digital assets energy consumption

Are Cryptos Going Green?

On the 12th of May, Elon Musk tweeted about Tesla suspending Bitcoin payments due to its impact on the environment. This was the starting point for a downward trend of a few months for cryptos. Let’s dig into the real environmental impact of Bitcoin and cryptos. We’ll begin with the energy consumption of digital assets and then investigate how green the energy used is.

Energy consumption of digital assets

Bitcoin consumes a lot of energy due to its mining process. Bitcoin’s transactions are validated through a Proof of Work protocol, meaning that for each transaction, miners compete among themselves, using their computing power, to guess a random number and make sure the information contained in each block is correct. For this effort, the winning miner receives a reward, in the form of a newly minted amount of bitcoin. All of this takes energy in the form of computer processing power, hence electricity. As bitcoin rises in price, more miners are incentivised to join the race; and more miners equals more energy used. In that context, the whole industry is seeking to lower its energy consumption through various projects:

  • Transition from PoW to Proof of Stake (PoS), a much more sustainable consensus protocol

PoW is the original consensus in blockchain, with most early digital assets using this protocol, but as it is proven to be energy intensive and unscalable, the crypto community came up with other options, with PoS being today the new standard. In PoS protocol, the security of transactions is guaranteed by a locked amount of cryptos and only one validator per transaction. This can be done with a laptop with no particular computing power.

The trend is very clear with digital assets dominance shifting away from PoW to PoS: a year ago (on 06 Sept 2020), digital assets were still massively dominated by PoW consensus, with Bitcoin and Ethereum representing respectively 68% and 12% of the total market capitalisation. Today, Ethereum is well underway converting to PoS and has grown to 20% dominance. We also see the emergence of new PoS cryptos in the top market capitalisations: Cardano, Binance, Solana, Polkadot. As a result, bitcoin dominance is slipping away, now down to 41% of total market capitalisation.

  • Emergence of green layers on top of existing blockchains

As demand rises sharply, Bitcoin and Ethereum have experienced congestion of their blockchain and uncontrolled peaks in transaction fees, due to the poor scalability of PoW protocols. To tackle this, green layer 2 solutions have been built on top of the main blockchain. The idea is to validate many transactions on a PoS secondary framework, allowing to bulk validate into a much larger transaction on the main PoW blockchain. The cost and energy deployed is the same on the PoW main blockchain but layer 2 solutions make it faster and generally more energy efficient.

  • Derivative markets

Futures and options allow to get an exposure to the underlying (ie. bitcoin) without any transaction on-chain. Most positions are rolled over at maturity with no settlements. Today, derivatives have higher daily volumes than spot markets. As of  the 2nd of September 2021, total bitcoin future volume was $51bn against bitcoin spot volume of $39bn.

  • Bitcoin halving every 4 years

At the very core of bitcoin DNA is the capped supply, raising bitcoin status to “Store of Value” or “digital gold”. New bitcoin is minted each time a block is validated, but the amount of new supply is halved every 210,000 blocks mined (ie. roughly every four years). Mechanically, about half of miners will have to quit as the industry is a less profitable industry. Obviously profits would also vary with the price of bitcoin and the cost of energy.

  • Coding improvements

Digital asset code can be changed if its community massively agrees with the change. Bitcoin has implemented the Segwit project in 2017, which has doubled the energy efficiency of bitcoin mining. Last December, Ethereum set its path to change protocol for a less energy intensive consensus (PoS).

Crypto is still a very nascent industry and will surely continue to see new improvements to tackle high energy consumption.

Crypto electricity becomes more sustainable

In September 2019, 75% of all global bitcoin mining was produced in China where electricity mostly relies on fossil fuels (and especially coal), and on a small part, on renewable energy like hydropower during the rainy season. Electricity is cheap in China as it is subsidised by the government.

Bitcoin mining geographical repartition

Source: Source: Cambridge Bitcoin Electricity Consumption Index

Over the past few years, the crypto community developed other hubs outside China to profit from renewable resources like geothermal power (Iceland), hydroelectric energy (Quebec, Tibet, Washington state, Austria), windpower (Texas).

Last May, the Chinese authorities banned cryptos, partly due to its carbon neutral policy and its national power shortages. The majority of Chinese miners are reportedly moving to Texas in the US, and on a lesser extent to Kazakhstan and Russia. As of June 2019, Austin (Texas) energy’s generation mix was at 43% renewable energy. Texas, already a leader in wind energy, will be home to the largest US solar farm, as the US pledge to cut its net greenhouse gas emissions by half by 2030.

Other landmark projects include solar powered and geothermal facilities:

  • Square will invest $5 million to build solar-powered bitcoin mining facility TheVerge
  • El Salvador to use energy from volcanoes for bitcoin mining Independent

Digital assets were inherently energy consumers. With the emergence of PoS, the Crypto community is adapting to a more energy conscious public demand. The community has identified its shortcomings and assessed its sustainability given the world’s view in 2021 on eco-friendly activities. It is heading in the right direction to become a greener, more sustainable 21st century asset.

Source: Trakx

Post Author: Wealth Monaco