However, the top two cryptocurrencies in the world, Bitcoin and Ethereum, have seen such a massive exponential growth since their inception, and there is no doubt that there is wide adoption of cryptocurrency going on today.
However, amid its hype, environmentalists have had concerns about the amount of energy mining cryptocurrency such as Bitcoin consumes and that it may cause an increase in the emission of carbon and affect climate change. Is Bitcoin bad for the environment? Compared to the traditional finance system, how bad is crypto mining? This article will look into the environmental issues of cryptocurrencies and how they compare to the traditional finance system.
The Environmental Issues with Cryptocurrency
Before considering the environmental concerns surrounding cryptocurrencies, let’s take a look at what blockchain is and how Bitcoin is run?
A blockchain refers to data stored in blocks of information linked together in a permanent chain. Cryptocurrencies are digital currencies powered by blockchain technology. Keeping cryptocurrencies such as Bitcoin safe and secure from hackers takes computers all running the same software to lend their computing power to the network. The more computers on a blockchain network, the more secure it is. This particular process is called mining. It involves computers in a blockchain network solving equations to be rewarded with Bitcoin. The first computer in a blockchain to solve the equation wins, and each computer that runs the software has a chance of being rewarded for its contribution to the network.
The bigger the blockchain network, the bigger the energy required by computers to keep the blockchain running and secure from attacks. Popular cryptocurrencies such as Bitcoin demand a lot of computing power and a lot of energy. This is where the problem lies for environmentalists. The Bitcoin blockchain uses a proof of work consensus algorithm. This means that instead of storing balances in a central database, transactions on the blockchain network are recorded by a distributed network of miners.
These computers, specifically meant for mining, engage in a race to record new blocks by solving cryptographic puzzles. This puzzle requires many energy-intensive computations and has resulted in concerns from environmentalists.
Comparing Energy Consumption in Crypto to Traditional Finance
Now that we have discussed blockchain and cryptocurrency and their impact on the environment let’s talk about how much energy crypto consumes compared to traditional finance. Some blockchain advocates assert that cryptocurrencies such as Bitcoin use more renewable energy and have less impact on the environment. So the question is, compared to traditional finance, how much energy is cryptocurrency such as bitcoin consuming?
The United States Energy Information Administration predicts that the world will increase its energy consumption by 28% in the next two decades. As energy consumption increases, this will also affect both decentralized systems and traditional financial systems. Using renewable energy sources such as solar energy, heat energy, and wind energy will greatly reduce the financial industry’s carbon footprint, and the Bitcoin ecosystem is already heading in this direction.
There are reports that about 77% of all Bitcoin mining is supported through renewable energy resources, making it greener compared to other large-scale industries. Also, after China banned crypto mining, there have been new mining operations set up in regions where miners can cool off their equipment using natural resources.
Regions such as Canada, Iceland, and Russia are attracting new miners as they keep looking for more efficient and less energy-consuming ways to mine cryptocurrencies.
The traditional financial system is less energy efficient due to the sheer difference in methods. There are over 30,000 banks in the world that rely on different central systems to verify and sign off every transaction that goes through their networks.
This process is time and energy consuming since several computers interact between different parties, and the central computer that processes these transactions.
Hardware used for Global banking alone accounts for about 100 Terrawatts Per Hour annually. This is comparatively greater than Bitcoin’s energy output which is around 50 Terrawatts Per Hour. Nevertheless, these numbers alone are enough to show how much energy the traditional financial system takes and the toll these transactions have on the environment.
We all know that mining cryptocurrency demands large amounts of energy. However, although Bitcoin consumes energy, based on our research, this is little compared to the amount of energy consumed by traditional finance systems.
It’s also important to note that newer cryptocurrencies do not use the Proof-of-work consensus algorithm. Instead, cryptocurrency such as EOS, Solana, and Cardano uses the Proof-of-stake consensus algorithm. This algorithm allows transactions to be processed with the same energy requirement as an ordinary computer network and does not need mining.