It's no secret that Bitcoin and Ethereum are both large consumers of electricity. This fact is used to dispute the efficiency of the underlying technology as it may pose an existential risk to our environment. What good will a decentralized currency do if it only accelerates climate change? This question is not easy to answer without the proper context, and after being asked this question in many forms, by many people, I decided to do some research. In this essay, I will try to contextualize this issue by providing some background information and offering some insight into what the future may hold.

Bitcoin’s greatest strength is also its greatest weakness. The network provides proprietary security for its users by scattering miners around the world. Anyone with internet access and the required hardware can set up a mining rig that validates transactions on the blockchain. This is made possible by Bitcoin’s consensus mechanism - Proof of Work. Essentially it requires a participant to prove that the work done and submitted by them qualifies them to process transactions on the blockchain. The miner’s hardware uses computation to solve a cryptographic puzzle, validate a transaction, and then the miner is rewarded in Bitcoin. This requires energy but provides a shared consensus that unites every user around the world and keeps the blockchain updated. So, What are some problems with this? The network requires a large amount of electricity to operate, and the decentralized nature of the network distorts the source of its electricity consumption. This problem is unique to Bitcoin because most other cryptocurrencies use consensus mechanisms like Proof of Stake that utilize trivial amounts of electricity. Unfortunately, Bitcoin will not adopt Proof of Stake because of certain incentives that hold the network together (not going to get into that philosophical rat's nest). The other major energy-consuming cryptocurrency (Ethereum) is currently scheduled to switch to proof of stake within this next year.

Now that we have that out of the way, let's start talking about how we attempt to measure Bitcoin’s energy consumption and carbon emissions. According to the University of Cambridge's Bitcoin Index, Bitcoin consumes 125 terra-watt hours of electricity per year. The best comparison to this level of energy consumption is gold mining. Bitcoin and Gold are both seen as “stores of value” and gold mining consumes about 131 terra-watt hours of electricity annually. Both of these industrial consumers use more energy than the nation of Ukraine. Bitcoin’s energy consumption is also comparable to a variety of residential and industrial consumers as seen in the first figure below.

What about carbon emissions?

This is where it starts to get convoluted. Bitcoin is mined everywhere and there are many possible energy sources drawn to facilitate that. The sources of this energy range from coal and fossil fuels to geothermal heat and hydroelectric power. Since most Bitcoin is mined in the United States (after China banned Bitcoin) we will calculate carbon emissions based on the United State’s energy production.

We start by finding the United State's total terra-watt hour production per year and dividing that by the carbon emissions from its energy sources. Once you have carbon emissions per TWh, you can apply that to Bitcoin's annual energy usage of 125TWh to find an estimate of how much carbon the Bitcoin network produces annually.

U.S. Carbon/TWh (0.416 million tons) X Total Bitcoin Energy Consumption (125 TWh) =

Estimated Annual Carbon Emissions (52 million tons)

That's a lot of Carbon. You won't be able to apply this to Bitcoin's fourteen-year existence because the network’s energy consumption changes over time. Up until 2016 - 2017, Bitcoins energy consumption was trivial, and most Bitcoin was mined with minimal hardware and low energy costs.

Given this info, what is the best way to manage Bitcoin's carbon emissions?

Decentralization is Bitcoin’s greatest strength, not only because of its immutable nature but also because of the mobility granted to its physical mining operations. Anyone can set up a mining operation anywhere. Stranded energy assets or energy waste can be collected by miners in a cheap and environmentally friendly manner. In Iceland, large mining operations utilize hydroelectric and geothermal power to sustain most of their electricity usage. In El Salvador, the government has started to mine Bitcoin using 100% renewable geothermal energy and is planning to increase its mining capabilities in the future. The best way to curb Bitcoin’s emissions is to make miners relocate or use renewable energy. While Bitcoin is a trustless network, the cryptocurrency community has always stressed accountability to its founding principles. As the network grows there have been regulatory discussions regarding its environmental impact, and at this point, governments will want a say in Bitcoins mining practices going forward.

** **Miners play an important role in Bitcoin’s network, and Bitcoin plays an important geopolitical role in finance. It may not seem like it, but state-run fiat currencies need alternatives, and traditional assets aren't exchanged in free markets. The only competition to these traditional systems is their decentralized counterparts, as they provide a transparent immutable layer to transact on. I rarely hear someone talk about the environmental effects of the petrodollar regime, or how Saudi Arabia is allowed to commit genocide so that the United States can keep its currency pegged to oil prices. After all, how can you quantify these things? There are no transparent metrics to assess the irreversible damage caused by our dependence on the dollar. Bitcoin can run on renewable energy, the dollar will always be dependent on oil.

Sources:

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U.S. Energy Information Administration

eia.gov/tools/faqs/faq.php?id=427&t=3

U.S. Environmental Protection Agency

epa.gov/ghgemissions/sources-greenhouse-gas-emissions

University of Cambridge Bitcoin Electricity Consumption Index

ccaf.io/cbeci/index

Written by: Maxwell Nietubicz