Is cryptocurrency bad for the environment? We discuss reasons why cryptocurrencies might be considered damaging to the environment. Cryptocurrency differs from the conventional currencies we are used to, like pounds sterling or dollars. It isn’t controlled by any central bank or company and anyone can buy it or sell it. However, it is entering the mainstream so needs to be examined for the environmental impact it has (and will have) on the planet.
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What is a cryptocurrency, and why should we care about it.
The term cryptocurrency is a portmanteau of two words: cryptography (the art of writing or solving codes) and currency. Cryptography has been around for thousands of years, but it wasn’t until recently that cryptocurrencies were invented. Cryptocurrencies like Bitcoin or Ethereum are basically “money” on the internet that only exists electronically.
The first cryptocurrency was created by a software developer (or developers) named Satoshi Nakamoto (pseudonym). They/he mined the first Bitcoins in 2009. Cryptocurrency has since been modified into many different cryptocurrencies and has become a new way to transfer money on the internet.
Bitcoin is the best-known cryptocurrency but (as of December 2021) there are over 8,000 cryptocurrencies! Some currencies are more than just currency. For example, Ether is a cryptocurrency on the Ethereum blockchain on which you can build other applications e.g. smart contracts. Most cryptocurrencies exist as a currency first and a platform for other things second.
Cryptocurrencies use a decentralized network which means that banking institutions do not control the transactions. Instead, transactions use a concept called proof of work. Proof of work is essentially a way for a network to verify that transactions are legitimate.
It is clear that cryptocurrency is here to stay. Digital currency is already used in over 20 countries as a viable alternative to mainstream banking. In fact, all cryptocurrencies combined now account for 7% of the world’s money.
What are the environmental impacts of cryptocurrency mining?
Mining cryptocurrencies, particularly Bitcoin mining is not great for the environment. It already takes up about 0.2% of the world’s electricity supply, which is roughly equivalent to all the energy used by Ireland!
There is also an ecological impact of cryptocurrency. Energy consumption tends to involve the use of coal power energy which also produces greenhouse gases. There are also concerns over the waste from mining. One report suggests that Bitcoin mining alone produces 30,700 tonnes of e-waste. The knock-on effect is that tech waste if disposed of incorrectly causes toxic chemicals to leech into the soil.
Digital currencies are energy intensive because they are “mined” on distributed computer networks. In other words, computers around the world process transactions and record them to an electronic ledger, called a blockchain.
The electricity consumption of digital currencies that use blockchains, like Bitcoin, is astronomical. According to Digiconomist, a single Bitcoin transaction uses 2194.67 kWh which is the equivalent to the power consumption of an average U.S. household over 75.22 days!
This is because processing digital currency transactions take a lot of computing power from specialised hardware. These expensive machines are energy-consuming so use a lot of electricity and produce a lot of heat. The problem is that mining tends to be in countries that are dependent on fossil fuels. For example, until recently, a significant percentage of mining took place in China. While China fairs better than the US and the UK for overall energy consumption, the mining process added to China’s carbon footprint making carbon neutrality difficult to pursue. However, China has since banned cryptocurrency mining so that the country can focus on being carbon neutral in the future.
Proof of work has a huge carbon footprint. It is not only the cryptocurrency mining, the hardware or the energy required for the transaction processing. Energy is also used for the air conditioning to keep the machines cool while they process over a million transactions per day on each blockchain.
The environmental impact has encouraged those in the crypto space to seek an alternative method of transaction confirmation. Some cryptocurrencies now use “proof of stake” for transaction verification. Proof of stake is allegedly more energy-efficient with some researchers suggesting that it uses 99.99% less energy. However, there is alternative research that suggests some proof of stake blockchains consume more energy than others. Proof of stake also reduces the need for expensive high-end machines for processing, transactions can be carried out on an everyday laptop. Overall, proof of stake seems to have a smaller carbon footprint than proof of work.
There are some green cryptocurrencies that allegedly use solar technology. However, there is no way of independently verifying any claims that these platforms are using sustainable energy sources. Crypto mining is so energy-intensive, it is difficult to believe that all the energy required for these digital assets can be obtained from solar arrays.
Environmentally friendly cryptocurrency
Any cryptocurrency that uses proof of stake could theoretically be called an environmentally friendly cryptocurrency because it has a lower energy consumption compared to Bitcoin. The lower carbon footprint for proof of stake currencies and platforms do not necessarily make them eco friendly as their energy use may still be quite high. However, they are a green alternative to Bitcoin.
The same applies to cryptocurrency trading. Ultimately any transaction needs a low kWh per transaction.
How to reduce the environmental impact of cryptocurrency mining.
To reduce the environmental impact of crypto mining, four issues need to be addressed:
- Changing cryptocurrencies and their platforms to proof of stake rather than using proof of work.
- Energy sources to be renewable with independent verification that renewables are being used in the mining process
- Equipment components to be sourced from sustainable sources and/or to minimise the waste produced from the mining process.
- Crypto mining to be used in supporting climate positive actions
The future potential of blockchain technology and its role in sustainability.
The use of smart contracts on blockchains has the potential to help the environment. For example, the European Commission sees the potential for blockchain technology to help with tracking the “accountability and traceability of greenhouse gas emissions”.
Other potential uses include being used in decentralised markets for renewable energy. This could enable people to sell their excess solar energy stored in batteries back to the grid and get paid instantly.
The World Economic Forum sees the potential of blockchain technology to incentivise regenerative agricultural programmes.
Which is the ‘greenest’ cryptocurrency?
Obviously, we are not financial experts so the usual disclaimer applies – any statements should not be taken as investment advice. If you are an eco-conscious investor, then the usual advice of doing your own research is paramount if you want to invest in “eco-friendly cryptocurrencies”.
Decentralized cryptocurrency has the potential to be sustainable. We need to bear in mind that the transaction systems are likely to use more energy as more transactions are completed. However, the whole process of mining and trading cryptocurrency needs to use less energy for a more sustainable future. The key factor, for now, is controlling energy expenditure.
As we have already explained, cryptocurrencies are not good for the environment due to the high electricity usage of mining cryptocurrency. However, this has little to do with blockchain algorithms themselves. It is more a problem of energy production and equipment efficiency.
If the annual energy consumption came from sustainable sources (so that mining was carbon neutral) and proof of stake was used rather than proof of work for transaction validation, then we could say that cryptocurrency is eco-friendly. For digital currencies to be part of a circular economy, we would also need equipment to be both energy efficient and minimal waste.
It is clear that some blockchains are making efforts to be environmentally friendly cryptocurrencies and platforms. For example, the currencies/platforms that have sustainability initiatives include:
- Stellar Lumens
Blockchain technology and cryptocurrencies have great potential to decentralise marketplaces and lower the carbon footprint of many processes including cryptocurrency creation. So while most cryptocurrencies are not environmentally friendly, it is only a matter of time until there will be a clear winner.