Is cryptocurrency energy usage bad for the environment?

The answer you get to this question typically depends on whether the person you are asking is invested in digital assets or not. It’s a simple question with a not-so-simple answer, and we’ve seen a ton of misguided information from both crypto supporters and opponents on this topic over the past few years.

Specifically, we will examine:

The energy use of different types of blockchains
The sourcing & environmental impact of this energy
The utility derived from this energy use for users
Policy recommendations for regulators

This article will be written for a relative beginner to blockchain and Bitcoin, making no assumptions about prior knowledge. As such we will simplify some concepts in this post, but will always provide links to deeper reading. Even though we are a blockchain-based organization, we hope to take a fair look at the issue and not shy away from some of the current environmental problems associated with cryptocurrency mining.

TL;DR

Only Proof-of-Work blockchains like Bitcoin use large amounts of energy; the majority of cryptocurrencies use a fraction of this and are not harmful to the environment. This energy use is essential to the security of the network.
The mix of energy used (renewable vs nonrenewable) is critical when estimating the environmental impact.
Bitcoin scaling solutions will help reduce the energy cost per transaction and bring performance in-line with traditional finance alternatives.
Incentivizing renewable energy use for crypto mining and disincentivizing coal/gas use is likely to be the most effective regulatory policy for reducing emissions.
Miners want to work within regulations. Cracking down on PoW mining in the U.S. will only send miners abroad and, ultimately, do more harm than good.

Jump to a Section:

Why do some blockchains use a lot of energy?
How much energy does Bitcoin use?
Cryptocurrency mining and renewable energy
Bitcoin energy use in the United States
Bitcoin’s utility and scaling solutions
How to regulate cryptocurrency carbon emissions
Resources

Let’s get to it.

Why do some blockchains use a lot of energy?

It is important to first understand that not all blockchains are equal when it comes to energy use, and the amount of energy used is largely determined by the blockchain’s consensus mechanism. The consensus mechanism is the algorithm used by a blockchain to maintain an agreement of state across the network, which is an ongoing list of every transaction that has ever occurred on the network.

There are many types of consensus mechanisms, but we will focus on the two most popular ones: Proof-of-Work and Proof-of-Stake.

Proof-of-Work (PoW)

Proof-of-Work is the consensus mechanism used by Bitcoin and other early cryptocurrencies. It requires network validators to compete to solve a mathematical puzzle (called a hash); the first validator to find a correct hash will then broadcast that solution to the rest of the network. The other validators in the network verify the solution, and a new block is added to the blockchain containing user transactions that were submitted prior to the hash being solved. The validator that found the correct answer is then given a reward in BTC. This process is known as mining and is essential to the operation and security of the blockchain.

Trust is implicitly created across the network because any validator on the blockchain (including you) can double-check the solution and all transactions included in a given block. If any user tries to fraudulently alter any historical transaction after the fact, that block’s hash will no longer verify and network validators will reject the fraudulent transaction attempt.

In this case, security is created within the network through the energy required to solve these hashing puzzles. Bitcoin is secure because of the tremendous amount of energy that would be required to override the other network validators and create fraudulent transactions as described above.

List of all Proof of Work Cryptocurrencies (sorted by market capitalization)

Proof-of-Stake (PoS)

Proof-of-stake is a newer consensus mechanism that uses less than 1% of the energy required in Proof-of-Work. Instead of securing the network with a computationally expensive hashing process, in Proof-of-Stake users must ‘stake’ a portion of their own funds to become a network validator. If a validator records a fraudulent transaction or invalid block, their staked funds can be taken. This gives validators an economic incentive to do the right thing for the network and creates a level of security on par with Proof-of-Work.

It’s worth noting that, while the process is complicated, Proof-of-Work blockchains can make the switch to Proof-of-Stake. The most notable example is Ethereum (the #2 cryptocurrency by market cap), which began with Proof-of-Work and is now making the final transition to a Proof-of-Stake mechanism sometime later this year. Dogecoin is another early PoW coin that is planning to transition to PoS, citing energy concerns as the main reason for doing so.

Bitcoin Energy Use & Environmental Impact

Much of the rest of this article is going to discuss Proof-of-Work cryptocurrencies since Proof-of-Stake and other consensus mechanisms do not pose serious energy use concerns. Specifically, we will focus on Bitcoin since it is still the largest cryptocurrency by market cap, and as such its energy use accounts for the majority of all energy used by cryptocurrency.

How much energy does BTC use?

As of the time of writing, Bitcoin uses about 135 TWh of energy per year – roughly the same amount as a mid-sized European country. This actual number fluctuates greatly with the price of BTC itself, as mining becomes profitable/unprofitable vs local energy costs, but it’s somewhere around 0.5% of all energy consumed worldwide.

https://www.visualcapitalist.com/visualizing-the-power-consumption-of-bitcoin-mining/

There’s no denying it – that’s a lot of energy, particularly at a time where large-scale energy use of any kind has come under scrutiny due to global warming concerns. In order to assess whether this tremendous energy expenditure is useful or not, there are two important questions that must be answered:

What is the energy mix being used? (ie is the energy coming from predominantly renewable or nonrenewable sources?)
What kind of utility is gained from this energy use?

Not all energy is sourced equally

Network energy usage is only half of the equation when determining the environmental impact of cryptocurrencies – we also need to know how “green” the energy consumed is in order to estimate the total impact on the environment.

In terms of carbon emissions, the simplest way of thinking about it is:

Total emissions = TWh consumed * average CO2 emissions per TWh

Consider the following two hypothetical scenarios:

50 TWh annual expenditure, powered mostly by coal and gas
250 TWh annual expenditure, powered mostly by solar, wind, and hydro

Even though scenario B uses five times the energy of scenario A, scenario B will have fewer carbon emissions due to the cleaner energy blend.

The state of BTC and renewable energy

This is all fine and good for a hypothetical scenario – limitless access to clean energy makes for many wonderful hypotheticals. So let’s take a look at the current state of clean energy in Bitcoin mining around the world.

According to the 3rd Global Cryptoasset Benchmarking Study, 39% of the total energy consumption of the bitcoin network comes from renewable sources.

Keep in mind the study was published in late 2020, before China’s Bitcoin mining ban in June 2021. At the time, over 50% of all Bitcoin mining operators were located in China due to the relatively cheap blend of hydroelectric and coal power. In June 2021, China cracked down on all cryptocurrency mining specifically citing the environmental concerns and helping China meet its carbon goals in the coming decade.

Bitcoin miners in China had to shut down overnight and relocate. Here’s a chart showing the relative blend of Bitcoin’s energy expenditure before and since China’s ban:

Contrary to expectations, the energy blend has moved away from renewables and more towards coal and natural gas. What happened?

Lots of Bitcoin mining in China was located in Yunnan and Sichuan provinces, where there is also a large amount of seasonal hydroelectric power. During the wet season, large-scale bitcoin mining operations could use this highly available power with a lessened need for coal. Of course, this is only true for several months out of the year.

“Hydro is the most well-known example of this. In the wet season in Sichuan and Yunnan, enormous quantities of renewable hydro energy are wasted every year. In these areas, production capacity massively outpaces local demand, and battery technology is far from advanced enough to make it worthwhile to store and transport energy from these rural regions into the urban centers that need it. These regions most likely represent the single largest stranded energy resource on the planet, and as such it’s no coincidence that these provinces are the heartlands of mining in China, responsible for almost 10% of global Bitcoin mining in the dry season and 50% in the wet season.”
https://hbr.org/2021/05/how-much-energy-does-bitcoin-actually-consume

When the ban came, many of these miners moved to Khazakstan, the United States, and Canada where renewable energy sources contributed less than China’s hydroelectric power had.

Here’s a chart of Bitcoin’s total hash rate (correlated with energy use) per country over time showing the winners after China’s mining ban:

One big caveat on all this: the data presented is the best-educated estimate by the CCAF team, who regularly polls miners for their input. It should be noted that this data is still a rough estimate, as they do not have data from every mining pool.

For live metrics about global Bitcoin mining see https://ccaf.io/cbeci/mining_map

Bitcoin Energy Use in the United States

The United States is now the leader in Bitcoin mining globally, accounting for almost 1/3 of the global hashrate. Here’s a breakdown of hashrate by U.S. state:

Many of the states in that chart have a relatively high concentration of renewables. Georgia, Texas, California, and North Carolina all have ample nuclear and renewable power sources for miners. States with large renewable sources need something to do with that energy during times of excess. Directing excess grid energy to Bitcoin mining is an excellent way to both buffer the grid excess and generate revenues for the state.

One exception in the chart above is Kentucky. Kentucky is the least clean state with a significant portion of the total BTC hash rate, with only 7% of the state’s energy coming from renewables, mostly in the form of hydropower. The reason is that the state recently passed a law that exempts miners from paying sales tax on electricity used for mining operations, which has added significant demand regardless of the energy source (in this case, mostly coal).

This highlights that miners are now seeking states that give regulatory clarity for future operations, in addition to consideration of energy prices. States like Washington and New York have good sources of renewable energy, but an uncertain regulatory atmosphere that is preventing miners from expanding operations.

“All cryptocurrency companies have a permanent hold on starting businesses in New York due to the political and regulatory ambiguity. If the bill were to pass, New York would become a permanent afterthought for the industry”
https://www.coindesk.com/policy/2022/05/19/new-york-bitcoin-miners-start-to-give-up-on-state-amid-regulatory-uncertainty/

Cryptocurrency mining is showing no signs of slowing down in the US. One of the strongest criticisms of the sector comes from those who believe it is destroying the environment due to this large energy use. And, as long as the energy mix used to mine cryptocurrencies is mostly gas/coal, they’re largely right.

Because of this, we urge lawmakers to consider incentivizing renewable energy use for cryptocurrency mining and to open a dialogue with miners to find ways to encourage renewable energy use.

The Utility of Bitcoin

Or, what do you actually get for all that energy use?

As of today, not that much. As of today.

Bitcoin critics are quick to point out that Bitcoin is slow; currently it can handle only a few transactions per second, which means each transaction costs a lot of energy given how much the network takes to operate. This pales compared to other traditional alternatives like Visa:

https://digiconomist.net/bitcoin-energy-consumption

If you look at the energy cost per transaction of these various alternatives, Bitcoin is even less energy-efficient than mining physical gold by an order of magnitude:

So again, by most metrics Bitcoin (and Proof-of-Work cryptocurrencies) look pretty bad, at present. However, most users drawn to cryptocurrency have a strong vision for the future.

Scaling Bitcoin

It is important to note that most of the energy costs associated with Proof-of-Work are due to the mining process – sending transactions and otherwise using the network requires very little energy. So, if you can increase Bitcoin’s transaction capabilities by several orders of magnitude, the average cost per transaction will fall in line with other traditional finance alternatives.

Bitcoin specifically has multiple scaling solutions that have been proposed over the years, although none currently have widespread use or adoption. Most notably, layer-2 solutions like the Lightning Network would allow for nearly instant and feeless transactions. There are also those who believe that Bitcoin should follow in the footsteps of other major PoW cryptos and begin transitioning to PoS in order to reduce environmental impact long-term.

How to regulate cryptocurrency carbon emissions

At this point, we hope it is clear that:

Only proof-of-work cryptocurrencies require large-scale energy use. The majority of cryptocurrencies use a fraction of this energy.
The energy mix used by miners is far more important than the amount of energy used.
Cryptocurrency mining can help balance excess grid energy that would otherwise be wasted, however, these mining operations will still consume energy when renewables are not being produced.
Miners highly value regulatory compliance for the safety of their operations. They also bring in significant revenue to regions that offer such compliance.
Cryptocurrency is barely a decade old, and many solutions are being researched and implemented to scale this technology for better efficiency.

While cryptocurrency mining is likely to always contribute to some carbon emissions, we believe the best course of action is for governments to financially incentivize miners to make use of local renewable energy grids, and to disincentivize nonrenewable sources.

Bitcoin mining is inherently competitive, as mentioned above. If a region with large renewable resources like California worked with miners to make use of excess renewable energy, this would naturally draw miners away from less clean sources of energy. In this specific example, California lost an estimated $700 million in revenue in 2021 due to unused renewable energy.

This recommendation is consistent with the findings of a study that evaluated the results of various policy recommendations (market access, site management, and carbon taxation) on reducing cryptocurrency mining emissions.

“Through scenario analysis, we show that moving away from the current punitive carbon tax policy consensus to a site regulation (SR) policy which induces changes in the energy consumption structure of the mining activities is more effective in limiting the total amount of carbon emission of Bitcoin blockchain operation”
https://www.nature.com/articles/s41467-021-22256-3

Given the future potential of this nascent industry, we believe harsh crackdowns similar to those seen in China would only hamper innovation and drive thought leaders in the space away from the US. Furthermore, proper regulation could drastically reduce total global cryptocurrency emissions while also bringing in significant revenue for local governments.

If legislators do decide to regulate cryptocurrency on the basis of reducing environmental impact, it is critical that they keep in mind that only a small subset of cryptocurrencies have meaningful carbon emissions, and that blanket judgment not be made about the entire industry.

Resources

These are some of the leading resources on both sides of the cryptocurrency energy use debate and were essential to drafting this article. They are all worth your time if you’re serious in understanding this issue with all its nuance.