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Cryptocurrencies: current state of the impact on the environment

Cryptocurrencies are a type of currency that is entirely digital: the exchange of money only takes place as a digital transaction; the peculiarity of cryptocurrencies is not the absence of a physical counterpart, but the absence of another element: banks. All the transactions aren't assessed by any bank but recorded in one enormous common script called “the ledger." The ledger exists in as many copies as the participants in the cryptosystem. Each time somebody operates a transaction, a copy of the ledger is created for every user. This system is “peer to peer” and decentralized.


 


This coding system, which updates the ledger in its multiple copies and hides the data through cryptography (this is why “crypto-currency”), requires enormous amounts of data calculations to create and elaborate the cryptography; this is what is called “mining”, which can be summarized as crunching through the transactions on a computer. People that decide to deploy their computer’s power to mining are rewarded in cryptocurrency.


 


At the moment, the regulations on cryptocurrency in the world are scarce and very differentiated by country. The cryptosystem thrives on the lack of banks and institutions ruling its operation, inside and out of its realm. Safety concerns have been raised by many countries recently, and progressive regulations are in the making.


 


One of the side effects of the cryptocurrency system is that it is gaining a lot of attention, and its impact on the environment. The environmental concerns of crypto-currencies are mainly regarding the primary cryptography method used by most cryptocurrencies (e.g. Bitcoin): the blockchain system. The blockchain system is a cryptography system that secures a type of ledger by organizing it in blocks: each transaction is depicted by a block in a common network, that reports the sender of the money, the receiver, and the amount; it has encrypted two codes: the hash, a unique identifier, and the pre-hash, so the hash of the previous block in sequence.


 


It is important to stress that the blockchain system is used not only in cryptocurrency, but also in video games, the entertainment industry, and data centers. The blockchain system might be efficient in terms of safeness of the data and costs, but at the same time, the amount of energy required to its working and the increasing complexity developed in the process of mining (the data that are processed can only increase) can have a significant impact on the global environment.


 


One of the key issues for the environmental impact of crypto is the Proof-of-work system (PoW): it is a consensus mechanism used for transaction validations that allow blockchains to operate securely. This system requires participating miners that are attracted by incentives in compensation to increase the computational power, especially since the rise in bitcoin price, mining becomes less efficient. This trend is doomed to only go upwards with time. As a result, the energy consumption increases, along with the material carbon footprint and significant generation of electronic waste, harming the global efforts to reach the climate and sustainability goals.


 


Bitcoin mining, which uses the PoW system, consumes 133.65 TWh of power every year, according to the Cambridge Bitcoin Electricity Consumption Index. If Bitcoin were a country, it would rank 27th on the world chart concerning electricity consumption. Also, the growth in energy consumption is followed by an increase in necessary mining equipment, generating significant electronic waste: Application-Specific Integrated Circuits are specialized pieces of hardware used to mine the most popular cryptocurrencies, that cannot be reused.


 


Image credits: Business Insider


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