Bitcoin Mining – The Flip Side
hen the world’s first cryptocurrency – Bitcoin, was coined in 2009 by the enigmatic, possibly nonexistent Satoshi Nakamoto, the idea was to build a decentralized payment platform that would transform the way we buy and sell. According to Nakamoto’s original white paper, the goal of Bitcoin was to allow rapid, borderless transactions without the exorbitant fees and foreign exchange obstacles that exist today.
Bitcoin mining is a way of creating new currencies that involve computers solving complex mathematical algorithms or riddles. Cryptocurrencies must be mined to function since they are founded on a decentralized network. For those on the network, solving the complicated program and processing a block takes roughly 10 minutes on average.
Miners require enormous amounts of electricity because they use huge, efficient systems to mine blocks and validate transactions. Miners are also compensated for their work by receiving freshly created Bitcoins as well as transaction processing fees.
The crypto sphere is heavily reliant on fossil fuels. Cryptocurrency mining frequently employs fossil-fuel-derived energy. As the price of Bitcoin rises, so does the amount of energy used by miners to generate coins, tempting more people to join the Bitcoin network.
Bitcoins consume more than 120 Terawatt Hours (Twh) every year, according to a University of Cambridge study. According to a report published by Galaxy Digital and confirmed by the International Energy Agency (IEA), the figure was 113.89 terawatts per hour per year (TWh/year). Whereas banking systems consume 263.72TWh/year and gold mining consumes around 240.61 TWh/yr. Traditional banking systems, as well as gold mining, use almost double of energy that Bitcoin mining does. Study shows that if Bitcoin were a country, it would be among the top 30 energy users in the world. According to Digiconomist’s Bitcoin Energy Consumption Index, that is nearly enough electricity to power countries with populations in the tens of millions and a carbon footprint of 34 megatons or more.
According to a research by the International Energy Agency (IEA), the top electricity consumers on the African continent are South Africa, Zambia, Botswana, and Zimbabwe.
“Average consumption per capita in Southern Africa is the highest of all sub-regions, but this is driven primarily by very high levels in South Africa and relatively high levels in Zambia, Botswana, and Zimbabwe – all above 500 kWh per capita per year,” according to a report by the International Energy Agency on Sub-Saharan energy prospects.
It is no surprise that South Africa is included, given the country’s highly developed and industrialized economy, according to VenturesAfrica. It generates the most electricity of any African country, with over 40,000MW. Nigeria, by comparison, generates 2,500MW to 3000MW on average for a population nearly four times that of its nearest economic rival, South Africa.
Going further, intermittent power supply and unreliable network connectivity that bewildered most parts of Africa, Nigeria in particular, will be the greatest challenge for savvy developers who are looking forward to developing a cryptocurrency owned by Africa for Africans.
Also, the government of Nigeria’s ban on Bitcoin mining in Nigeria is a move that is discouraging. One would think that as a fast-growing economy in the sub-Saharan region and with the largest economy in Africa, Bitcoin would be welcomed with both arms wide open. But the reverse was the case! The reason the government gave for the ban was the lack of there involvement, control, and regulation of digital currency. What they fail to understand is that soon as the government takes full control of the digital space the way they do in the banking sector (having a central body that regulates activities), it seizes to be a cryptocurrency since it is a peer-to-peer form of exchange that need not go through a middleman (a regulator like an apex bank in the land) before getting to its final destination.
If you are following Elon Musk on Twitter, by now you are well aware of his tweet dated May 13, 2021, showing a graphic illustration of Bitcoin electricity energy consumption. He was one of the first prominent figures who called attention to the impact of Bitcoin on the environment, and now, the government has taken notice and, some countries like China are already putting plans in effect to curb the excess energy consumed by crypto mining.
Of course, Bitcoin is not the only cryptocurrency with an environmental footprint, but its high profile and inefficient transaction approval mechanism make it an easy target. Meanwhile, the blockchain technology that underpins it could be the key to a more environmentally friendly future.
Bitcoin does not appear to require a lot of electricity from a conceptual standpoint. To purchase and sell bitcoin, all you have to do is point and click or tap on your smartphone. For decades, we have had electronic networks that provide similar functions for different types of digital transactions.
But it is Bitcoin’s decentralized nature that is responsible for its massive carbon footprint. Because Bitcoin requires computers to solve increasingly complicated mathematical problems in order to validate transactions. This is the underlying premise of a “proof-of-work” system in the cryptocurrency sector, and it consumes far more energy than confirming transactions on centralized networks.
“In the case of Bitcoin, this is accomplished by having a competition between many different competitors to see how quickly they can package transactions and solve a simple mathematical problem”, explains Paul Brody, Global Blockchain Leader at EY. The quickest computer not only confirms the transaction but also receives a little incentive in the form of a Bitcoin payment for its trouble.
Bitcoin’s early stages did not necessitate the use of nation-state-sized amounts of electricity. However, it is built into the cryptocurrency’s infrastructure for the mathematics problems to get much, much harder as more people fight to answer them—and this dynamic will only get worse as more people try to buy into Bitcoin.
To address this, an increasing number of specialized computers known as rigs are entering the fray, pouring massive quantities of computing and electrical energy into the ecosystem in the contest to solve Bitcoin mathematics puzzles and win the related prize. Even if hundreds of thousands of machines compete to solve the same issue, only one can win the Bitcoin prize.
“Of course, this is wasteful in the sense that 99.99 percent of all machines that did work simply throw away the outcome because they did not win the race,” Brody explains. While this method yields a fair and secure decision, it also generates a significant amount of carbon emissions. “I really doubt (whoever established) Bitcoin foresaw such massive potential growth and, as a result, the massive levels of power we are talking about,” Brody says.
Bitcoin Mining – The Way Forward
he solution to Bitcoin’s near-continent-sized energy consumption problem does not necessitate a return to centralized systems like Visa’s network—after all, the central promise of Bitcoin is the removal of middlemen like card networks and their concentrated authority over finance. Instead, Bitcoin supporters have a variety of options.
Change to renewable energy sources.
Renewable energy currently accounts for around 39% of proof-of-work mining. So perhaps the simplest approach to a green future for Bitcoin is to just increase that figure.
Countless firms have sprung up to fill this need, all aiming to find innovative ways to make Bitcoin more environmentally friendly. Take, for example, Hong Kong-based LiquidStack, which attempts to more effectively lower the temperature of mining rigs, or Iceland-based Genesis Mining, which only employs sustainable energy sources.
These solutions, on the other hand, ignore the fact that, even if all of the energy used in the Bitcoin industrial complex were green, its proof-of-work verification technology is inherently wasteful when used on a wide scale.
Make the switch to Proof-of-Stake (PoS) systems.
According to eToro cryptocurrency market expert Simon Peters, bitcoin could evolve away from proof-of-work systems and toward “proof-of-stake” systems, which do not require the same mad dash to solve hard riddles.
Simply put, proof-of-stake requires miners to put up a tiny quantity of bitcoin in exchange for a chance to validate transactions in a lottery. The idea is that if you put up some cash as collateral, you will be less inclined to allow fraudulent transactions that devalue the currency and cost you your investment.
“It saves energy and lets each computer in a PoS to work on one problem at a time, as opposed to a PoW system, in which an array of machines are rushing to solve the same problem (therefore wasting energy”),” Peters explains.
Ethereum, the blockchain technology that underpins Ether and most NFTs, has already announced its intention to switch to a proof-of-stake mechanism. The energy usage of Ethereum-based cryptos and blockchains will be reduced by 99.5 percent.
Pre-Mining should be embraced.
Some cryptos have added pre-mining, a mechanism that functions similarly to fiat currency or stocks, to prevent the excessive computing necessary in solving mathematics problems rapidly to earn digital coins. A central authority, such as the United States Government (in the case of dollars) or a company (in the instance of stocks), creates a specific amount of an item and then carefully releases it into the economy based on what is going on in their business or the world.
Cryptocurrencies that have already been mined work in the same way.
“Several other crypto-assets, such as XRP [also known as Ripple], were created algorithmically rather than mined,” Peters explains. “This reduces the need for high-speed mining equipment that is dedicated.”
Transactions are still verified by a decentralized network of validators before being added to the currency’s blockchain record in these systems, but those involved in the transaction may be required to pay a small transaction fee to compensate the validators for their efforts, as the currency system does not always reward them. This cost is currently a tenth of a cent in the case of XRP.
It would be difficult to convert Bitcoin to a proof-of-stake or pre-mined system: To fundamentally alter the Bitcoin protocol, someone would have to persuade the majority of miners to accept the new system, which is a tall order when billions are on the line and the current system works, albeit slowly and inefficiently. The previous time a change of this size occurred, it was not widely accepted by miners, resulting in a so-called “hard fork” that established a rival cryptocurrency called Bitcoin Cash, which then hard forked into Bitcoin SV and other cryptocurrencies.
Carbon credits or fees should be implemented.
Carbon credits are government-approved permits that allow a corporation to emit a specified quantity of carbon dioxide into the atmosphere. They are frequently securitized, which means that companies who do not need to produce a lot of emissions can sell them to companies that do. This encourages companies to produce less than their allotment while also penalizing those who exceed it. In the case of a crypto mining company, this could entail buying carbon credits from another company to help offset the amount of emissions it produces, or switching to greener energy to sell its credits for a profit.
Scott Janoe, Chairman of Baker Botts’ Environmental, Safety, and Incident Response Section, says, “These are a tried-and-true technique under a variety of programs including the Clean Air Act to get to net-zero emissions for products.” He continued, “As a result, I think there will be a trend toward tying credit products to Bitcoin mining and transactions in order to mitigate those emissions.”
Consumers will also be able to pay to have their crypto emissions neutralized, according to Brody. “I see a future where you can pay a transaction processing cost and a carbon-offset fee at the same time on networks like Ethereum, just like you can when flying,” he explains.
The Blockchain’s Environmental Future
Apart from the environmental damage, according to Digiconomist, electricity expenses currently consume approximately 28% of Bitcoin mining profitability each year.
Miners, on the other hand, will not only improve their profits by producing digital currency more efficiently, but they will also raise the likelihood that a really innovative component of Bitcoin, the blockchain, will become widespread. According to Brody, incorporating blockchain technology, which is similar to a public ledger, into every aspect of economic life might help many organizations reduce their carbon footprint.
“I believe that smart contracts [like those enabled by Ethereum will allow firms to automate much of their complex payment and business process systems by automatically checking to make sure that, for example, a purchase order complies with the terms and conditions of a contract,” he says. This could allow a business to reduce the number of staff who need to go to an office to process orders, resulting in lower transportation-related carbon emissions.
Though we will not know the full scope of blockchain technology’s green applications for years, there’s already talk of using it to address major issues like helping businesses better track carbon emissions or, in a truly meta move, using blockchain-powered carbon credits to transition to a carbon-free future.