Cryptocurrencies and the environment

Before we get into the environmental impact of cryptocurrencies, it’s important to first understand how crypto is created. 

What is crypto mining?

New units of cryptocurrencies like Bitcoin are minted in a process called mining. During the mining process, thousands of computers get to work on solving a complex mathematical problem. The first computer to solve it is rewarded with a portion of the transaction fees. In order to make sure the minting is done correctly, the process is validated through a system known as Proof-of-Work (PoW), where mining computers need to “prove” they have used up energy. The PoW validation system is energy-intensive by design, as it’s meant to ward off potential hacks and to keep the network safe and stable. 

Not all cryptocurrencies are minted in this way, but Bitcoin, the world’s most popular cryptocurrency, is the most famous example of a Proof-of-Work system. We’ll learn more about how other cryptos are minted further down.

Why is mining and Proof-of-Work bad for the environment?

Cryptocurrency mining negatively impacts the environment in three major ways: 1) Mining consumes massive amounts of energy, 2) the sources of that energy aren't always clean, and 3) it produces a lot of electronic waste.

Energy sources

Unfortunately, PoW still relies heavily on energy from non-renewable sources. Before it banned crypto mining in 2021, China was one of the leading mining countries in the world, and apparently a lot of the energy used came from coal power.

However, efforts are being made to use more renewable resources. Since China’s ban, the biggest share of mining is being done in the United States (nearly 36%), Kazakhstan (18%) and Russia (11%), with a report from the New York Times finding that Bitcoin, a proponent of the energy-intensive PoW system, sources 40% to 75% of its energy from renewable sources.

Energy consumption

Even so, Bitcoin remains one of the biggest offenders when it comes to energy consumption: Mining Bitcoin requires an amount of energy that exceeds the energy consumption of many countries, including Belgium and Finland. Even just validating one single Bitcoin transaction uses the same amount of energy that the average American household does over 50 days - around 1455.8 kilowatt-hours of electricity. According to the Cambridge Centre for Alternative Finance, Bitcoin uses an estimated 131 twh annually, which is about 0.29% of the world’s energy production.

It’s difficult to measure the full scope of crypto’s impact on the environment because its decentralised nature makes it hard to pin down exact numbers, especially in how they relate to carbon emissions. 

There have been several attempts to try to convey the carbon footprint of Bitcoin. According to a study published by Joule and the American Chemical Society, the annual carbon emissions for Bitcoin ranges from 17 to 22.9 MtCO2, which is comparable to the emissions of Kansas City or the country of Jordan. Another study published in Finance Research Letters suggests an even broader range, from 1.2-5.2 Mt CO2 to 130.50 Mt Co2, proving just how difficult it is to narrow down.

Electronic waste

Mining additionally produces a lot of waste, because the computers that are used in the process undergo so much computational stress in such a short amount of time (it’s estimated that the average lifespan of a computer mining for Bitcoin is about 1.29 years) that they quickly become obsolete. The hardware used for mining is highly specialised and cannot be repurposed for another use case, and so it ends up as unrecyclable electronic waste. Mining for Bitcoin alone produces 36 kilotons of electronic waste annually.

Why is Proof-of-Stake better for the environment?

It’s important to understand that mining is a choice, not a requirement. There are many other ways of validating transactions and keeping cryptocurrency networks safe. One popular method is Proof-of-Stake (PoS), which is used by many cryptos including Ethereum, the world’s second largest cryptocurrency.

Proof-of-Stake eliminates the need for energy-intensive mining, because the network is secured by validators who put up a stake of the currency that is issued by the network. So for instance for Ethereum, which recently switched to a PoS system, individuals stake an amount of ETH to validate transactions. While a PoW system requires hardware and coding skills, PoS makes it easy for anyone to stake and therefore to help secure the network. It’s estimated that the average Proof-of-Stake network consumes about 0.001% of the energy that Bitcoin consumes.

Ethereum and PoS

Up until September 2022, Ethereum relied on a Proof-of-Work system to secure its network. But after the Merge, where the Ethereum Mainnet blockchain merged with the Beacon Chain, it now uses Proof-of-Stake. Before the switch, each Ethereum transaction used as much energy as an average American household does in 5.51 days or 163 kilowatt-hours of electricity. It’s estimated that with the switch to PoS, Ethereum will cut around 99% of its energy consumption.

Other cryptocurrencies and PoS

There are several smaller cryptocurrencies using a Proof-of-Stake system that are considered to be especially eco-friendly. These include IOTA, Cardano, Avalanche and Polkadot, just to name a few. According to the Crypto Carbon Ratings Institute (CCRI), Avalanche consumes only 0.0005% of the amount of energy that Bitcoin expends. Avalanche’s total yearly energy consumption is 489,311 kWh, compared to 89,780,000,000 kWh for Bitcoin. Polkadot is one of the greenest cryptos out there with the incredibly low annual energy consumption of around 70,237 kWh.

The future of crypto and the environment

Though Ethereum’s historic switch from PoW to PoS and the increased regulatory attention to the crypto industry’s practices are both steps in the right direction, Bitcoin’s continued refusal to consider abandoning PoW for something less energy consumptive shows that mining is here to stay, at least for the foreseeable future. 

But just as cryptos like Bitcoin disrupted the financial industry, so will other innovations disrupt Bitcoin: The rise of even more types of consensus mechanisms (Proof of History and Proof of Activity, just to name a few); the launch of eco-conscious, carbon-offsetting cryptos like KlimaDAO; even the White House issuing a report stating that cryptos could potentially harvest methane gas emissions to generate electricity for mining proves that there is indeed an appetite to challenge the existing status quo and to make the crypto industry more green.