Keep calm and carry on mining...but with renewable energy!
The value of many cryptocurrencies soared to the moon last year and attracted the attention of speculators and entrepreneurs alike. However, as the recent price pullbacks have shown, cryptocurrency prices are highly volatile and very risky investments.
Only the most battled hardened traders and (of course the exchanges) revel in this volatility. Therefore, many looking to capitalize on the phenomenal rise of cryptocurrencies have opted instead for cryptocurrency mining rather than trading.
The biggest issue we face right now is not the “big crash’ that everyone fears, but the energy consumption that comes with mining cryptocurrencies based on proof of work consensus mechanisms. Mining, bitcoin in particular, has led to a surge in global electricity consumption due to the absurd amount of energy used to power GPU units that solve the cryptographic puzzles required to verify transactions on the blockchain.
This surge in energy consumption should be addressed, but the environmental impact of cryptocurrency mining is not as severe as often portrayed in the media, as journalists do not take into account of the future development of the mining industry.
What is cryptocurrency mining?
The Proof of Work (PoW) consensus mechanism, inspired by cryptographer Adam Back’s Hashcash, underpins the how transactions are securely verified on a public blockchain such as bitcoin. This validation process works as miners dedicate immense amounts of computing power (or work) to compete with others in the network to solve complex cryptographic puzzles to securely validate transactions on the network (proof).
These validated transactions are then pooled together into a “block” of transaction data which is then added to the ledger, or historical record of these transactions described as a “chain.” Hence the term blockchain.
Miners are rewarded for their effort in solving these cryptographic puzzles in the native token or coin of that blockchain, in the bitcoin case they will be rewarded with bitcoin, thereby incentivizing them to continue to mine or validate transactions on the network.
This eliminate the needs for third parties and intermediaries to process the peer to peer transactions that take place through the network, such as banking institutions, enabling a trust-less and immutable consensus. Bitcoin, *ethereum and Zcash are prime examples of PoW based cryptocurrencies.
*Ethereum will be migrating to Proof of Stake based public blockchain in the upcoming Casper implementation
PoW is designed so that the difficulty of the cryptographic puzzle will scale with the total hash rate of the network. It will take additional computational power to solve the cryptographic problems as the network’s total hash rate increases. It is highly unlikely that an individual mine could solve these puzzles with a home-based rig, even with an advanced setup. Mining now requires so much computational power that some miners pool their hash power together into a mining pool and solve the puzzles as a group, while sharing the block rewards.
Since 2015, a swarm of companies have set up mining farms mostly in China, with the aim to capitalize on the potential returns of bitcoin. Mining farms are equipped with modern hardware such as application-specific integrated circuit chips (ASICs), which are designed for the sole purpose of cryptocurrency mining. ASICs offer much higher hashing power and outperforms conventional GPUs and CPUs in mining speed and efficiency, but at the cost of high energy consumption.
Managing a mining farm can be very troublesome. Cheap land, power and internet access are all essentials to maintaining a profitable mining business. Mining equipment operates 24/7, so miners must take the temperature and the climate into consideration when operating a mining farm. Companies such as Genesis Mining provide “cloud mining” service, allowing their customers to buy CPU power from them and the data centre will use their own equipment to mine on the customer’s behalf.
The environmental impact of cryptocurrency mining
Research from Digiconomist, a cryptocurrency and blockchain research agency, indicates that the bitcoin network’s estimated annual electricity consumption in 2017 was valued at approximately 36 terawatt hours, which Business Insider reported is more than the annual electricity consumption of Ireland and 158 individual countries. The argument against cryptocurrency mining is that as long as it remains a profitable activity, businesses will join the industry and consume more energy. As the difficulty of the PoW problem increases, mining firms will add more mining hardware to increase their hash rate.
The carbon footprint associated with cryptocurrency mining is also a significant issue. Prior to the recent clampdown on bitcoin mining activities by the Chinese government, China was the world’s the centre of bitcoin mining. Chinese bitcoin mining pools amounted to almost 70% of bitcoin mining capacity at their peak. China, for a long time, held a competitive advantage for bitcoin miners because of its cheap electricity and cold climate for mining farms in specific regions. Low temperatures mean that mining rigs do not require additional electricity to cool them down.
To be less dependent on energy imports from foreign countries, China relies heavily on its abundant source of coal. Over 70% of China’s electricity production was generated from coal sources in 2014 and China is one of the world’s biggest carbon dioxide contributors, emitting over 9040.74 million metric tons of carbon dioxide in 2015.
The cryptocurrency mining industry in China was largely fueled by coal, one of the dirtiest and environmentally harmful fossil fuels. As global energy demand is expected to grow by 28% by 2040, the continuous burning of fossil fuels will severely impact our ecosystem.
So is bitcoin killing polar bears?
Cryptocurrencies and blockchain applications are here to stay. The current energy consumption of cryptocurrency mining and its environmental impact is a clear issue, however, one that we foresee being resolved in the near future as the industry’s eco-consciousness will strengthen and deploy sustainable solutions to conserve our ecosystem.
But how?
Proof of Work is a high energy consuming and hardware dependent consensus mechanism , therefore more cryptocurrencies are slowly migrating away from Proof of Work (PoW) to Proof of Stake (PoS). PoS is an alternative consensus mechanism that allows the validation of transactions on the blockchain according to the amount of coins or tokens (stake) held by a validator, or stakeholder of the network.
The higher the stake the validator has in the network, the higher chance they will validate the transaction and receive a reward or incentive in the protocol’s native token (which they also hold as their stake). Most importantly, PoS will be far more energy efficient when compared to PoW.
Under the new “Casper” protocol, Ethereum will be migrating from PoW to PoS to address energy consumption and other issues related to PoW. This shows how software updates will bring major changes to the energy consumption of cryptocurrency transaction validation.
Elaine Ou, a columnist for Bloomberg View, argues that “the currencies and commodities that bitcoin could help replace” such as gold and cash also consume a significant amount of energy. Gold mining for example, consumes about 475 million gigajoules(131 terawatt hours) per year. While less bitcoins are produced each year, bitcoin mining is significantly greener than gold when compared to bitcoin’s energy consumption of 36 terawatt hours last year.
As cryptocurrency mining farms flee China, we expect to see an increase in mining operations that adopt renewable energy sources to mine cryptocurrencies that are still reliant on PoW such as bitcoin. Canada, for example, is a prime destination for cryptocurrency mining firms to relocate to.
The natural cold climate in Canada is beneficial for miners as it lowers the costs of cooling mining hardware. Some mining farms are even developing ways to utilize the heat generated from mining farms, from warming nearby homes to growing food. Bitmain, the largest cryptocurrency mining company, is already looking to expand into Canada, harnessing the surplus of cheap and renewable energy.
Several mining companies have also taken the initiative in adopting renewable energy to fuel their mining farms. Hashgains, a cryptocurrency cloud mining service provider, has recently launched an ***ICO to crowdfund a large scale mining farm in Canada which aims to “go green” by utilizing renewable energy to tackle to tackle the problem of high energy consumption that comes with cryptocurrencies mining.
The Canadian government has been very clear regarding its stance on cryptocurrencies. Canada is the first country in the world to release a national law on cryptocurrencies way back in 2014, which states that dealers in digital currency will be considered as money service businesses(MSBs). Canadian MSBs must maintain a anti-money laundering (CML) and counter terrorist funding (CTF) compliance programs.
In 2017, the Canadian Securities Administrator also published guidelines on ICOs, thereby creating a clear framework for the cryptocurrency industry, rather than prohibiting innovation completely. Given this context, Canada provides a crypto-friendly environment, making it an ideal destination for miners.
Aside from hydroelectricity, Solar energy is also an effective and efficient energy source that can also be utilized for cryptocurrency mining. The initial investment to install solar panels can be very high. A 10 kW solar energy system costs approximately USD $20,160 in Arizona, USA. However, the long-term benefits significantly outweigh the costs, as well as help to reduce the global carbon footprint.
As shown in the chart above, the unsubsidized levelized cost (the average cost of renewable energy) of solar energy is significantly cheaper than conventional energy sources. International Renewable Energy Agency suggests the cost for renewable energy is continuing to fall and it is projected to be cheaper than conventional fossil fuel by 2020.
The investment cost for solar panels has dropped by 9 % while providing 15% cheaper energy. Miners can take advantage of this by relocating to rural areas with easy access to sunlight. Solar energy does not require any large scale infrastructure such as power plants or reactors, it is much more simple to set up. ***SolarCoin (SLR) is a cryptocurrency that incentivizes the use of solar electricity, verified solar electricity producers will be rewarded free SolarCoins. Individuals at home can also earn SolarCoins by simply installing solar panels to generate clean energy. There are also projects that aim to harness excess solar power to fuel cryptocurrencies mining, bringing the industry closer to the full adoption of renewable energy.
Due to the high costs of conventional energy sources, mining farms will be moving away from fossil fuels in favor of low carbon renewable sources such as hydro and solar energy.
Conclusion
The impact of of bitcoin’s energy consumption is overstated and certainly cannot be applied to cryptocurrency in general. As technology continues to advance, renewable energy will surely be cost competitive with fossil fuels in the very near future. GMO Internet Group, a Japanese tech company, first entered the cryptocurrency mining industry in September 2017. GMO is a relatively new company in the mining field but their mining farms are located in Northern Europe to utilize the abundant source of renewable energy there. The eco-consciousness of mining community is evidently growing and we look forward to more environmentally conscious mining to power the rapid growth and development of blockchain technologies.
***DISCLAIMER: The content of this blog is intended to provide general education only. This blog post does not provide provide any legal, investment or any other type of formal advice. Gatecoin currently has no intention to list or participate in any of the cryptocurrency or ICO projects listed above. You should not treat any information on this blog as a call to make any particular decision regarding cryptocurrency usage, legal matters, investments, cryptocurrency mining, etc.
Trading cryptocurrencies such as bitcoin and blockchain tokens such as ether carries a high level of risk, and may not be suitable for all investors. The high degree of price volatility can result in incredible losses as well as gains. Before deciding to trade cryptocurrencies or blockchain tokens you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest using funds that you cannot afford to lose. You should be aware of all the risks associated with the trading of digital assets, and seek advice from an independent financial advisor if you have any specific concerns.
