Elon Musk, CEO of Tesla, has been at it again. At what, exactly? He’s using his not insignificant social media presence (46.5 million followers) to endorse cryptocurrencies, notably Bitcoin and Dogecoin, helping to drive their price and value up, up, and away. Rising faster than one of his SpaceX rockets, Musk has almost single-handedly pushed Dogecoin and Bitcoin’s prices up by as much as 50% in the last 10 days thanks to his tweets and Tesla’s $1.5 billion Bitcoin purchase. As Musk likes to say, “Dogecoin to the Moooonn”!
Crypto rallies have consequences, however. And I’m not just talking about for financial speculators who risk losing money or reaping rich rewards. There is an elephant in the room with cryptocurrencies and blockchain, the software infrastructure underpinning Bitcoin, Dogecoin, and thousands of other cryptocurrencies, and that’s the energy consumption (i.e. electricity) needed to power the efforts of crypto miners.
We are talking huge numbers, up to 289 terawatt hours (TWh) annually, just for Bitcoin. This is the sort of electricity generation and consumption you might expect from a country the size of the Netherlands, Czech Republic, or Ireland. But it’s important not to focus on the enormous amount of electricity crypto mining requires alone, but also on how that electricity is generated because that’s where we could have a problem. To put it another way: how much fuel does it take to send crypto to the moon? Answer: a lot, and it might not be very clean! So what are we going to do about it?
Referred to as Bitcoin’s “dirty baggage”, the problem of crypto’s environmental credentials is not a new story. The Economist reported in 2018 that ‘Bitcoin has been alarming people for years because of the amount of electricity needed to mint new virtual coinage’. That fossil fuels might be, and sometimes are, driving growth in Bitcoin (and other cryptocurrencies) should concern all of us. But especially to governments committed to meeting climate change targets that are already under a great deal of stress.
We have to be slightly careful here, though. Why? Because not all blockchains are born equal and, therefore, all cannot be tarred with the same brush regarding high-energy consumption or dirty energy consumption. Here are the basics. There are public (permissionless) blockchains, of which the Bitcoin blockchain is probably the most well known and well used. This type of blockchain is open-source software that supports the likes of Bitcoin and Dogecoin. Then there are private (consortium, permissioned) blockchains that sit within certain definable organizations (e.g. banking networks). These blockchains are not publicly accessible, for obvious reasons, and maintain a high degree of centralized governance. And there is hybrid or “third-way” blockchains that are public but still permissioned and combine the permissioning from private consortiums with a decentralized governance model that we find with, for example, Bitcoin.
Our interest here is really on public permissionless blockchains such as Bitcoin, because that is where the bulk of activity driving legitimate concerns about high and dirty energy consumption occurs. Why does Bitcoin use so much energy in the first place? The amount of energy the Bitcoin blockchain requires and consumes is directly proportional to the method used to create the coin. We call this proof of work (PoW) and it involves high-powered computers competing against one another to solve complex mathematical puzzles.
Today, this puzzle-solving is unlikely to be a person at home on their laptop. Instead, mining farms, including super mining farms like Enigma in Iceland built by Genisis Mining in 2014, combine huge amounts of CPU processing power to, effectively, game the Bitcoin creation process, ensuring the complex mathematical puzzles - the royal road to Bitcoin - are solved with increasing speed and efficiency. And much like the rationale for growing numbers of server farms near the arctic circle or data centres under the sea, locating a mining farm in a chilly place (like Iceland) only improves its energy efficiency further, allowing creation of Bitcoin more quickly and cheaply.
The International Energy Agency (IEA) highlight the key features of Bitcoin creation that require so much energy, and, importantly, why fluctuations in energy consumption occur (go up and down) when someone like Elon Musk prompts a crypto frenzy with a single tweet:
The energy use of the bitcoin network is a function of a few inter-related factors (some of which respond to the changing price of bitcoin):
Perhaps the most obvious solution to mitigate the threat of crypto’s carbon footprint growing too large is to ensure Bitcoin and other crypto mining only uses renewable energy. Indeed, some commentators argue renewables are playing a bigger role than first thought and that mining is not the environmental disaster many think it is or could become. In 2020, the 3rd Global Cryptoasset Benchmarking Study by the University of Cambridge also showed that 76% of cryptocurrency miners were using electricity from renewable energy sources as part of their energy mix.
But there have to be political and legal solutions as well. Given that several areas of crypto and blockchain remain unregulated (or directly regulated) and the US, EU, and UK governments are all engaged in ongoing consultations and projects dealing with the future of the technology, this is a good opportunity to define regulation regarding energy consumption in crypto mining. If mining farms, for example, were to become the norm in Bitcoin creation, why not ensure, as a condition of their operation, that such farms must use renewable energies? Like Cryptosolartech in Spain, this could contribute upwards of 900 kilowatts of energy to the mining process. This won’t cover all the power needs, but it’s a start. Or perhaps, given Tesla’s none-too-small commitment to Bitcoin, why not engineer electric vehicles capable of mining Bitcoin and improve both the environmental and financial sustainability of their owners (spoiler: someone’s tried this!)
There’s a lot of work to do. We know it takes a lot of fuel to shoot crypto to the “moooonn”, and that appetite is unlikely to lessen soon. It would be a good idea, however, to leave the dirty baggage behind.