Bitcoin Mining - How Unsustainable?
Critics of Cryptocurrency & Blockchain technology have always been on the lookout for various reasons to express their disapproval. Not to call them all luddites, some of their concerns have actually led to massive improvements in this space.
One of the reasons that gained prevalence over the years is the technologies massive consumption of energy, its carbon footprint and thereby its impact on Environment aspect of the ESG (Environment, Social & Governance) concerns.
There is variance within the crypto community about the actual data on the quantum of total energy consumed. However, as of writing this article an estimate by ‘Cambridge Bitcoin Electricity Consumption Index’ about the annualized energy consumption by Bitcoin is about 97.11 TWH (Tera Watt Hours). Although on a declining trend, still this is almost equivalent to 0.55% of the global electricity production. To put it in perspective, Singapore’s annual consumption of electricity in 2018 was 50.45 TWH. Ostensibly, the given findings indicate a valid sustainability issue.
Let’s take a dive into the validity of Bitcoin’s sustainability concern. This would require consideration of various factors:
Consensus Mechanism.
In the world of Blockchains and Crypto, there are two major consensus mechanisms- Proof of Stake (POS) & Proof of Work (POW).
Sustainability concern for the crypto world is limited to blockchains like Bitcoin & others which use POW mechanism, for its massive energy consumption.
POS on the contrary is much more energy efficient. The much-anticipated transition of the Ethereum network from the proof of work to proof of stake, which happened on 15th of September 2022, is being considered as one of the biggest event in crypto history, mostly for its claim to reduce consumption of energy by 99.95%. This move should substantially solve the carbon emission concern.
Problem with the woke concern for sustainability is that it is generally limited to the ‘E’ (Environment) of ESG. Often overlooking the equally important ‘S’ & ‘G’ (Social & Governance) parts?
This is where there is a need to figure out POW.
To understand POW, it is imperative to have a general understanding of ‘Bitcoin Mining’ the resulting use of energy and its social & governance impacts.
Bitcoin Mining – the need for energy consumption
Bitcoin Mining is the process through which Bitcoin (BTC) is entered into the system. Miners around the world form a consensus using proof of work mechanism. They perform “complex calculations” and compete among themselves to verify and add transactions to the network, in reward for crypto (BTC).
These Miners are not the ones with “Picks & Axles”, instead they use energy hungry specialized hardware having complex software, which perform these “complex calculations”.
Think of it as a ‘Game Theory’ where at the end of proving a successful and fastest calculation (winning a game), miners get rewarded in the form of a newly generated Bitcoin.
What is the requirement for this huge computing power?
Strength of Bitcoin blockchain system revolves around the massive computing power with the nodes. In this gaming theory, calculations are so designed that to solve it, would require huge computing power.
Higher the computing power, more difficult and expensive it is for anyone to hack and meddle with the consensus mechanism, in effect making it more decentralized. It enables the system to be less susceptible to scamming attacks.
Wide adoption of POW mechanism enables Bitcoin to be a more effective peer-to-peer networking system, have a superior monetary policy, be more scalable and without a doubt the most decentralized network. Since its inception in 2008, Bitcoin has proven time and again to be the most secure and reliable digital system in the world.
Even the recent ‘Eth Merge’ is not expected to provide such strong Social & Governance models.
Should Energy really be an issue?
Yes & No.
Well...more arduous the task, more energy it needs. Since ages, massive energy was spent to build huge walls to guard numerous castles & city-forts. The objective was to secure the people in it from any foreign invasion.
Likewise, in blockchain it is this huge computing power, which requires seemingly huge amounts of energy, with the objective to make the system more robust, decentralized, efficient and transparent.
Similar to mining of any rare commodity, generation of bitcoin is not easy. It is natural to not have enough computing power, hence not all miners who are working for the prize get to form a consensus. For those who don’t, the energy consumed in this mining process is a waste.
Although this wasteful energy is essential to preserve the integrity of the system, it does give rise to sustainability and ESG concern.
To further augment this concern, some of the biggest mining farms are located in China and US, which themselves are largest energy consumers in the world.
Rise in ESG- focused miners
A major fact which the climate activists seem to discount however, is the difference between Energy consumption and Carbon footprint. Problem of energy consumption cannot be denied, however increased awareness and activism over the years has resulted in a rise in ESG focused miners.
While analyzing data on energy consumption, it is vital to understand the source as well. A large amount of energy generation is from hydro power and geo-thermal energy, resulting in Carbon sequestration.
Even in China there has been an upsurge in the use of renewable energy in mining operations. South west China’s diverse landscape has provided an opportunity to utilize the otherwise unused hydro energy. There have been instances of solar powered mining stations in Africa. Dubai has been building one of the largest solar powered mining farm.
Bitcoin Mining Council (BMC) members presented a report stating a 64.60% sustainable power mix in their use of electricity.
There have been instances where big names like Coinshares (a digital asset service provider), Ripple (a global payments network), ConsenSys (an Ethereum software company) have come together and joined Crypto Climate Accord (akin to the Paris Climate Accord), which is designed to make crypto run completely on renewable energy by 2025. Importance of sustainability resonates among the crypto industry. It is primarily this concern which led to the Ethereum merger.
Conclusion
From the above facts and arguments, it seems that the inherent Governance and Social benefits which Bitcoin brings to the table and the ample steps being taken to mitigate the climate concern might reassure the ESG compliance as a whole.
The debate as to whether bitcoin is sustainable or not, depends on what value one might put on it. Despite sufficient facts to prove otherwise, the naysayers will always call Bitcoin a ponzi scheme and consider any amount of energy spent on it a waste, majority however, seems to disagree.
For more such insights keep visiting: www.aniruddhvikram.com
To connect: www.linkedin.com/in/caaniruddhagrawal
contact@aniruddhvikram.com