Separating fact from fiction: Examining the true costs of crypto mining and its environmental impact
In recent years it has been all too easy to get caught up in the crypto hype. After all, it’s the future of finance - it cuts out banks, its cryptography security is impenetrable, transaction speeds are faster, fees are lower, and it can definitely make you a quick buck! The most well-known cryptocurrency, Bitcoin, has dramatically risen in value from a few pence to tens of thousands of pounds, making many early adopters incredibly wealthy. In addition to Bitcoin, there are now thousands of other cryptocurrencies that have joined the surge, each with unique features and practical use cases. Cryptocurrencies also enable new forms of decentralised applications, such as smart contracts and decentralised finance (DeFi). The hype surrounding cryptocurrencies has led to an eruption of investment and speculation. Crypto’s expansion is creating, redefining, and manipulating industries, changing the very way we perceive digital finance. But there must be a catch. And there is, a quick external analysis presents a multitude of possible issues for every type of stakeholder.
Here's a definition of crypto from the UK Financial Conduct Authority (FCA):
"Cryptocurrencies are a digital representation of value that can be traded and function as a medium of exchange, unit of account, or store of value. Cryptocurrencies are typically decentralised and use encryption techniques to regulate the generation of units of currency and verify the transfer of funds.”
The dark truth
While the technology behind cryptocurrencies like Bitcoin and Ethereum has the potential to revolutionise the financial world, the energy-intensive nature of the ‘proof of work’ mining process used to create and trade them poses a monumental threat to our environment. The enormous amounts of energy needed for crypto mining is a critical problem for the viability of digital currencies. Mining is the automated process of validating transactions without the intervention of trusted third parties like banks. The network behind every transaction demands the immense computational power of thousands upon thousands of machines mining 24/7.
The environmental impact of cryptocurrency mining is twofold. Firstly, it contributes to the overall consumption of energy, which has a significant carbon footprint. The energy required to mine and trade cryptocurrencies is estimated to be equal to the entire energy consumption of Argentina, a country with a population of 45 million people. Digiconomist estimates that the Bitcoin network is responsible for about 73 million tons of carbon dioxide per year, this level of energy consumption is not sustainable, especially given the urgency of addressing climate change.
Secondly, the mining process generates electronic waste (e-waste) as mining equipment becomes obsolete and is replaced by more powerful hardware. E-waste is a significant environmental hazard, as it contains toxic materials such as lead, mercury, and cadmium that can contaminate soil and water sources. Again, Digiconomist states, the Bitcoin network generates approximately 38 thousand tons of electronic waste per year, equivalent to the annual e-waste of over 690,000 UK households.
A greener approach
Calculating the carbon footprint of cryptocurrency is somewhat complicated. Although fossil fuels are the predominant energy source in most countries where cryptocurrency is mined, miners tend to seek out the most inexpensive energy sources to remain profitable. Previously China accounted for 70-75% of the world’s bitcoin mining. Having relatively cheap coal-powered electricity, the country was a rational choice for miners, who required a lot of computing power. However, China was quick to impose firm sanctions on all crypto related services and reduce the input of crypto related media content and information. A harsh, but not holistically effective approach; within 6 months miners had relocated operations to the USA and continued their operations without any sanction, with the detrimental effects on the environment following suit.
Employing a tax instead of an outright ban would largely skirt these issues. As with taxes on gasoline, tobacco, plastics, and alcohol, a cryptocurrency tax could reduce real-world harm by making consumers pay for it, forcing an adjustment in the profitability of the proof-of-work system. Even a small tax on proof-of-work currencies would reduce their damage to the planet. Imagine that you’re new to cryptocurrency and want to become a first-time investor. You’re presented with a range of currencies to choose from: bitcoin, ether, Litecoin, Monero, and others. You notice that all of them except Ether add an environmental tax to your purchase price. Which one do you buy?
Ethereum, switched from proof-of-work to proof-of-stake earlier this year, its energy consumption dropped by more than 99.9 percent overnight. Ethereum produced an estimated 35.4 million tons of carbon dioxide emissions which dropped to just 0.01 million.
On proof-of-stake blockchain, miners validating the transaction blocks have to put something at stake so others can trust them. If these validators have something at stake, they have something to lose. This collateral is enough of an incentive for them to tell the truth and maintain the integrity and security of the network. This structure provides a method that bypasses the need to solve complex puzzles requiring the excessive computing power, allowing the digital currency to boast its many positive features, without harming the environment.
The proof of stake system offers an ideal reality for the future of digital finance. This method combined with a taxation on proof-of-work based mining will drive the uptake for coins using the updated validation system.. Unfortunately, Bitcoin and other cryptocurrencies probably won’t follow suit unless forced to, because proof-of-work offers massive profits to miners—and they’re the ones with power in the system. Multiple legislative levers could be used to entice them to change, ultimately reducing the detrimental effects on our planet. it is important for the cryptocurrency industry to recognise and address these environmental concerns in order to ensure a sustainable future.