Amid the ongoing noise about cryptocurrencies, it’s often hard to decide what really matters. However, this month, if all goes according to plan, the energy-hungry digital sector will experience its biggest shake-up in years.
The rapid growth of cryptocurrencies in recent years has been staggering. Unfortunately, so does their contribution to climate change, due to the huge amount of electricity used by the computers that run the buying and selling of cryptocurrencies.
Take, for example, the world’s largest cryptocurrency, Bitcoin. At a time when the world is desperately trying to reduce its energy consumption, Bitcoin uses more energy each year than medium-sized countries such as Argentina. If the Ethereum switch is successful, Bitcoin and other cryptocurrencies will come under immense pressure to deal with this issue.
Why are cryptocurrencies so polluting?
Cryptocurrencies are digital currency systems in which people make direct online payments to each other.
Unlike traditional currencies, cryptocurrencies are not managed from one place like a central bank. Instead, they are run by a “blockchain”: a decentralized global network of powerful computers. These computers are called “miners”.
The Reserve Bank of Australia provides this simple explanation of how it all works (edited for brevity):
Suppose Alice wants to transfer a unit of cryptocurrency to Bob. Alice starts the transaction by sending an email message with her instructions to the network, where all users can see the message.
The transaction sits with a group of other recent transactions waiting to be compiled into a block (or group) of the most recent transactions. The information in the block is transformed into a cryptographic code and miners compete to solve the code to add the new block of transactions to the blockchain.
After a miner successfully solves the code, other network users verify the solution and come to an agreement on its validity. The new transaction block is added to the end of the blockchain and Alice’s transaction is confirmed.
This process, used by most cryptocurrencies, is called “proof of work mining”. The central feature of the design is the use of calculations that require a lot of computer time – and huge amounts of electricity – to perform.
Bitcoin alone consumes approximately 150 terawatt hours of electricity each year. Producing this energy releases some 65 million tonnes of carbon dioxide into the atmosphere each year, roughly the same as Greece.
To research suggests that Bitcoin last year produced emissions responsible for around 19,000 future deaths.
The proof-of-work approach intentionally wastes energy. Data on a blockchain has no inherent meaning. Its only purpose is to record difficult, but useless calculations, which provide a basis for assigning new cryptocurrencies.
Cryptocurrency advocates have given a variety of excuses for monstrous power consumption, but none stand up to scrutiny.
Some, for example, seek to justify the carbon footprint of cryptocurrency by saying that some miners use renewable energy. That may be true, but in doing so they can move other potential energy users – some of whom will need to use coal or gas-fired electricity.
But now Bitcoin’s most successful rival, Ethereum, is changing course. This month, he promises to change his computer technology for something much less polluting.
Read more: Ethereum: the transformation that could see it overtake bitcoin
What is the switch
Ethereum’s plan is to abandon the “proof of work” model for a new model called “proof of stake”.
In this model, crypto transactions are validated by users, who stake substantial amounts of blockchain tokens (in this case, Ethereum coins) as collateral. If users act dishonestly, they lose their bet.
Importantly, it will mean that the vast network of supercomputers currently used to verify transactions will no longer be needed, as users perform the verification themselves – a relatively easy task. Removing IT “miners” will lead to an estimated 99% drop in Ethereum electricity consumption.
Some smaller cryptocurrencies – such as the Ada coin traded on the Cardano platform – use “proof of stake”, but it has been confined to margins to date.
For a year, Ethereum has been functioning the new model on experimental blockchains. But this month, the model will be merged with the main platform.
Nowhere for cryptocurrency to hide
So what does all this mean? The Ethereum experiment could fail – if, for example, some stakeholders find ways to manipulate the system. But if the change is successful, Bitcoin and other cryptocurrencies will be under pressure to abandon the proof-of-work model, or else shut down.
This pressure has already started. Last year, Tesla founder Elon Musk announced that his company would no longer accept Bitcoin payment for its electric cars, due to the currency’s carbon footprint.
The New York State Legislature in June passed a bill to ban certain bitcoin operations that use carbon-based energy. (However, the decision requires the approval of the Governor of New York and can 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 colder 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 reduce global emissions grows ever more pressing, cryptocurrencies will run out of excuses for their blatant energy consumption.
Read more: Tesla’s Bitcoin flip-flop is a warning for cryptocurrencies that ignore climate change