A single bitcoin mining process consumes as much energy as power consumed by a regular American household in a month.
To the already stressed and high energy-consuming crypto mining, the current geo-political environment catalyzed by Russia-Ukraine is adding by an increase in energy prices. The energy consumed for mining is primarily sourced from fossil fuels. Since crypto mining relies on codes and not people, there is a degree of unsustainability attached to it in the context of energy consumption Authenticating a process of this nature requires a significant reliance on very advanced technology.
Crypto mining demands a high level of energy consumption, reason being that miners and the transactions have to both, agree on the manner of and existence of the transaction on the blockchain. Like with nature, the selection of the transaction on the blockchain is, random!
According to the Cambridge Bitcoin Electricity Consumption Index, as part of the mining process Bitcoin uses 122.87T per hour of electricity every year in the United States of America. Collectively, this is more than the yearly energy consumption of Netherlands and Argentina, combined.
RANDOM SELECTION AND CRYPTO MINING
Each mining process relies on a Proof-of-Work (PoW) authentication process since out of the bulk of the blocks the miners have to keep generating, the Bitcoin protocol allows for only one miner’s block to be accepted as a valid block. Essentially, one valid block requires other miners to accept the same after confirming that the rules of the Bitcoin protocol have been adhered to. In turn this means, once one block emerges as the valid one, the other miners have to discard the blocks they have been working on. To overtly simplify the challenge this entails, it requires numerous attempts to make the right value of a block component, hinging on a matter of “chance” that outcome (completely unpredictable) will match the requirement. It is near impossible to predict the number of attempts a miner will require to meet this valid and matched outcome. Although, PoW is a complex structure, effective in countering cyberattacks.
SUSTAINABILITY CHALLENGE
In the mining world, miners have no control over a crypto network and have to deal with high-cost hardware and electricity charges, but the cycle has incentivized many over the world to jam in the Bitcoin network causing the energy consumption equivalent to some countries.
Miners are using Application-Specific Integrated Circuits (ASICS) to generate greater revenue, trading it against higher carbon emissions. Energy consumption is not so much of an issue for mining as is the use of fossil fuels. Assessing the exact carbon impact is difficult. To determine the power consumed by the relevant miner, one needs to know their location and the source of the power (the electricity mix and carbon footprint). In a report by Cambridge Link, the localization of the miner is stressed. The Ukraine-Russia crisis has led to miners seeking refuge in countries like Canada and the United States. In a similar crackdown in China last year, where hydro energy was available to miners, the miners moved to locations like Kazakhstan which uses coal or gas electricity.
The constant energy requirement of Bitcoin mining prevents an ASIC miner from switching off till a certain outcome is achieved. This places an excessive load on the grid and needs a steady source of energy which fossil fuels provide as opposed to renewables. This points to only renewable energy will not solve this problem.
POSSIBLE SOLUTIONS
No concrete and reliable ones!
Data says, Bitcoin released 56.8 M tons of CO2 to the atmosphere through mining in 2021. There can be a switch to energy-efficient algorithm (saving of 99.95% energy from PoW) like Proof of Stake model (PoS) over Proof of Work (PoW), where coin owners create the blocks and not miners-which eliminates the rush to create more. PoS has, currently been limited to Ethereum and Bitcoin, it may not be as secure or tamper-resistant as PoW.
Another change could be using PoS (Ethereum 2) (ETH) over Ethereum 1. Ethereum 1 has minimized energy consumption and added greater data security. ETH-based decentralized applications allow recycling of programs and management of the supply chain.
Environment-conscious smart contracts, green smart contracts applications are being developed on the ETH platform.
Using power, from oil wells and wind energy could be sources for crypto mining, although the need for continual demand for energy, may not get fully supplemented.
Regulatory regime can reign in the growth. The GoI, while committing to a pledge in COP26 to reduce Carbon emission by 1 billion tonnes by 2030. While it has not passed its Cryptocurrency Bill, 2021, yet, it has taxed @30% trade profits from cryptocurrency in the current Finance Bill, 2021.
Cryptocurrency’s environmental impact is not ignorable, however, alternatives and solutions are still opaque with regulations still firming up.
This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Endeavoured to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner.
Sources: Investopedia, Finextra and CNBC