It can sometimes be challenging to distinguish what is essential from the constant chatter around cryptocurrency. But if everything goes according to plan this month, the energy-hungry digital industry will experience its most significant upheaval in years.
The second-largest cryptocurrency in the world, Ethereum, is anticipated to begin a technical transition tomorrow that, when complete, will result in a 99% reduction in carbon emissions.
In recent years, cryptocurrencies have grown incredibly quickly. Unfortunately, because of the massive amount of electricity computers consume to control the buying and selling of crypto coins, they have also contributed significantly to climate change.
Consider Bitcoin, the largest cryptocurrency in the world. Bitcoin uses more energy annually than countries the size of Argentina, which are desperately attempting to cut their energy use. If the Ethereum transition is successful, there will be tremendous pressure on Bitcoin and other cryptocurrencies to solve this issue.
Why do cryptocurrencies cause so much pollution?
Digital currency systems known as cryptocurrencies allow users to send money directly to one another online.
Cryptocurrencies are not controlled from a single location, like a central bank or traditional currencies. Instead, they are controlled by a worldwide, decentralized network of powerful computers known as a “blockchain.” The term “miners” refers to these machines.
The Reserve Bank of Australia offers the following concise explanation of how everything operates:
Let’s say Alice wishes to send Bob one bitcoin unit. A digital message containing Alice’s instructions is sent to the network, where it is visible to all users, to begin the transaction.
The transaction is waiting to be assembled with a collection of other recent transactions into a block (or group) of the most recent transactions. To add the new block of transactions to the blockchain, miners compete to crack a cryptographic code created from the information within the league.
The network’s other users verify the answer when a miner has successfully cracked the code and agree that it is correct. The transaction made by Alice is confirmed, and the new block of transactions is added to the end of the blockchain.
The majority of cryptocurrencies employ this technique, which is known as “proof-of-work mining.” The primary design element is the utilization of calculations, which take a lot of computer time and electricity to complete.
Around 150 terawatt-hours of electricity are used annually only by bitcoin. About 65 million tonnes of carbon dioxide are released yearly from producing that energy, comparable to Greece’s emissions.
According to research, emissions from bitcoin last year were likely to cause 19,000 more fatalities in the future.
The proof-of-work methodology wastes energy on purpose. The data in a blockchain has no inherent significance. Its primary function is to save challenging but unnecessary calculations that are the foundation for assigning fresh cryptocurrencies.
Cryptocurrency proponents have offered a variety of justifications for the enormous energy usage, but none are convincing.
For instance, some people try to justify cryptocurrencies’ carbon impact by claiming that miners use renewable energy. That might be the case, but doing so might also force other prospective energy consumers to use coal- or gas-fired power.
However, Ethereum, the most prominent competitor to Bitcoin, is currently adopting a new strategy. It plans to transition to much less polluting computing technologies this month.
Why the switch was made
The “proof of stake” approach will replace the “proof of work” concept as part of the Ethereum project.
According to this concept, users stake sizable amounts of blockchain tokens (in this case, Ethereum coins) as collateral to authenticate cryptocurrency transactions. Users forfeit their stake if they are dishonest.
Importantly, it will eliminate the need for the extensive network of supercomputers currently used to verify transactions because consumers will perform the straightforward task of proving transactions themselves. The amount of electricity used by Ethereum will reportedly decrease by 99% once the computer “miners” is eliminated.
Specific minor cryptocurrencies use proof of stake, but it has only been used on the margins up until now. One example is the Ada token, traded on the Cardano platform.
Ethereum has been using test blockchains to execute the new concept for the past year. However, the model will be integrated into the primary platform this month.
Nothing to conceal for cryptocurrencies
What does this mean, then? For example, the Ethereum project might not succeed if some stakeholders manage to corrupt the system. However, if the transfer is successful, there will be pressure on Bitcoin and other cryptocurrencies to drop the proof-of-work concept or risk going offline.
This stress has already started. Elon Musk, the inventor of Tesla, declared last year that his company would stop accepting Bitcoin payments for its electric vehicles due to the carbon impact of the cryptocurrency.
In June, the New York state legislature approved a bill that outlawed some Bitcoin activities that rely on carbon-based energy. (However, the choice needs the governor of New York’s approval and could be vetoed.)
Additionally, the European Parliament approved a motion to outlaw the proof-of-work approach in March of this year. The move was rejected. Energy-guzzling cryptocurrencies will still be under attack as Europe enters the cooler months and struggles with an energy crisis brought on by sanctions on Russian gas suppliers.
One thing is sure: cryptocurrencies will eventually run out of justifications for their outrageous energy demand as the need to reduce global emissions grows more urgent.
This process, used by most cryptocurrencies, is termed “proof-of-work mining.” The central design feature uses calculations that require a lot of computer time — and vast amounts of electricity — to perform.
Bitcoin alone consumes around 150 terawatt-hours of electricity each year. Producing that energy emits some 65 million tonnes of carbon dioxide into the atmosphere annually — about the same emissions as Greece.
Research suggests Bitcoin last year produced emissions responsible for around 19,000 future deaths.
The proof-of-work approach intentionally wastes energy. The data in a blockchain has no inherent meaning. Its sole purpose is to record complex but pointless calculations which provide a basis for allocating new crypto coins.
Cryptocurrency advocates have given a variety of excuses for the monstrous energy consumption, but none stand up to scrutiny.
Some, for example, seek to justify cryptocurrency’s carbon footprint by saying some miners use renewable energy. That may be true, but in doing so, they can displace other potential energy users — some of whom will have to use coal- or gas-fired power.
But now, the most successful of Bitcoin’s rivals, Ethereum, is changing tack. This month it promises to switch its computing technology to something far less polluting.
What the switch is about
Ethereum’s project involves ditching the “proof of work” model for a new one called “proof of stake.”
Under this model, crypto transactions are validated by users, who stake substantial quantities of blockchain tokens (in this case, Ethereum coins) as collateral. If the users act dishonestly, they lose their stake.
Importantly, it will mean the vast network of supercomputers currently used to check transactions will no longer be required because users are doing the checking — a relatively easy task. Doing away with the computer “miners” will lead to an estimated 99% drop in Ethereum’s electricity use.
Some smaller cryptocurrencies — such as the Ada coin traded on the Cardano platform — use “proof of stake,” but it’s been confined to the margins to date.
Ethereum has been running the new model on experimental blockchains for the past year. But this month, the model will be merged into the leading platform.
Nowhere for cryptocurrency to hide
So what does all this mean? The Ethereum experiment could fail — if some stakeholders find ways to manipulate the system. But if the switch succeeds, Bitcoin and other cryptocurrencies will be under pressure to abandon the proof-of-work model or shut down.
This pressure has already begun. Tesla founder Elon Musk last year announced his company would no longer accept Bitcoin payment for its electric cars due to the currency’s carbon footprint.
In June, the New York state legislature passed a bill to ban some Bitcoin operations that use carbon-based power. (However, the decision requires sign-off from New York’s governor and may be vetoed).
And in March this year, the European parliament voted on a proposal to ban the proof-of-work model. The proposal was defeated. But as Europe heads into the cooler months and grapples with an energy crisis triggered by sanctions on Russian gas supplies, energy-guzzling cryptocurrencies will remain in the firing line.
One thing is clear: as the need to slash global emissions becomes ever more pressing, cryptocurrencies will run out of excuses for their egregious energy use.