Myth: Crypto is bad for the environment

By Rana Kortam, Global Director for Public Policy at Binance.

Johannesburg, 22 Aug 2023
Crypto and blockchain have the potential to contribute to a more sustainable future.
Crypto and blockchain have the potential to contribute to a more sustainable future.

One of the main reasons people associate crypto with environmental harm is the energy-intensive nature of the mining process. The original crypto-currency, Bitcoin, as well as many other established and widely used projects, rely on the proof-of-work (POW) consensus mechanism for maintaining the distributed ledger of transactions. This method of validation involves miners using powerful computers to solve complex mathematical puzzles. The process is thought to consume a significant amount of electricity, which in turn raises concerns about its environmental impact.

However, critics often focus on the energy consumption of crypto-currencies, particularly Bitcoin, without providing full context or comparison. This selective representation can lead to the perception that crypto is inherently harmful to the environment.

A balanced perspective is crucial to understanding the scale of the environmental impact of crypto and putting it into context. One only gets to see the full picture when various consensus mechanisms and sustainability initiatives helping to reduce the industry’s footprint are considered.

Understanding the crypto energy debate: A deeper dive

It's essential to acknowledge that POW blockchains, such as the Bitcoin network, do indeed consume significant amounts of energy. However, this alone doesn't make crypto inherently bad for the environment.

Any direct comparison between the energy consumption of blockchain and another industry or activity inevitably runs into a comparing-apples-to-oranges problem. Given the uniqueness of a system like Bitcoin, which serves a variety of purposes and is truly global, there is no qualitatively and quantitatively similar sector or system for a valid direct comparison. Any analogy will be, perforce, partial.

A 2021 Galaxy Digital research report put the energy footprint of the top 100 global banks’ data centres at more than two times that of the Bitcoin network and that of "always-on" electrical devices in American households at 12.1 times the footprint of Bitcoin. Furthermore, the World Bank and International Energy Agency’s estimates of the amount of electricity lost in transmission and distribution each year are 19.4 times greater than what the Bitcoin blockchain uses over the same period.

You may notice that the critique around energy usage and environmental harm is rarely levied against traditional financial industries because they are better understood, and their existence is rarely questioned. Fundamentally, the myth we are dissecting today is based on the premise that, no matter how much energy Bitcoin and other blockchains consume, the resources they use are ultimately wasted because, purportedly, distributed ledgers and digital assets have no real value.

The latter couldn’t be further from the truth. Anyone anywhere can use Bitcoin to transact and store value. Bitcoin transactions can be settled 24 hours a day, 365 days per year. This technology is extraordinarily valuable. Yes, there is an energy cost to running the network. But there’s no such thing as a global financial system that uses no energy.

This point is aptly summarised in a paper published by the World Economic Forum’s Crypto Impact and Sustainability Accelerator (CISA): “Crypto provides economic freedom to people in developing countries and consumes less energy globally than tumble driers or domestic refrigeration.”

Advancing the use of sustainable energy

The idea that all Bitcoin mining is immediately damaging is a fallacy in and of itself. A Q2 2022 report from the Bitcoin Mining Council revealed that 59.5% of global energy used for BTC mining is derived from renewable sources, indicating a shift towards sustainability of the process. Given the broader shift towards renewable energy sources around the world, this trend is likely to accelerate in the future. Furthermore, the organisation reported a 46% year-on-year increase in mining efficiency resulting from advancements in semiconductor technology and the implementation of modern mining techniques.

These dynamics result in a decrease in the network’s emissions. There is evidence suggesting that, even as hashrate and the overall electricity consumption of the BTC network go up, emissions go down thanks to miners increasingly opting for more sustainable energy sources.

According to the U.S. Energy Information Administration, in 2022, renewable energy sources accounted for 13% of total US energy consumption and about 21.5% of total utility-scale electricity generation. These figures show that Bitcoin mining companies rely on renewable energy to a much greater extent than an average US organisation.

There are also multiple examples of crypto mining businesses working with energy producers to help solve a problem known as energy curtailments. These deliberate reductions in energy output to balance supply and demand result in surplus power going unused. Research shows that crypto mining can help prevent renewable energy curtailments and thus increase the efficiency of energy use, facilitating the transition to renewable energy along the way.

Meanwhile, one 2022 study estimated that payments made through the Bitcoin Lightning protocol are 56 times more energy-efficient than the traditional banking system, further demonstrating the potential for innovation in the crypto sector.

Consensus mechanisms and energy efficiency

Another key point to consider in relation to the “environmental” myth is that it almost always focuses on Bitcoin and other POW-based systems, highlighting how their design prescribes that energy be consumed to solve computational puzzles. But the reality is that POW isn’t the only game in town.

Blockchains rely on different consensus mechanisms to verify transactions on the blockchain. POW does require numerous machines to solve complex mathematical puzzles. However, recent years have seen a spike in the popularity of proof-of-stake (POS) solutions, which instead rely on a limited number of nodes, selected based on their stake in the network, to validate transactions. POS mechanisms are more energy-efficient, thereby significantly reducing the overall electricity consumption of crypto-currencies – which we’ve already seen is lower and greener than sceptics have it.

Ethereum, the second-largest blockchain network in the world, has undergone a switch from POW to POS in September 2022, one of the major drivers for the change being the superior energy efficiency of the latter consensus mechanism. Crypto Carbon Ratings Institute (CCRI) has examined the impact of Ethereum’s transition and found that its annualised electricity consumption went down by more than 99.9%. Accordingly, Ethereum’s carbon footprint also decreased by 99.9%.

This corresponds to a reduction in emissions from the height of the Eiffel Tower to a tennis ball, or a swimming pool versus a small lemonade pitcher. Research from the Cambridge Centre for Alternative Finance shows that Ethereum’s annual electricity usage is now equivalent to the yearly consumption of 587 air conditioners and is smaller than that of many global companies and famous buildings. For a system that has processed upwards of 400 million transactions at an average transaction time of just a few minutes, such a level of energy consumption is nothing short of remarkable.

Additionally, several newer protocols emerged, which put eco-friendliness front and centre from the very start. Such projects typically use variations of a POS model or offer innovative consensus mechanism designs.

Blockchain's role in solving sustainability challenges

Blockchain technology's role in sustainable development goes far beyond the carbon footprint of its financial services applications. A report by the Organisation for Economic Co-operation and Development (OECD), for example, recognises the immense potential of distributed ledgers to improve efficiency in various fields, including infrastructure, supply chains and manufacturing.

For instance, blockchain can be used to track and verify the origins of goods, ensuring they are produced sustainably and ethically. This level of transparency can incentivise companies to adopt more environmentally friendly practices and help consumers make informed choices.

Several blockchain startups are revolutionising the energy industry by monetising renewable energy generation, driving down energy prices and consumption, creating economic opportunities for households and encouraging greener choices.

For example, using blockchain technology to enable peer-to-peer energy trading allows consumers to sell excess solar power directly to their neighbours. This innovative approach not only promotes the use of renewable energy sources, but also decentralises the energy market, reducing reliance on large-scale power plants and inefficient energy distribution systems.

Final thoughts

Crypto and blockchain more broadly hold the potential to not only be part of, but also heavily contribute to, a more sustainable future. By fostering energy-efficient consensus mechanisms, driving innovation in renewable energy and promoting transparency and accountability across various industries, these technologies can play a vital role in addressing global sustainability challenges and helping shape a greener world.

Fact: Blockchains are becoming more energy-efficient and increasingly rely on renewable energy. Moreover, distributed ledger technology offers solutions to global sustainability challenges.