One of the main criticisms of cryptocurrencies (especially Bitcoin) is the amount of energy they use, and whether the energy is produced by fossil fuels or clean energy sources like wind, solar, etc. However, the problem may not be as bad as people make it out to be.
A research study by CoinShares found that approximately 74.1% of the Bitcoin mining network gets its electricity from renewable energy sources like solar, wind, and hydropower. So why do people use this subject to attack crypto as a whole, and what can be done about it? First, we need to understand how Bitcoin uses energy and how its energy consumption compares to the central banking system. Then, we’ll look at a new technology that\’s helping reduce crypto’s environmental footprint.
How Does Bitcoin use Energy?
The Bitcoin network functions using a Proof-of-work (PoW) system, meaning that the algorithm the network is based on needs miners to validate transactions. Miners vary greatly in size and computing power; but typical large-size operations are warehouses full of computers that constantly run, trying to solve the next block to gain a reward. Additionally, as time progresses, the blocks are increasingly difficult to solve, meaning that mining operators need to add computing power, which uses more energy.
How Much Energy Does Bitcoin use?
According to the Cambridge Bitcoin Electricity Consumption Index, Bitcoin is on track to use approximately 89.1 Terawatt hours (TWh) of electricity this year. To put this figure into perspective, Bitcoin is estimated to use about 0.05% of global energy and produces about 0.08% of global carbon emissions, according to CoinShares.
How Does This Compare to the Central Banking System?
Blockchain and digital asset trading company Galaxy Digital published a report in 2021 calculating the estimated energy usage of the global banking system, the gold industry, and Bitcoin.
As illustrated in the graph, Bitcoin uses far less total energy in terms of Terawatt Hours in comparison to the global banking system and the gold industry.
New, Cleaner Crypto technologies
Proof of Stake (PoS) cryptocurrencies function differently than Proof of Work. Instead of having miners work to validate transactions, owners of coins delegate their crypto onto the network and validate transactions, also known as staking. This process uses much far less energy than Proof of Work cryptocurrencies that are mined.
Ethereum is in the news lately for preparing to shift the network from a Proof of Work model to a Proof of Stake model, which will happen mid-September. Since its launch in 2015, Ethereum has been a Proof of Work cryptocurrency and has suffered from high energy consumption and very high gas fees at times. When the network switches over to Proof of Stake in September, it will use 99% less energy and potentially be able to process over 100,000 transactions per second, according to MIT Technology Review.
Cryptocurrency continues to evolve into more useful applications as we enter the Web 3.0 era, and moving to Proof of Stake technology is an important step. Market giants like Bitcoin and Litecoin will continue to run using a Proof of Work model, and only time will tell if that will affect their popularity.