ENVIRONMENTAL IMPACT

So how can a purely digital currency, without physical manifestation, damage the planet? Held and created digitally, cryptocurrencies such as Bitcoin are created, or “mined”, by computers solving mathematical puzzles. By solving these puzzles, miners create a verified transaction, or block, that is then stored on the blockchain, in return for a cryptocurrency payment.

These verified transactions ensure the security of the system without the need for a bank or centralised authority; they are the bedrock of all cryptocurrencies. They also require a lot of verifications, and a lot of computers working on them. 

All these computers, working around the clock to mine cryptocurrencies, are powered, of course, by electricity. The University of Cambridge, which measures Bitcoin’s electrical consumption, estimates that mining Bitcoin uses the same amount of electricity every year as the United Arab Emirates. Ethereum, the second most valuable digital currency, reportedly consumes as much electricity as Portugal.

To meet burgeoning demand, entire landscapes have been altered as warehouses are constructed and filled with thousands of specially designed mining computers, known as “rigs”. Optimal conditions for such a warehouse include cheap electricity, a good internet connection and a cold climate, to reduce the cost of ventilating the huge amounts of waste heat generated by the intensive computation.

As a result, these facilities have been built across Arctic regions as early as 2013, including in Russia, Iceland and Canada. “Is bitcoin mining the next Arctic gold rush?” asked Mia Bennett, assistant professor of Geography at the University of Hong Kong and an Arctic specialist, back in 2018.

Pictures have emerged of these eerie-looking, silent “crypto farms”, sometimes as big as airports, in the midst of the snow and ice, sheltering endless rows of heating computers working hard to create what appears to be nothing at all.

“At its heart, Bitcoin is yet another industry that is extractive,” says Bennet, describing the lack of value it adds to the Arctic and its inhabitants.

China, with its relatively cheap electricity and cold climate in its northern regions, houses the farms responsible for an estimated 65 percent of all Bitcoin mining. Over 50 percent of China’s electricity supply comes from burning coal.  

On top of this, the farms’ rigs age fast and cannot be repurposed, creating a huge amount of electronic waste. Put together, it paints a grim picture of cryptocurrency’s heavy environmental toll.

Related: Should You Invest in Bitcoin and Cryptocurrency?

GREEN SHOOTS

There are some signs, however, that the situation might not be as grim as it appears.

“If you think Bitcoin is dirty, you haven't understood how environmentally unfriendly gold mining is,” says investor Mironenko.

In 2017, climate journalist Eric Holthaus predicted that Bitcoin would use as much energy as the rest of the world combined within three years. Currently, Bitcoin mining represents only 0.5 percent of the world’s electricity consumption.

Crypto proponents also argue that the technology relies heavily on renewable energy, in particular hydroelectricity. Indeed, some of the world’s biggest mining farms, from Sichuan to Siberia, are located near major hydroelectricity plants.

Innovative solutions are also emerging in various forms. Some companies, such as Upstreamdata, are using natural gas, an unused waste product of oil drilling, to power rigs, locating farms close to remote oil fields. Others, such as Carbonbase, a Hong Kong-based consultancy that helps companies measure and offset their carbon footprint, are using blockchain technology to finance environmental projects worldwide.

THE UPCOMING ETHEREUM REVOLUTION

These solutions contribute to reducing the carbon footprint of cryptocurrencies, but do nothing to reduce the amount of power they need to consume. To do that, you need to fundamentally change the way crypto works. 

Ethereum, the second most valuable cryptocurrency after Bitcoin, is about to do just that by switching from “proof-of-work” (PoW), the method by which blockchain is secured and verified, with a new protocol, “proof-of stake” (PoS).  Delayed many times, the switch could now happen as early as the end of the year.

Related: Amazon May Be Launching Its Own Cryptocurrency

The technicalities are complex, but in essence the switch moves Ethereum away from a system where one is rewarded for verifying transactions to another where one is rewarded for owning cryptocurrency. The implications for the industry’s electricity consumption are massive.

While the existing PoW system incentivises people to buy more rigs and use more energy, the upcoming PoS protocol could achieve the same with a simple laptop. “They claim [it will result in] 99 percent more efficiency, who knows? But anything more efficient than now is a good idea,” says Mironenko.

Luis Buenventura, Gen.T honouree and co-founder of Bloom Solutions, a cryptocurrency exchange platform, is optimistic about the possibility of a switch. “The narrative is against PoW at the moment,” he says. 

Buenaventura says that if Ethereum’s switch to PoS proves it to be as scalable and secure as PoW, other digital currencies will follow. “[If that’s the case], the market cap of Ethereum will get closer to that of Bitcoin” he adds, predicting a bright future for Ethereum.

Investors have noticed too. Even the traditionally risk-averse institutional players, such as the European Investment Bank (EIB), which recently issued its first-ever digital bond using the Ethereum blockchain. Mironenko recently added an Ethereum Exchange Trade Fund (ETF) to his firm’s managed portfolios.

Will Bitcoin, which has so far ruled out changing its blockchain protocol, go down as a result? Buenaventura doesn’t think so. “Ethereum and Bitcoin will live alongside each other. Bitcoin is the purer of them, the more decentralized. Ethereum has more of the crazy ideas, there is more possible there,” he says.

Ethereum’s proof-of-stake experiment is potentially a major milestone on the path to significantly reducing the environmental impact of cryptocurrencies. But will it work on a large scale? Will it be as secure as proof-of-work? “Those questions cannot be answered theoretically,” says Buenaventura. “We will only see after it is launched.” 

See more honourees from the Finance & Venture Capital category of the Gen.T List 2020