The case for crypto industry (2/3) | The bright future of crypto’s energy consumption is one turn away

The first article in this series on building the case for crypto explained why volatility is a sign of a healthy market. Part two focuses on energy consumption, a criticism frequently levelled at bitcoin given it uses more power than some countries. However, this article puts this consumption in context and reviews a few of the initiatives promoting the use of environmentally friendly sources. It also explores the value blockchain technology brings to a broad range of applications outside crypto. 

Realistic Assessment of Crypto's Energy Consumption

Bitcoin relies on a ‘proof of work’ (PoW) consensus mechanism to validate transactions on the network. Participants, known as miners, compete to solve complex mathematical equations for the right to add the next set of transactions to the blockchain. Solving these equations requires high-performance hardware, like Application-Specific Integrated Circuits, which consume substantial amounts of energy. In return, miners receive block rewards of 6.25 coins per block, worth nearly $450,000 as of March 12, 2024. The reward drops to 3.125 coins after the next halving, expected to take place in April 2024. 

Satoshi Nakamoto, the pseudonymous founder of Bitcoin, designed the protocol so the cost to acquire block rewards roughly equals their value. That means the amount of energy required to validate transactions increases as bitcoin’s price rises and more miners join the network.  

Bitcoin’s consumption, estimated at just under 173 terawatt hours (TWh) per year by the University of Cambridge Centre for Alternative Finance, may seem excessive given it’s equivalent to the energy usage of Poland. But context is key. It’s only marginally higher than the gold industry (131 TWh), a reasonable comparison considering bitcoin displays many of the characteristics of a store of value and has a growing reputation as digital gold. It’s significantly lower than the chemical (1,349 TWh) and iron and steel (1,233 TWh) industries, while US households use 164 TWh just to power their fridges and televisions. Overall, the University of Cambridge estimates Bitcoin’s share of energy consumption to be around 0.26%.

Research also shows that mining emissions have halved over the last couple of years, from nearly 600 grams of CO2 per kWh in 2021 to 296 grams in July 2023. The increased use of sustainably sourced energy, from 33% in 2021 to 52% in 2024, has contributed to this reduction. Data published by the Institute for Energy Economics and Financial Analysis shows that in Texas alone, where a significant amount of mining takes place, renewable energy as a share of total energy produced rose from 20% in 2017 to 31% in 2023. 

Green Energy Initiatives and Technological Advancements

As the bitcoin ecosystem evolves, new initiatives are emerging to diversify the energy sources used by miners. 

In July 2023, Bitfarm, a miner with facilities in the US, Canada and Argentina, purchased 150 megawatts of hydropower from Paraguay to power its operations there. Bitfarm will build a second ‘farm’- to use the crypto terminology- in Villarrica and a new one near the Itaipu power plant, the world’s third-largest hydroelectric dam. 

‘Paraguay has access to an abundance of surplus renewable power, and these acquisitions secure valuable, yet limited, sustainable energy contracts while broadening our foothold in a resource-rich country,’ explained Geoff Morphy, the company’s chief executive, when announcing the deal.  

Research published by Cornell University at the end of 2023 suggests US miners can help fund renewable sources in the precommercial phase, meaning they’re generating energy but haven’t connected to the grid yet. For instance, Texas has 32 planned renewable projects which would generate profits of $47 million by supplying power to miners, funds they could reinvest to boost capacity. The research discovered similar opportunities in California, Colorado, Illinois and several other states.  

Flared gas is another, somewhat unconventional, option. Natural gas is a byproduct of oil drilling, which producers burn off, either for convenience or because selling it isn’t profitable. However, bitcoin miners can use this gas to power their operations, while simultaneously reducing the amount of carbon dioxide emitted into the atmosphere. Research by CoinShares shows that flared gas alone could provide over 800 TWh of power each year.    

Some protocols use a ‘proof of stake’ (PoS) consensus mechanism rather than PoW, partly because it’s more energy efficient. Instead of solving equations, PoS participants stake native tokens- Ethereum requires a minimum of 32 ether- for the right to validate transactions. Ethereum’s transition from PoW to PoS in 2022- nicknamed ‘the Merge’- reduced its energy consumption by more than 99.9%.

Powering Diverse Use Cases 

It’s worth remembering that while bitcoin is the original and most prominent application of blockchain technology, it adds value to a variety of use cases across different sectors.   

Decentralized finance (DeFi)- By introducing greater functionality to blockchain, Ethereum and other similar protocols have broadened access to financial services including saving, borrowing and insurance by removing intermediaries like banks. DeFi has also pioneered new investment products such as staking and yield farming.  

Capital markets- Financial institutions can leverage blockchain to upgrade the infrastructure underpinning the capital markets. Brokers can streamline operations such as the settling and clearing of trades, while providers can issue assets as tokens and increase liquidity by breaking them into smaller units, a process known as fractionalisation. 

Supply chain management- Blockchain can serve as a shared database for all stakeholders in a supply chain, from manufacturers to consumers. This improves traceability, as consumers can track the provenance of the products they purchase, and increases transparency by making documents like certificates publicly accessible.   

Government- Blockchain can help public bodies address legacy pain points, such as the secure storage of citizen data (a centralised database is much more vulnerable to exploits). It also reduces the risk of corruption by openly sharing records, for example the distribution of funds for public spending.  

Identity- Self-sovereign identity lets people store official documents such as a passport or driver’s license on the blockchain and control who accesses them. It also allows individuals to monetise their data by selling it to advertisers, rather than platforms like Facebook profiting from it. 

Conclusion 

Bitcoin’s high energy usage is due to its proof of work consensus mechanism, which requires miners to solve complex equations for the right to process transactions and earn block rewards in the form of bitcoin. In terms of consumption, bitcoin uses roughly the same amount of power per year as Poland and slightly more than the gold industry, but only a fraction of the chemical and iron and steel industries. 

Various initiatives allow miners to tap into renewable energy sources. Examples of these initiatives include Venezuelan hydropower, surplus supplies from precommercial projects in the US and flared gas, a byproduct of oil production which miners can use to power their operations. 

Finally, blockchain technology doesn’t just underpin bitcoin, it adds value to a range of industries and use cases.