hydropower. This hydropower backed “green mining” process cuts energy usage and costs.
Our future shouldn’t rely on fossil resources and unsustainable mining practices. However, using renewable energy isn’t the same thing as saving it. While renewable energy is certainly a fair step towards sustainability, additional efforts need to be explored.
Enter BitGreen (formerly Bitcoin Green), an energy-efficient alternative to Bitcoin that promises to reinvent the “proof-of-work” mining strategy by reversing the incentive structure. In this model of cryptocurrency mining, the coins already held by a miner prove that they can access more and this functions as a credit, reducing electricity needed to mine or “prove” a transaction. This would drastically reduce energy consumption and speed up the transaction process. With this new “proof-of-stake” concept, anyone could mine without the use of extensive hardware and pricey facilities. But there’s still a long way to go before this sustainable variant of the most popular cryptocurrency reaches the masses.
“Although right now the odds are not in our favor, we believe it is only a matter of time before proof-of-work energy consumption becomes so egregious that people will begin to more aggressively seek out sustainable solutions,” Bitcoin Green’s spokesperson, Daoud Schellin, told Grist.
And over in Estonia, mining company VenusEnergy plans to produce its own green electricity by building wind turbines along the windy Lithuanian coast.
Future Changes in Cryptocurrency Energy Consumption
In the future, we can expect more cryptocurrencies to evolve and change the way we use energy to build transparent, fortified transactional systems. After all, the traditional proof-of-work system is imbued with major ecological and economic issues. It’s clear that the digital currencies we know well have underlying structural problems that aren’t sustainable.
Because of the massive power necessary for these systems, we can also expect future regulations to reduce usage. Companies could be penalized or decimated altogether for exceeding their allocated energy usages. Moving forward, it’s time to start exploring eco-friendly ways to power our transactions and maintain our privacy.
About the Author
Stan Stalnaker is the founding director of Hub Culture, a social network service that operates Ven, the only digital currency to thrive on a basket of commodities currencies and carbon futures, making it the world’s first green monetary system. A leader in the market, Ven is a stable digital currency that is recognized by global financial markets and indexed by Thomson Reuters. Since 2007, Hub Culture has traded over 500 million Ven, helping to protect 25,000 acres of rainforest. Ven has become the world’s first environmentally-backed hedge currency.