Ever since Bitcoin was released in 2009, cryptocurrency mania has swept the globe. As more people started mining Bitcoin and other such cryptocurrencies, their value increased exponentially. In turn, as the value of these cryptocurrencies increased, more and more people began to mine them. However, global energy consumption has increased dramatically with the increase in the number of people mining cryptocurrency. Cryptocurrency mining is increasingly becoming a global phenomenon and the problem of its excessive energy consumption growing even larger is becoming a more prevalent problem within society. As ironic as it is that a fundamentally digital system poses an environmental hazard, this is the fact of our time, and this issue must be taken seriously.
The Bitcoin Energy Consumption Index, created by economist Alex de Vries, states that Bitcoin consumes about 73.12 TWh (terawatt-hours) annually. Essentially, this means that approximately 6,770,506 U.S. households can be powered by the energy consumed by Bitcoin. Furthermore, on a global scale, the amount of energy used by Bitcoin is enough to power an entire country such as Switzerland, or the Czech Republic, for one year. Clearly, the amount of energy consumed by Bitcoin mining is colossal. This impression is only strengthened when compared to a payment system such as VISA. Shockingly enough, the energy required to perform 100,000 VISA transactions is only a fraction of that needed to power one Bitcoin transaction.
In addition to its vast energy consumption, Bitcoin transactions also leave behind a large carbon footprint. This is because the network is mainly powered by coal-based power plants in China. Unfortunately, that form of energy is fairly cheap and easily available despite its horrendous effect on the environment. This brings to question whether or not the decentralized nature and enhanced security really outweigh the relative energy-efficiency of our current mainstream financial system. Although a best-of-both worlds situation that combines the decentralized nature of cryptocurrency with energy efficiency is within reach, it is first necessary to understand the reasons behind Bitcoin’s excessive power consumption.
The answer to Bitcoin’s massive energy usage lies in its Proof of Work (PoW) algorithm, which is integral for deterring attacks on the system and verifying transactions. The blockchain, or the immutable ledger of cryptocurrency transactions, relies on the validation of transactions by miners. These miners attempt to solve an algorithmic puzzle via Proof of Work to confirm transactions and reap a reward. Bitcoin mining is essentially a computational race, and the difficulty of winning this race and receiving a substantial reward is justified in that it prevents any one server from dominating the system and forging transaction records. As more miners join the network in pursuit of the solution to these puzzles, one would expect them to be solved more quickly. However, this is not the case. Bitcoin software is designed to adjust the algorithm in difficulty as more people join the network so that an algorithmic puzzle can only be solved once every ten minutes or so; therefore, coins are not minted too quickly. These algorithms are so complicated that the only feasible way to solve them is to use computers to make continuous random guesses until a solution is found.
Intuitively, the more guesses these computers make, the higher the probability of their guessing the correct numbers. On the other hand, the more guesses made by these computers and the more computers that join the mining race, the more power is consumed in pursuit of Bitcoin. As the mining race has intensified, eager miners have set up shop in places such as Iceland, which has both affordable hydropower and a climate perfect for cooling the energy-devouring mining computers. China is another popular location, as it has cheap coal power that can be used to power the computers. This increase in the number of computers on the Bitcoin network has caused global electricity usage to skyrocket, and both its electricity consumption and residual carbon footprint have alerted society as to the unsustainability of this system.
In light of the massive energy consumption by Bitcoin’s Proof of Work system, many solutions have been offered to increase the energy-efficiency of cryptocurrency mining. One of the most promising solutions was proposed by Vitalik Buterin, the founder of the popular cryptocurrency Ethereum. Buterin introduced an alternative concept for transaction verification called Proof of Stake. Unlike the Proof of Work system, Proof of Stake uses somewhat of a negative reinforcement-driven system. As stated by Vitalik Buterin in a blog post, “proof of work necessarily operates on a logic of massive power incentivized into existence by massive rewards;” on the other hand, proof of stake relies “not on rewards for security, but rather penalties” (Buterin). Essentially, the Proof of Stake system requires miners to demonstrate they have a stake in transactions by putting deposits at risk. These miners are rewarded slightly to compensate them for securing their capital, maintaining nodes, and protecting their private key safety. Furthermore, the severe costs of reverting transactions come from the steep penalties, which are hundreds or thousands of times greater than the reward received by the miners in the meantime. Therefore, the cost of attack is far greater than that of defense, so it is by far more profitable to follow the rules when dealing with Proof of Stake transactions. Most importantly, Proof of Stake drastically reduces the power needed for cryptocurrency transactions and is thus far more energy efficient than the widely accepted Proof of Work system.
All in all, the Proof of Work system is both excessively power-hungry and detrimental to the environment, especially when considering that a large portion of the energy used to power Bitcoin mining computers comes from fossil fuels such as coal. Therefore, alternate methods of conducting cryptocurrency transactions, such as the Proof of Stake system, must be considered in light of the serious energy and environmental concerns posed by the current and established system. Hopefully, with enough support for more sustainable methods of regulating digital transactions, we will be able to achieve the best of both worlds: a secure, energy-efficient blockchain-based transaction system.