The increased energy usage of blockchain is been observed by the public. Elon Musk announced that the company withdraws the decision to allow vehicle purchases with Bitcoin. Furthermore, he said that the company will reconsider its decision only when mining shifts to more sustainable energy sources.
Cryptocurrencies like Bitcoin and Ethereum rely on the proof of work (PoW) concept to process transactions and offer good network security. The mining process requires miners to solve complex math problems using specialized equipment. This mining process consumes more electrical power. In recent years, the prices of Bitcoin and Ethereum have increased leading to an increase in the number of miners joining the fray and engaging in a sort of arms race to increase their hash power.
Galaxy Digital compared the Bitcoin network’s energy consumption with banking and gold mining to find something interesting. The report portrays that banking consumes 263.72 TWh per year whereas gold mining consumes 240.61 TWh per year. Bitcoin network’s energy consumption is much lesser than the two as it is 113.89 TWh per year.
The Bitcoin price affects the use of energy by the cryptocurrency. How?
When price increases new miners (new hardware/computational power) are added to the network because of the profitability of the bitcoin mining and as we know mining hardware needs electricity so the total electricity consumption increases. Miners also shut down their hardware when the price drops a lot because of negative returns or negligible profits.
Marc Bevand, a computer security expert who developed the original methodology for the Cambridge Bitcoin Electricity Consumption Index says,
“That is why energy consumption usually grows or shrinks when Bitcoin respectively gains or loses value”.
Now that we know Bitcoin mining consumes a lot of energy, how can we make it sustainable?
Let’s have a look at the ways of making it sustainable.
- Use of renewable energy
The use of electricity leads to burning fossil fuel that again releases greenhouse gasses into the atmosphere, causing climate changes. Hence, using renewable energy for bitcoin mining may not reduce overall energy consumption but it will reduce the use of fossil fuels.
Crypto Climate Accord is a group working to make the cryptocurrency industry use 100% renewable energy. This group is building software that allows miners to report the amount and kind of power they use. There are chances that Bitcoin will transition to clean energy as it becomes cheaper than electricity that releases carbon emissions.
- Imposing a Carbon tax on miners
Mining activities cause carbon emissions. Imposing a carbon tax on miners will be an effective way to motivate sustainable mining activities. Although this is an effective solution, there are certain issues associated with it. Imposing carbon tax would make bitcoin mining less attractive, resulting in reduced bitcoin price.
Even if carbon is emitted centrally and verified independently, implementing a carbon tax on a decentralized currency is hard. Additionally, imposing a carbon tax on bitcoin before other parts of the economy can be inappropriate. It is because there are hundreds of other industries like oil and gas, transportation, aviation, steel, consumer electronic use, manufacturing, etc. that release large amounts of carbon.
- Alter the way Bitcoin is Implanted
Bitcoin operates using the proof-of-work mechanism that results in high energy consumption. There is an alternative mechanism called the “proof-of-stake” which some cryptocurrencies like Cardano (ADA) use. This mechanism organizes the cryptocurrency based on the amount of cryptocurrency the user owns and not based on which miner solved a problem.
Proof-of-stake does not require any computation so it does not require any energy expenditure. If Bitcoin makes a transition to a proof of stake mechanism, there are chances that the network’s energy consumption will reduce drastically. The amount of centralization required for proof-of-stake can be a deal-breaker for the Bitcoin community who think that Bitcoin is decentralized.
Blockchain technology offers secure and transparent ways of exchanging value. It has a long way to go. Even proof-of-work is here to stay for now and its energy consumption may grow. The blockchain industry is growing rapidly and many experts are focusing on the ways of reducing energy by achieving consensus and using innovative techniques as discussed earlier.