According to the latest estimates by the University of Cambridge, the cryptocurrency Bitcoin now consumes more electricity per year than all of Argentina. That’s because the creation of a bitcoin, in a process called mining, is accomplished by powerful computers that work day and night to decipher and solve complex math problems.
The energy these computers consume is unusually high. The UK police recently raided an allegedly large-scale indoor marijuana grow operation only to find that the huge amount of electricity they suspected was actually from a Bitcoin mining setup.
Thousands of similar setups, around 70% of which are currently based in China, continue to require more and more energy to mine bitcoins. Understandably, this has raised environmental concerns. Elon Musk tweeted in May 2021 that Tesla would no longer accept Bitcoins as payment for its vehicles due to its poor green credentials.
But there are thousands of other forms of cryptocurrencies, collectively known as “altcoins,” which are far greener than Bitcoin – and which investors are now turning to. Many of them are trying to use less polluting technologies to make each coin, which could ultimately herald a greener future for cryptocurrencies.
Of the thousands of “altcoins” on the market, Ethereum, Solarcoin, Cardano and Litecoin have shown great promise as greener alternatives to Bitcoin. Let’s take Litecoin as an example of how they do it.
Litecoins are very similar to Bitcoins, except that they supposedly only take a quarter of the time to produce. Where highly developed and powerful hardware with a colossal energy requirement is required to mine Bitcoins, Litecoins can be mined with standard computer hardware, which requires far less electricity to operate.
Other alternatives, like Solarcoin, aim to encourage green behavior in the real world. For every megawatt hour generated using solar technology, a solar coin is allocated, which rewards those who have invested in renewable energy.
Different cryptocurrencies also use different processes to complete transactions. Bitcoin uses what is known as a “proof-of-work” protocol to validate transactions, which requires a network of miners to compete to solve math problems (the “work”). The winner – and the one who mints a new Bitcoin – is usually the competitor with the most computing power.
While proof-of-work is considered relatively safe, making it difficult and costly to attack and destabilize, it is incredibly power hungry. The way it forces bitcoin miners to compete with an ever-growing arsenal of high-tech computers means it inevitably needs more and more electricity.
But there are alternatives to this form of mining. Ethereum, the second largest cryptocurrency in the world after Bitcoin, now uses a different protocol called “Proof-of-Stake”. This protocol is specifically designed to address environmental concerns about the proof-of-work system, and it does so by eliminating competition between miners. Without competition, there is no computing power arms race in which miners can participate.
Given the increasing environmental scrutiny that cryptocurrency is now facing, it is likely that all new altcoins will adopt the Ethereum system in place of the bitcoin. Investors will also pay attention to the green references of altcoins when deciding which cryptocurrency to convert their bitcoins into.
Credit: Behnam Norouzi / UnsplashBitcoin can be traded for any of the thousands of altcoins on the cryptocurrency market.
Still the future of finance?
Despite criticism of Bitcoin for its shocking energy inefficiency, the traditional financial system itself is far from green.
For example, in the five years since the Paris Agreement, it has been reported that 60 of the world’s largest banks have given $ 3.8 trillion (£ 2.7 trillion) to fossil fuel companies – not very environmentally friendly. One report found that 49% of financial institutions are not doing any analysis of how their portfolios are impacting the climate.
Then there is the electricity consumption of the sector. Where cryptocurrencies have the potential to run without the supervision of large financial institutions, the banking sector is built on a huge infrastructure, which of course consumes a lot of electricity.
The banks themselves use many computers and servers, as well as thousands of air-conditioned offices and fuel-guzzling vehicles. It’s difficult to estimate exactly how much energy is needed for all of these activities, but a recent report found that the banking system uses more than twice as much electricity as Bitcoin.
So while Bitcoin is rightly tarnished for its outrageous energy usage, all of our financial systems must ultimately be green and sustainable. Banks can do this by rethinking their portfolios and working towards net zero carbon emissions. However, cryptocurrencies offer a different avenue to greener funding – and the altcoins, which are focused on being environmentally sustainable, could cleanse the technology’s reputation for excessive energy consumption.
Article by Sankar Sivarajah, Head of School of Management and Professor of Technology Management and Circular Economy, University of Bradford and Kamran Mahroof, Assistant Professor, Supply Chain Analytics, University of Bradford
This article was republished by The Conversation under a Creative Commons license. Read the original article.