Cryptocurrencies are subject to what is known as the Scalability Trilemma. This means that a given crypto can only optimize for two out of the three variables below.
The more decentralized and secure a network is, the less scalable it becomes. The more secure and scalable a network is, the less decentralized it becomes. You get the idea.
What the protocol of a given cryptocurrency optimizes for is at the heart of that cryptocurrency’s use case – store of value, improve transactions efficiency, enable smart contracts, etc. – and one of the externalities of these optimization decisions tends to be the amount of energy consumption needed for the network to function properly. We would intuitively say that protocols that focus on security and decentralization tend to be more energy-dense, but let us know if you think otherwise.
Energy specifically matters in cryptocurrencies because of its underlying technology – the blockchain – which, in very simple terms, uses computing power as the one input to ensure the well-functioning of its network. Consider this:
Frequently, the more computing power one blockchain uses, the more mature the network it supports should be, meaning that more mature cryptos imply higher energy consumption (in fact, BTC and ETH account for the majority of energy consumed by crypto).
On the positive side, optimization in the code or hardware (i.e. mining equipment) might change this. Case in point:
Beyond fueling computing power, cryptocurrencies’ energy consumption also includes what is consumed by non-IT infrastructure, such as the cooling systems in order for mining equipment not to overheat.
This makes the energy consumption analysis slightly less straightforward.
Bitcoin is the most dominant cryptocurrency out there, and the majority of the computing power that supports its blockchain is located in China.
China is known to have a relatively dirty mix for energy sources, which implies that, if Bitcoin mainly relies on computing power located in China, and if that computing power uses energy sources that have a dirty (i.e. polluting) mix, then Bitcoin must have a negative environmental impact.
There are two main points that need to be made on the energy discussion before we give you the stat dropdown:
With that, the energy discussion is, really, less about numbers and statistics and more about ideology, something that we’ve become accustomed to in the world of cryptocurrency.
Here are some stats:
In our view, the most important thing to highlight about Bitcoin miners is the uniqueness of their profile as energy buyers. Quoting Square’s recent Whitepaper:
“Bitcoin miners are unique energy buyers in that they offer highly flexible and easily interruptible load, provide payout in a globally liquid cryptocurrency, and are completely location agnostic, requiring only an internet connection. These combined qualities constitute an extraordinary asset, an energy buyer of last resort that can be turned on or off at a moment’s notice anywhere in the world.”
With solar and wind energy already at a lower deployment cost than coal or natural gas, its largest headwind is no longer price, but the lack of consistency of its energy production (i.e. intermittency) – the sun isn’t always shining and the wind isn’t always blowing – which, paired with peak energy demand in the morning and the evening, creates a supply and demand power imbalance and grid bottlenecks (think demand peaks around 6pm, when there is less sun shining).
Whilst improved energy transmission and storage will eventually solve this, Bitcoin mining’s unique profile can efficiently complement renewable energy’s operations by:
This would obviously be severely impacted by the headline price of Bitcoin, which makes all of the above possible (or not). But one thing is reasonable to assume: Bitcoin mining presents a new source of flexible demand for constrained renewable energy producers across the world.
Proof of Work (PoW) consensus has been the standard blockchain algorithm of choice for the most important cryptocurrencies out there, with more than $1 trillion in market cap using that consensus algorithm in their protocol.
PoW requires significant computing resources and, thus, energy consumption in order to ensure the network’s security, which is one of the reasons why Proof of Stake consensus algorithm has been pointed to as one potential solution for the energy consumption debate (follow this link in case you need a refresh on how Proof of Work… works.)
There are more than 300 coins based on Proof of Stake consensus algorithms and more than $100 billion of market cap associated with it.
PoS’ basic idea is that letting everyone compete against each other in the mining process to validate transactions is simply wasteful. Instead of having miners compete against each other, PoS algorithms randomly (with a few caveats) select one node to approve the block (PoS doesn’t have miners, only validators), and lets that node run the computation.
These potential validators must deposit a certain number of coins in the network (similarly to a security deposit when you rent a car) before they can be considered to be selected for the validation of a block. The larger the node’s deposit, the more likely it’ll be selected as the validator.
Once the validator validates the transactions, it is rewarded with the transaction fees associated with the block. As long as these transaction fees are smaller than the number of coins staked, the network can expect the validators not to approve fraudulent transactions (or else, they would lose their deposit and incur a loss).
Ethereum, which currently uses PoW, has always had the goal of transitioning to PoS, and with it, to bring its energy consumption down by 99%.
Make no mistake: the energy consumption argument has surfaced on every crypto market cycle, and it will likely continue to be the case going forward. But we find that the crypto community is not ignoring these issues, with multiple solutions popping up every day. We have learned not to be bearish human ingenuity, and we think that this is yet another example of that.