Amidst the constant noise surrounding cryptocurrencies, it is often difficult to pick out what really matters. However, if all goes according to plan, this month will see the energy-hungry digital sector undergo its biggest upheaval in years.
Ethereum, the world’s second-largest cryptocurrency, is expected to begin a technology shift on Tuesday that should result in a 99% drop in carbon emissions when complete.
The rapid growth of cryptocurrencies in recent years has been breathtaking. Unfortunately, this has also been their contribution to climate change, due to the massive amount of electricity consumed by computers managing the buying and selling of crypto coins.
Take the world’s largest cryptocurrency, Bitcoin, for example. At a time when the world is desperate to reduce energy consumption, Bitcoin uses more energy than mid-sized nations like Argentina every year. If the move to Ethereum succeeds, Bitcoin and other cryptocurrencies will be under immense pressure to solve this problem.
Why are cryptocurrencies so bad for the environment?
Cryptocurrencies are digital currency systems in which people make direct online payments to one another.
Unlike traditional currencies, cryptocurrencies are not managed from a single place like a central bank. Instead, they are managed by a “blockchain”: a decentralized global network of high-performance computers. These computers are called “miners”.
The Reserve Bank of Australia offers this simple explanation of how it all works (edited for brevity):
Suppose Alice wants to transfer a unit of cryptocurrency to Bob. Alice starts the transaction by sending an electronic message with her instructions to the network where all users can see the message.
The transaction sits with a group of other more recent transactions waiting to be compiled into a block (or group) of most recent transactions. The information from the block is turned into a cryptographic code, and miners compete to solve the code to add the new block of transactions to the blockchain.
Once a miner has successfully solved the code, other users of the network review the solution and agree that it is valid. The new transaction block is added to the end of the blockchain and Alice’s transaction is confirmed.
This process, used by most cryptocurrencies, is called “proof-of-work mining”. The key design feature is the use of calculations that require a lot of computer time – and huge amounts of electricity.
Bitcoin alone consumes around 150 terawatt hours of electricity annually. The production of this energy releases about 65 million tons of carbon dioxide into the atmosphere every year – about the same emissions as in Greece.
Research suggests that over the past year, Bitcoin has caused emissions responsible for about 19,000 future deaths.
The proof-of-work approach intentionally wastes energy. The data in a blockchain has no inherent meaning. Its sole purpose is to record difficult but pointless calculations that provide a basis for allocating new crypto coins.
Cryptocurrency advocates have offered a variety of excuses for the monstrous use of energy, but none stand up to scrutiny.
For example, some try to justify the cryptocurrency’s carbon footprint by saying that some miners use renewable energy. That may be true, but it can force them out of other potential energy consumers — some of whom have to rely on coal or gas power.
But now Bitcoin’s most successful rival, Ethereum, is changing course. This month, it promises to upgrade its computing technology to something far less polluting.
Read more: Ethereum: the transformation that could overtake Bitcoin
What the switch is about
Ethereum’s project involves doing away with the Proof of Work model with a new one called Proof of Stake.
In this model, crypto transactions are validated by users who deposit significant amounts of blockchain tokens (Ethereum coins in this case) as collateral. If users act dishonestly, they lose their stake.
Importantly, the vast network of supercomputers currently used to verify transactions is no longer needed, as users do the verification themselves — a relatively easy task. The abolition of computer “miners” will result in an estimated 99% drop in Ethereum’s power consumption.
Some smaller cryptocurrencies – like the Ada coin traded on the Cardano platform – use a “proof of stake”, but so far it has been limited to margins.
Over the past year, Ethereum has been running the new model on experimental blockchains. But this month the model will be integrated into the main platform.
Cryptocurrency has nowhere to hide
What does it all mean? The Ethereum experiment could fail – if, for example, some interest groups find ways to manipulate the system. But if the switch succeeds, Bitcoin and other cryptocurrencies will come under pressure to abandon or shut down the proof-of-work model.
That pressure has already begun. Tesla founder Elon Musk announced last year that his company would no longer accept Bitcoin payments for its electric cars due to the currency’s carbon footprint.
The New York state legislature passed legislation in June to ban some Bitcoin operations that use carbon-based electricity. (However, the decision requires the approval of the governor of New York and is subject to veto).
And in March of this year, the European Parliament voted on a proposal to ban the proof-of-work model. The proposal was rejected. But as Europe heads into the cooler months and grapples with an energy crisis sparked by sanctions on Russian gas supplies, energy-guzzling cryptocurrencies will remain in the line of fire.
One thing is clear: as the need to reduce global emissions grows more urgent, cryptocurrencies will have no excuses for their prodigious energy consumption.
Read more: Tesla’s U-turn on Bitcoin is a warning for cryptocurrencies that ignore climate change