Crypto & Energy (1/3) - Why Does Crypto Consume Energy?

Crypto and sustainability are often pitted against each other by crypto detractors. Some analysts worry about the impact of crypto’s energy consumption, flashing distressing numbers. At CoinShares, we believe that it’s important to address this concern with solid research - and then share it with a wider audience. 

That’s why we have designed a series of three articles diving deep into the topic to tackle misconceptions around crypto’s (and particularly Bitcoin’s) energy use. This first article will be dedicated to the basics of crypto and energy use, the second article will focus on ongoing improvements towards a greener Bitcoin network, and the last article will cover the Proof of Stake revolution.  

After having read this series, we hope that you’ll have enough information to make your own opinion about crypto’s energy consumption, and even discover some inspiring crypto features along the way. Let’s get started!

How Crypto Works

Crypto assets are not excavated out of the earth (like gold) or printed by national banks (like dollar bills). Instead, they are generated by decentralised computer networks, which rely on a shared set of rules to issue tokens. Two main consensus mechanisms - the intricate gears that synchronise and validate transactions within blockchains' intricate machinery -  currently dominate the crypto sphere: Proof of Work (PoW) and Proof of Stake (PoS). 

Proof of Work is the “pioneering” protocol, devised in 2009 by Satoshi Nakamoto’s, Bitcoin pseudonymous founder(s). Bitcoin was the first ever blockchain, and the one which introduced the concept of “mining” cryptocurrency. Mining refers to the process of creating new Bitcoins by solving complex computational problems. Miners compete to be the first to “crack the code” in order to be rewarded with a fraction of the block’s value. To do so, they set up “Bitcoin Mining Farms”, where hundreds (or thousands) of computers run 24/7. 

This system is energy-intensive by design, as the protocol automatically adapts the cost of obtaining mining rewards to be close to the value of the rewards. But this choice is not only motivated by economic efficiency: it’s a way to guarantee the system remains secure and truly decentralised. By compensating miners based on the computational power they invest in the network, Bitcoin benefits from a large pool of resources ensuring the integrity of the network - no single actor can manipulate it. 

Proof of Stake is the newest addition to the crypto family. Ethereum switched from PoW to PoS in September 2022, through a process called “the Merge”. Instead of requiring miners to “work” for their rewards, PoS asks validators to “stake” their assets by locking them in specific contracts. The system then randomly allocates rewards to validators depending on the number of tokens they have staked. 

Compared to PoW, PoS is much less energy-intensive. There’s no obligation to have advanced hardware crunching data for long periods of time - the staking process does the work.

How Much Energy Does Crypto Consume?

So crypto, and especially Bitcoin mining, needs energy to operate. Just how much is where the consensus breaks down. Due to the decentralised nature of crypto, obtaining reliable figures on global energy consumption is no easy task.

CoinShares’ research-intensive Bitcoin Mining Report attempts to do just this, by collecting data and developing a comprehensive model to calculate emissions. Based on this framework, we estimate that the Bitcoin mining network drew 75 TWh of electricity in 2020 and 82 TWh in 2021, emitting 36 Mt of CO2 in 2020 and 41 Mt in 2021. This may seem like a large number, but it actually accounts for 0.08% of global CO2 emissions (by December 2021). Putting this number in perspective with other industries is even more telling. Indeed, Bitcoin’s CO2 emissions don’t even match USA Tumble Dryers’ (53 Mt of CO2 annually, according to NYDIG).

What about Ethereum? Following the Merge, the network’s annual electricity consumption and CO2 emissions dropped by more than 99.9%. This corresponds to 870 t of CO2 emissions yearly. In terms of energy consumption, ETH’s consumption is approximately ~0.0026 TWh/yr - this is orders of magnitude below data centres globally (200 TWh) and even lower than Netflix (0.451 TWh).

Conclusion: A Small Price for a Decentralised World

By actually looking at the numbers, it’s clear that crypto energy consumption is negligible compared to what it can offer: a truly global, permissionless and open monetary system. This is also what Satoshi Nakamoto had in mind when he replied to comments about BTC’s energy consumption as early as 2010. “The utility of the exchanges made possible by Bitcoin will far exceed the cost of electricity used. Therefore, not having Bitcoin would be the net waste."

What Nakamoto didn’t foretell is how much BTC would reduce its environmental impact in the following years. This is what you’ll discover in the second instalment of our series: Bitcoin: advancing towards a greener blockchain.