Tesla and China’s restrictions to 'bitcoin' have brought to the foreground new ways to generate more energy-efficient cryptocurrencies.
In mid-May, Elon Musk announced on social media that Tesla would stop accepting 'bitcoin' payments until the cryptocurrency sorted out its sustainability issues. In addition, China, a country that is home to a large part 'bitcoin' mining farms, announced a sweeping ban on 'bitcoin' trading that could also have an impact on its production, which has caused some of the largest mining farms in the world to halt their activity temporarily.
These two announcements caused 'bitcoin' prices to plunge by up to 50% in mid-May compared to April figures, evidencing its high volatility. 'Bitcoin' is the world’s top cryptocurrency by market capitalization.
Fossil fuels to generate digital assets
One 'bitcoin' is generated with 'blockchain' technology by means of a mining process based on the so-called 'proof-of-work' (PoW) mechanism, a consensus mechanism that requires all involved technological units to solve increasingly complex mathematical operations. In this way, transactions are validated in a secure and decentralized way, but, as more 'bitcoins' are generated and more miners enter the scene, these operations become more complex. For this reason, mining requires increasingly powerful computers and tech resources, and this is causing demand for the energy required to power them to skyrocket.
According to the Cambridge Centre for Alternative Finance, 'bitcoin' accounts for 0.59 percent of the world’s energy consumption. In 2020 alone it went from 71 terawatt hours (Tw/h) to 128 Tw/h, a trend that can do nothing but increase: an article published in 'Nature' in April indicated that annual energy consumption of the Bitcoin blockchain in China is expected to peak in 2024 at 296 Twh and generate over 130 million metric tons of carbon emissions: an amount that exceeds the total annualized greenhouse gas emission output of the Czech Republic and Qatar.
The exceptional power requirements that mining applications demand has caused many farmers to move or set up their operations in China, where electricity is very cheap but also more polluting as the country relies heavily on fossil fuels – largely coal – for energy production.
In addition, mining operations require specialized high-performance computers that need to be subject to constant upgrades. Obsolescence periods are very short and units cannot be repurposed for home use, because they are specifically designed for cryptocurrency mining purposes. As a result, as of March 2021, it was estimated 'bitcoin'’s hardware waste footprint had reached 58,000 tons, 47 percent of which were generated in the last year alone.
Towards the optimization of energy consumption
Several options are being considered to address this worrying environmental challenge.
In 2012 , the 'proof-of-stake' (PoS) consensus mechanism was created as an to PoW. With the new mechanism computational power is no longer a determining factor to validate transactions. While in PoW all computational nodes perform at their best to solve the mathematical operations required to mine cryptocurrencies, in PoS validator nodes are chosen randomly, prioritizing those that meet a series of requirements. This method alleviates the amount of energy required to generate new cryptocurrencies.
“'Blockchain' is an emerging technology that becomes more efficient as it evolves. We have examples, such as the migration from PoW to PoS or the appearance of private 'blockchains' with efficient consensus mechanisms,” explains Francisco Maroto, leader of the Blockchain discipline at BBVA.
More and more cryptocurrencies are choosing PoS to operate. For instance, the Ethereum network, the infrastructure that supports not only 'ether' - the world’s second largest virtual currency by market value after 'bitcoin' -, but also many other 'blockchain'-based digital projects, has pledged to migrate to Ethereum 2.0 in the coming months, a new version of its 'blockchain' that will use the PoS consensus and thus slash its energy consumption by 99 percent.
Due to its very own nature, 'bitcoin' is unlikely to transition to PoS in the same way that Ethereum will. However, the announcement by Chinese authorities could signal a step change in the right direction: mining farms in this country may start looking for new locations to resume operations, regions where their mining activities draw from renewable sources and they have less impact on climate change. “Many players in the ecosystem are becoming increasingly concerned about the sustainability of their activity and are lending preference to renewable energy sources,” said Maroto.
In fact, North American miners have made a commitment to Elon Musk to develop more sustainable solutions for their activity.
Sustainability and 'blockchain'
'Blockchain' technology has enormous potential for use in sustainability-related projects. “At BBVA we are exploring the possibility of contributing to a number of energy and sustainability related initiatives that use 'blockchain', such as carbon footprint offsetting platforms,” says Francisco Maroto.
BBVA recently issued the first structured green bond using 'blockchain' technology to negotiate its terms and conditions, which simplified processes and expedited negotiation times. The proceeds will be used to finance green projects under BBVA’s Sustainable Development Goals (SDGs) Bond framework.