Bitcoin’s carbon footprint
The first thing most people think of when they hear about the blockchain, cryptocurrencies or Bitcoin is that they are environmental disasters, so their adoption by governments would be a mistake and a nonsense to use them to make our societies more sustainable. However, the reality is much more complex, and if we stuck to this false observation, we would be missing out on the huge potential that digital currencies and registers have to make our societies more efficient, fairer, more transparent and more environmentally conscious. But let’s start with what’s true about this cliché: yes, the power consumption generated by Bitcoin is immense.
Bitcoin and power consumption
Electricity consumption caused by Bitcoin accounts for about 0.40% of the electricity consumption on earth, more than that of Belgium, which would put currently Bitcoin as the 36th most electricity consumer on earth if it were a country. Ironically, the power consumption generated by Bitcoin came very close to that dedicated to gold mining in 2021, according to the Cambridge Center for Alternative Finance (CCAF), which closely monitors these issues. And all this for a currency that is completely virtual, still underused and a priori superfluous, since States have not waited for Bitcoin to issue currencies in various forms. The power consumption of the Bitcoin network is a reality that no one disagrees with; it’s just a fact that is being followed particularly closely by the CCAF, a reference in this specific area. Those who are unaware of the reality of digital currencies and registries even go so far as to believe that every digital currency, every blockchain is an environmental monster, and that trying to adopt these technologies is as pointless as trying to equip every citizen with an SUV to promote sustainable mobility. It is important to understand that the reality is much more complex, and not to miss the potential of digital currencies and registries in our fight against climate change.
Source: CCAF as of August 7, 2022
Source: CCAF as of August 7, 2022
The role of the consensus algorithm
Bitcoin’s phenomenal energy consumption is not related to the blockchain, but to the consensus algorithm used by Bitcoin; we saw that at the beginning of the book. A blockchain is nothing but a decentralized and shared digital ledger within a community or around the world. The only point of criticism from an environmental point of view is that the security of a blockchain depends in particular from the fact that it is recorded in the same way on all computers involved in the network and updated by them. Data that your bank stores on one or maybe two or three servers is stored on thousands of computers in a network like that of Bitcoin or Ethereum. This certainly results in increased energy consumption compared to centralized systems, as thousands of computers update and store the same data instead of two or three, but this overhead is a far cry from the 0.40% of global electricity consumption.
A blockchain is governed by a consensus algorithm that allows it to be periodically and therefore always updated, always presenting a single “truth” shared by all network participants and interweaving the interests of the system and those of its participants to align their efforts towards a positive evolution of the system. Two consensus algorithms reign in the decentralized world: Proof of Work and Proof of Stake (and their variations). By requiring participants to invest significant amounts in equipment and energy in order to solve a cryptographic puzzle that I detailed in my first book, Proof of Work incurs a power consumption that is directly related to the number of participants creating new blocks as they want to be rewarded by the system for doing so. The difficulty of solving the cryptographic puzzle automatically adjusts to the cumulative energy expenditure of the participants in order to keep the block creation frequency stable. So, the more energy participants put into the system to try and collect rewards, the more difficult it becomes for them to do so. And here, sky is the limit.
Bitcoin isn’t the only cryptocurrency using PoW; Litecoin, Bitcoin Cash, Monero, and Ethereum 1.0 do, too. But Bitcoin is by far the best known and most energy consuming network. Proof of Work is the ultimate consensus algorithm that can provide great security to a decentralized system as miners have no interest in destroying an open network in which they invest colossal amounts. Therefore, Bitcoin has never failed and has never been hacked. In a PoW system, only the computing power that miners invest in the network to be the first to solve the cryptographic puzzle, which requires potentially infinite power consumption as they are in constant competition with no limits or legal frameworks, counts. Proof of Work is a very elegant (and energy-intensive) solution to a very complex problem: periodically agreeing on the “truth” of a decentralized network in which the participants do not need to trust each other. But Proof of Work makes absolutely no sense in a centralized system where a logic can be set up for the appointment of identified validators, which can be, for example, based on their investment in the system, or chosen randomly among the participants.
In Proof of Stake, which is suitable for both the centralized and decentralized world, validators are randomly determined according to the number of units (coins/tokens) of the system each of them owns, so a participant who has 1 coin in a 1,000-coin system has a 1 in 1,000 chance of validating a block. The Proof of Stake system does not cause any specific energy expenditure, so the Ethereum Foundation has announced that it will reduce the energy expenditure of the Ethereum network by 99.5% when moving from Proof of Work (Ethereum 1.0) to Proof of Stake (Ethereum 2.0) .
A blockchain in itself is thus not automatically an environmental monster; the energy cost it incurs depends almost entirely on its consensus algorithm. Proof of Work is much more the exception than the rule here, but the fact that it rules Bitcoin makes it very “media-friendly”. It has been years since a major new cryptocurrency project adopted Proof of Work as a consensus algorithm, and Ethereum, as previously described, has taken on the challenging task of abandoning Proof of Work, which will probably fully occur in the second part of 2022, after several delays given the decentralised nature of the network the technical implications of such a change and the interests at play.
Bitcoin and electricity consumption: facts and figures
When it comes to power consumption, what counts is not the number of kWh per se, but the CO2 footprint resulting from production, which depends heavily on the power sources used. There is currently no consensus on Bitcoin in this area, but the most critical speak of 40% renewable energy and the Cambridge Center for Alternative Finance of 44 million tons of annual CO2 emissions from the Bitcoin network in 2020; the activity of Bitcoin has increased significantly in 2021 so carbon emissions generated by Bitcoin in 2021 should be much higher.
Source: CCAF as of August 7, 2022
One thing to note about Bitcoin’s energy consumption is that it’s largely predictable and can happen anywhere in the world as long as that place is connected to the Internet, so a significant portion of the electricity consumed by Bitcoin comes from overproduction by Icelandic geothermal energy, hydroelectric dams, wind turbines, and solar panels almost anywhere on earth, waterfalls in Paraguay or volcanoes in El Salvador. Initiatives like Jack Dorsey’s Bitcoin Clean Energy Investment Initiative are also promoting the use of heat from computers that mine Bitcoin to heat greenhouses or homes, or even distill whiskey. The Bitcoin system creates the demand to optimize electricity production because miners have an interest in settling where electricity is cheap, i.e. often where supply exceeds demand, i.e. in regions where too much renewable energy is produced for the few inhabitants and industries. Iceland is a very good example of this.
What is the point of Bitcoin energy consumption?
Bitcoin is a purely decentralized system; this accounts for a significant part of its value. Mining is the process that enables such a system to reach consensus at regular intervals according to strict and public rules. This system consists of computers owned by participants who are not identified, do not know and do not trust each other, but ensure continuously the maintenance and security of the system because it gives them a significant financial incentive. Sensitive data (transactions) are processed in this system, which is currently valued at just over half a thousand billion dollars (!), and has never failed in its thirteen-plus years of existence. The first airplanes and cars were certainly not a boon from an environmental point of view, but they were a necessary step towards getting to electric cars today and solar or hydrogen airplanes tomorrow. Being able to represent and exchange value is a must for any economic system, and if we accept that today’s capitalism is in a bad state and money issuance is way too centralised, then it is salutary that alternatives are emerging. These alternatives, like the systems they replace, are not perfect, but clearly have the potential to outperform and therefore replace them. If one criticizes Bitcoin for one reason or another, one should also not forget that our current monetary system is also not perfect and also requires significant energy and resources. Criticizing a system because it has flaws and overlooking the flaws of a competing system, usually the legacy one, is fallacious but is a technique used endlessly by the advocates of systems in place and those who are willing to listen to them, be it to badmouth renewable energy sources or the Bitcoin, as if producing energy from coal or nuclear power or the current banking and financial system were exempt from flaws.
Ultimately, the question of how much energy Bitcoin is “allowed” to consume is a matter of opinion. Anyone who sees no advantage in cryptocurrencies will think that even a single kWh is already too much. On the other hand, anyone who thinks that the emergence and development of Bitcoin will benefit our society or their wallet sees this expenditure of energy as a necessary evil that is justified by all the contributions made by Bitcoin: from the blockchain to pure decentralization, which enabled a new way of managing and exchanging value on a large scale and with high reliability. In any case, the market has long since formed its own opinion.
