Cryptocurrencies and their collectible spinoff, non-fungible tokens (NFTs), have become hot commodities during the Covid-19 pandemic. But now these blockchain-based assets are catching heat for another reason: their cost to the environment.
Bitcoin and other cryptocurrencies went mainstream in 2020 and continued to show growth in the new year. On Monday, the value of the cryptocurrency market topped R28-trillion. At the time one bitcoin — the largest cryptocurrency by market capitalisation — was worth close to R850 000.
Crypto’s rise was accompanied by unprecedented interest in NFTs, digital collectables traded on a blockchain, a decentralised digital ledger on which crypto is created, distributed, traded and stored. NFTs are encrypted with a unique digital signature so, unlike a cryptocurrency, one NFT does not have the same value as another.
Last month, a digital artwork by United States-based artist Beeple sold for over R1-billion. Also in March, Cape Town gallery Worldart announced it would be the first in South Africa to go to market with an NFT artwork. Norman O’Flynn’s GIF Da bomb will be on auction until 16 April.
But this recent blockchain boom has been followed by concerns over its impact on the environment.
Why bitcoin is electricity-heavy
Recent studies have explored the environmental impact of cryptocurrencies. One widely cited study by researchers at the University of Cambridge found that the amount of electricity used by the bitcoin network in one year could power all tea kettles in the United Kingdom for 30 years. Other cryptocurrencies, like Ethereum, currently use similarly energy-heavy processes. NFTs live on blockchains, but by themselves do not use electricity.
Energy is used by cryptocurrency networks through what is called proof-of-work mining. Mining is the process of creating a block of transactions to be added to a cryptocurrency’s blockchain. The blockchain grows larger every day as new blocks of transactions are added by miners.
Solving the puzzle
Proof-of-work mining is a consensus mechanism, which is necessary when there is no central authority determining the validity of transactions. It requires miners to expend effort and capital — in the form of hardware and electricity — to solve an arbitrary mathematical puzzle to prevent anybody from gaming the system.
Mining uses a lot of electricity to run and cool the hardware. And the more machines a miner uses, the more likely they are to solve the puzzle. According to the Cambridge Bitcoin Electricity Consumption Index, the bitcoin network uses an estimated 136.84 terawatt-hours over the period of a year.
Another study by the Bank of America, said environmental, social and corporate governance-minded investors ought to take note of bitcoin’s “enormous environmental costs”. “In some ways, the rising complexity that underpins bitcoin is its biggest asset. In some others, rising complexity is the biggest flaw of the entire system,” the report reads.
The Bank of America report adds that the recent unprecedented gains by bitcoin is bad news from an environmental standpoint. According to the report, as bitcoin prices get steeper, electricity costs follow. Bitcoin’s estimated energy consumption has grown over 200% in the past two years, the report notes.
However, crypto’s actual carbon emissions require closer examination, the Cambridge study points out. According to the study, while some mining facilities disclose the energy sources used to power their machines, the exact energy mix of the majority of mining farms is unknown.
Have concerns been overstated?
“If you compare the cost of keeping the blockchain for bitcoin alive, it is just a fraction of what it costs to keep the banking system alive. And if you consider that crypto has the potential to replace banking, then you can see that people are just trying to find things to diminish its value.”
Singer pointed out that Ethereum, the second-largest cryptocurrency, is on its way to being upgraded to a more efficient system that will no longer rely on proof-of-work. Most NFTs are traded on the Ethereum blockchain.
Last week, Ethereum and ConsenSys cofounder Joe Lubin announced the launch of Palm, an Ethereum-based NFT ecosystem that is reportedly 99% more energy efficient than proof-of-work networks.
Carel de Jager of the Blockchain Academy said that what makes blockchain technology different to other industries is that it can live anywhere. This means it can tap into energy sources that would otherwise go unused.
“Normally we need to generate electricity close to the market, because electricity does not travel very well — it is not distributed very efficiently …. The great thing about bitcoin and Ethereum is that they don’t care where the electricity generated, they can consume this electricity regardless of where it is generated.”
De Jager added that the question that ought to be asked is whether the value of blockchain technology is worth the environmental impact. “Just from a theoretical standpoint, you cannot argue with someone if they do not have that same belief, because that’s where the argument ends,” he said.
“But definitely, for me, removing the barriers to conventional finance opens up so many incredible opportunities to the human population. There is no doubt in my mind that this technology advances us towards a better world.”