Recently, Tesla announced it would accept Bitcoin payments only to cancel that plan just over a month later. The company said, “Cryptocurrency is a good idea … but this cannot come at great cost to the environment.” Why is cryptocurrency bad for the environment? And can that change? Let’s dig in.
What Is Cryptocurrency?
Before we get into the environmental questions, it’s important to know what cryptocurrency is and where it comes from. At its heart, cryptocurrency is a form of digital currency. Chances are, you already have digital currency and might have never given that much thought. When you shop online or pay in person using a credit card, you’re using digital currency. After all, you aren’t handing over physical money.
But where cryptocurrency deviates from other digital currency is the ledger. When you pay with a credit card, a retail system contacts your bank and asks for your money. The bank checks its ledgers to ensure you have the funds and then disperses them. Most currency relies on a private or centralized ledger.
Cryptocurrency prides itself on using a decentralized ledger (also known as a blockchain). No one entity controls the information concerning who has how much of what kind of funds. Instead, that information is shared and validated among the many volunteers participating in a particular cryptocurrency coin.
Another unique facet of cryptocurrency is something it shares in common with physical currency—a limited pool of assets. The digital U.S, Dollar is effectively endless. It’s digits in a computer, and when someone earns another penny, we don’t need to find one to give that person. Likewise, billionaires don’t have to worry about where to store their money (Scrooge McDuck notwithstanding) or what to do if they earned more money than actually existed.
But physical money is made, circulated, destroyed, and made again. And similarly, most (if not all) cryptocurrency is “made” (called mining) and features a stopping point. Take Bitcoin, for example; at the start of 2011, only about 5.2 million Bitcoins existed. Today over 18 million Bitcoins exist. But the system only allows for 21 million Bitcoins—once we hit that number, that’s it: no more new Bitcoins.
And it’s the process of making cryptocurrency that can cause environmental problems. Because for many coins, mining cryptocurrency relies on “proof of work” instead of “proof of stake.” Here’s what that means.
Proof of Work: An Environmental Problem
For most popular crypto coins, like Bitcoin and Etherium 1.0, making more coins (called mining) is arduous. Anyone interested in mining crypto coins sets up software on any number of devices (PCs, phones, dedicated mining machines, etc.), then lets it run as long as they want.
Part One: The Contest
But mining is a multistep process. The first part is a blind puzzle race that every miner participating tries to win. You might have heard that mining is all about doing complex math, but that’s not quite right. Instead, the system itself comes up with a complex equation with a single answer—but it doesn’t reveal the equation. Every miner essentially attempts to guess what the answer is without knowing the equation. Either the guess is right, and the miner wins, or it’s wrong and has to try again. The first miner to guess right wins the round.
The beauty of the system is, it’s hard to become the winner but easy to tell who won. It’s a bit like solving a puzzle with the picture side down by randomly putting all the pieces in place. It would take a lot of effort, but you know the moment it’s solved.
Part Two: The Ledger
The second part is all about squaring the ledger. Remember how the banks don’t keep track of the crypto coins? Miners do. Every time someone sends or receives cryptocurrency, that information is shared to the public ledger and then later verified by miners. That’s what keeps anyone from spending the same bitcoin twice, and what makes it easy to track cryptocurrency spending.
Think of it as something similar to the serial number on a $20 bill. If you photocopy a $20 bill with the right colors and the right paper, it might look real. But when you try to spend both “$20 bills,” the fact that they have the same serial number will give the fake away (among other security measures).
Similarly, each miner that wins the contest in the first section receives a block of transactions to validate and to ensure that the people claiming to own the crypto they’re spending actually do own it. Once the miner checks and validates the transactions, the information gets distributed to all the other systems that comprise the ledger. That part is easy but lucrative. For winning the block and validating the transactions, you get a portion of newly created crypto coins (6.3 in the case of Bitcoin), and if the transactions called for fees, those go to you, too.
Winning Requires Lots of Energy
And those two parts of mining work hand-in-hand to drive up energy usage. The more powerful your machine is, the quicker it takes guesses. The quicker it can take guesses, the more likely you are to win the contest for the newest crypto coin. Powerful hardware doesn’t guarantee you’ll win, but it increases your odds—a lot like buying more raffle tickets makes it more likely to win a prize. The guy who bought just one ticket might still win, and the person with an underpowered machine might still get the crypto coin. It’s a gamble.
But, in a dual-edged sword, powerful hardware requires more electricity to run, which is the first hit against proof-of-work solutions. After all, the entire point of mining is to make a profit—and a higher electricity bill eats into the profits. To solve that, many miners locate their machinery in places that offer cheap electricity rates (or steal it!), which in turn typically rely on fossil fuels instead of renewable or even nuclear energy. That’s a double-whammy to the environment—more energy use in dirtier places.
And to add to the problem, the more people who mine, the harder it is to mine. In Bitcoin’s case (and others like it), the system only creates a new block to solve every ten minutes. Once it’s solved, you have to wait ten minutes to try again. The faster it’s solved, the more difficult the system will make the next block. So as the price of Bitcoin goes up, more people jump in and the system adjusts to make solving the puzzle harder.
This means people rely on more powerful computers and dedicated miners, which burn through even more energy. It’s a problem that feeds itself. In the process, GPU prices have skyrocketed, NVIDIA tried to cripple mining on its hardware, and it’s almost cheaper to buy a prebuilt computer now than it is to build your own. Some companies even tried to jump in on the trend, like the ill-fated Kodak KashMiner pictured above.
According to Cambridge Center for Alternative Finance (CCAF), Bitcoin mining alone consumes 112.57 Terawatt Hours per year—more than countries like the United Arab Emirates and the Netherlands consume in a year. And to address that, some cryptocurrencies are turning to a different system entirely that relies on proof-of-stake or proof-of-coverage instead of proof-of-work.
Alternative Mining Consumes Less Energy
To get away from the intense electric requirements proof-of-work systems, some cryptocurrencies are turning to alternative options. The two popular choices right now are proof-of-stake and proof-of-coverage. Etherium, in particular, which currently operates on a proof-of-work model, plans to shift completely to a proof-of-stake model by 2022.
Proof of Stake Is a Raffle System
The proof-of-stake system flips cryptomining on its head by removing the competition entirely. Instead of competing against each other to solve a puzzle first, you invest your coins into the system to earn more coins. You still have to provide hardware, but it doesn’t need to be powerful under the new system. This system focuses solely on the second half of proof-of-work mining—validation.
With proof of stake, you “stake” coins in a raffle-like system to prove you’re a trustworthy validator. The more coins you stake, the more entries you get. When it’s time to make a new block of coins, the system chooses random participants to create new blocks. If you don’t get selected, you can validate previously made blocks instead for accuracy and legitimacy.
Unlike proof of work, you don’t get the coins you made in this system. Instead, you get rewarded with coins for creating and validating blocks. You get to keep the coins you staked as well—-unless you validate malicious blocks. Cheaters never prosper in this system.
Preventing cheaters is the original point, in fact. In a proof-of-work system, if someone has 51% of all the processing power in a system, they could create malicious blocks and fake coins. When Bitcoin runs out of new coins to mine, people might jump ship and suddenly, having 51% of all the power becomes easier.
In proof of stake, you’d only gain the power to create malicious blocks by owning 51% of all the coins. And even then, you might lose all your coins trying. So even in the unlikely scenario that someone does own 51% of all Etherium, the system has a built-in disincentive to cheat. Create a bad coin and get caught, and you lose all your coins.
But the upshot is, proof of stake doesn’t require powerful hardware. Validating blocks isn’t the hard part; it’s the race to solve the puzzle. The proof-of-stake system removes the puzzle entirely, so nearly any hardware will do, so long as you have enough coins to enter. When Etherium launches its 2.0 model, it will require users to stake 32 coins, which is a lot of money (around $80,000 worth as of this writing).
Some miners and cryptocurrency apps are working on pooling resources so people with less than 32 Etherium can still get it on the action, but that comes with risk, as does the proof-of-coverage model.
Proof of Coverage Works Your Network
A few crypto coins, like Helium, work off another model called a proof-of-coverage (PoC) system. With this model, you don’t solve puzzles or stake coins. Instead, you provide a service. Helium, in particular, requires you to host a router in your home that connects to your network.
The Helium router then broadcasts a LoRaWAN signal (that’s Long Range Wide Area Network) for others to use. LoRaWAN powers tracking tiles, health monitors, and more. As a compatible device approaches your Helium router, it automatically connects to the shared network. And hopefully, someone can find their lost keys or a missing pet.
For your trouble, you’ll get cryptocurrency—-but how much depends on a varying set of circumstances. Every so often, your PoC router will reach out to prove you kept it connected to the network. Another nearby PoC router will validate that information, and you’ll get rewarded.
But because the idea is to build the network widely and yet avoid overcrowding, routers that are too close get fewer coins. That’ll prevent someone from hosting three routers in one home and earning lots of coins while proving little service. Even neighbors are too close to earn the full amount. At the same time, routers that are too far apart can’t validate each other. So if you live in an overly congested area, your share of the coins goes down. And if you own the sole PoC router in your area, your work will go unvalidated, and you’ll earn fewer coins.
That’s setting aside the idea of inviting another secondary network in your home and the security questions involved. Additionally, the routers are expensive, in the $500 range, and some require payment through other cryptocurrencies, like Tether. But if you’re comfortable with that, the routers themselves require very little power and won’t drive as much energy usage as traditional cryptomining. And you might provide a valuable service.
Ultimately, just like all of cryptocurrency, the future is unknown. The shift away from the proof-of-work system might fall flat on its face, and we might be stuck with traditional mining for the long haul. Or all of cryptocurrency itself might see failure.
It’s hard to say because cryptocurrency’s greatest strength is also its worst weakness—decentralization. It makes for a volatile system, and recent drops in Bitcoin and Etherium prove that point. A singular tweet from an EV company, followed by an announcement from China, led both to spiral and lose thousands of dollars of value.
But for now, at least, most cryptocurrency does require an enormous amount of energy, and that’s something worth considering. If protecting the environment is high on your list of concerns whether that’s as an individual, or a company considering adding cryptocurrency payment options, running energy-hogging miners in fossil-fuel burning areas runs counter to that goal.
