Energy Consumption in Blockchain technology: Bitcoin

We have been hearing increasingly more about Blockchain and cryptocurrencies. What are cryptocurrencies and what is behind their energy consumption? Bitcoin has been dominating the discussion in this topic.

Elon Musk has been gaining notoriety in the space, particularly after having announced that Tesla was planning to buy 1.5 billion $ and to accept the currency as payment. In May, he backtracked because of environmental concerns linked to bitcoin’s energy consumption. More recently he claimed that once crypto mining becomes greener, Tesla would welcome it again. Given its alleged impact in the environment, I decided to explore this topic in depth.

Firstly I want to understand how this technology works, what its energy consumption is and whether its impact on climate change is significant. I also want to learn what the future look like for blockchain technologies in general. Can they be more sustainable? What issues are being addressed and which solutions are being discussed?

What is blockchain?

Blockchain is a special way of storing data that, like the name indicates, consists of a chain of data blocks. When new information comes in and it's validated, it is stored in a fresh block. This chaining creates an interesting property: once the block is filled with data, it is chained onto the previous block. This chaining of the whole data in chronological order makes manipulations very hard to execute and easy to detect. It was with cryptocurrency that this technology gained more traction but it can also be used for other things like storing medical records, creating digital notaries, votes in an election, product inventories, or even collecting taxes.

Cryptocurrencies

Back in 2009, Satoshi Nakamoto created the first decentralized cryptocurrency - Bitcoin. This was a concrete application of the blockchain technology to create a digital currency. Bitcoin, unlike government-issued currencies, can be bought, sold and exchanged directly, without an intermediary like a bank. Among its advantages are lower transaction fees compared to the traditional online payment mechanisms and the fact that its owners are anonymous. Instead of using names, tax IDs, or social security numbers, bitcoin connects buyers and sellers through encryption keys.

But how are Bitcoins created and transacted?

Bitcoins are generated through a process called Bitcoin mining which is essentially the validation and registering of transactions by solving an extremely complex computational problem. Whoever solves the problem gets a few newly created bitcoins, thus the motivation to “mine”. The consensus mechanism is called Proof of Work because it can only be solved by trial and error (i.e. work). A very important point is that the problem’s difficulty depends on the amount of “miners” trying to solve it. In 2009 there were not so many miners and it was easy for a simple home computer to generate bitcoins. In 2021 however, with the rise of bitcoin’s value and thus the amount of miners, it is extremely hard to generate a single bitcoin with a normal computer. There is much more computing power allocated to mining and this is the reason behind bitcoin’s increasingly high energy consumption.

Mining rigs of a super computer are pictured inside the bitcoin factory 'Genesis Farming' - one of the largest bitcoin factories near Reykjavik, Iceland.

According to the Cambridge Centre for Alternative Finance department, Bitcoin energy consumption is around 149.6 TWh per year. To give some perspective, it consumes more energy than countries like Ukraine or Sweden, as seen in the picture below, published by the Newstatesman journal.

Current estimated annual Bitcoin electricity consumption vs top European countries for electricity consumption in 2018 (TWh) - Source: Cambridge Bitcoin Electricity Consumption Index, IEA

The current carbon footprint of bitcoin is serious, as expected. One bitcoin transaction has a carbon footprint of 842.54 kgCO2, which is the equivalent to the carbon footprint of 1,867,357 VISA transactions.

Ok but what about the energy consumption of the whole banking system? It seems a horrible scenario when compared to countries, yet Bitcoin isn't competing with countries but with our actual financial system. The actual banking system is composed of: Delivery trucks, servers, branches, and ATMs. If Bitcoin is here to stay, and assuming it will be the new banking system, is it better or worse comparably to the actual system? A recent research report from Galaxy Digital calculated the energy consumed by the Bitcoin network and compared it to other industries, including the banking and gold industry, since Bitcoin is often compared with the two. They realize that the banking system consumes around 263.72 TWh per year, while Bitcoin consumes around 149 TWh as mentioned above.

As for the gold mining industry, it produces between 2,500 to 3,000 tons of new gold every year which is the equivalent of 240.61 TWh per year. Moreover, according to an analysis made by a Partner at tech investment firm Cota Capital, producing gold for the wedding band on your finger alone generates 20 tons of waste (heavy metals).

Alternatives to Proof of Work

As I mentioned above, bitcoin’s high energy consumption comes from the Proof of work mechanism. However, blockchain technologies don’t necessarily require proof of work for validating and creating new blocks. Proof of work is simply the mechanism used by bitcoin. Other crypto currencies can use different mechanisms. Cardano for example, uses a mechanism called Proof of Stake. In proof of stake, one can create (i.e. “mine”) blocks and validate transactions according to how many coins they own (aka stake). The more coins you stake, the bigger are your chances to be picked as a validator. Also, if you produce invalid blocks, the coins you are staking are deleted, thus removing the benefit for bad actors. This mechanism is much more energy friendly than Proof of work because it removes the need to solve a hard computational puzzle.

Could Bitcoin change to Proof of Stake?

Shifting from Proof of Work to Proof of Stake is definitely possible. Ethereum, the second most popular cryptocurrency, is doing exactly this with Ethereum 2.0. This shift is estimated to reduce ethereum’s energy consumption by 99.95% .

Bitcoin and Ethereum PoW data taken from Digiconomist

Bitcoin could indeed switch to Proof of Stake, however, it would require all bitcoin nodes (computers) to agree on this change and this doesn’t seem feasible as the community seems to be quite settled on Proof of Work.

Can Bitcoin be sustainable?

One alternative to reduce the environmental impact of PoW is to switch the source of energy from coal to renewables. In the report Bitcoin Mining Network 2018 it is mentioned that "the majority of Bitcoin mining is mainly powered by what would otherwise be a wasted surplus of renewable energy". It goes on to say that more than 70% of the energy consumed comes from renewables. Unfortunately that data is no longer accurate as it refers mostly to energy consumed in China, which has recently banned mining.

Furthermore, according to a study from the University of Cambridge, the percentage of renewable energy is only 39%, meaning that 61% is still coming from natural gas, coal, and other fossil fuels. Nevertheless, there are growing attempts in the bitcoin community to mitigate the environmental harm of mining.

Renewables still have the intermittency problem. However, building or moving the data centers to places where the energy is cheap and would otherwise be wasted, can still justify their use.

In fact this was already being done in China (before mining was prohibited) with miners changing places according to the wet season following the lower hydropower prices.

Other possible strategies that could reduce the PoW environmental impact include:

- Channel the heat generated by mining to other activities such as agriculture;

- Enabling data centres with intelligent load shifting and battery storage solutions, boosting efficiency and opening up market opportunities in energy transactions.

A recent study on data centres, found that while their computing output jumped six-fold from 2010 to 2018, their energy consumption rose only 6%. Google claims to have reduced the energy used for cooling in their data centres by 40% by using machine learning technologies.

Moreover, inspired by the Paris Climate Agreement, the Crypto Climate Accord was created. It’s a private sector-led initiative for the entire crypto community focused on decarbonizing the cryptocurrency industry, achieving a net-zero greenhouse gas emissions by 2040.

From what I’ve learned so far, Bitcoin must have great features that justify its value (not the topic of this post), however, its energy consumption is becoming a bigger challenge that needs to be addressed. There are many ideas on how to tackle this problem and many other crypto currencies are showing up with greener alternatives. Blockchain technologies are definitely something to keep an eye on.