The Environmental Impact of Cryptocurrency: An Analysis of the Energy Consumption Debate

Cryptocurrency has become a mainstream topic of people’s discussions. Everybody is talking about investing, crypto market analysis, new cryptocurrencies, etc. While most people already know what are cryptocurrencies, not everyone understands the debate around their impact on the environment. 

This article covers the topic of cryptocurrency mining, required for transaction validation. You will learn more about crypto’s impact on the environment and alternative, more sustainable ways to validate financial operations within the blockchain.

The Energy Consumption Debate

Cryptocurrency mining requires the usage of powerful computers (or mining rigs) to solve complex algorithms that validate and process financial operations due to blockchain technology. The first miner to solve the algorithm receives a reward in the form of cryptocurrency, which encourages miners to devote more computing power to the network. The more miners join the network, the more power is required. Thus, significant energy is required for cryptocurrency mining and financial operation processing. 

The need to solve these algorithms and use so much power has impacted how society views mining and cryptocurrency. Some claim cryptocurrency transaction validation harms the environment, while others believe it will offer positive changes.

Thus, let’s start with the arguments for the environmental impact of cryptocurrency:

  • Power consumption. Cryptocurrency transaction processing requires significant energy usage, leading to concerns about cryptocurrency’s environmental impact. According to some estimates, the maintenance of the Bitcoin network consumes as much energy as the entire of Argentina!
  • Waste of equipment. Cryptocurrency mining requires specialized hardware called mining rigs or powerful computers. However, it quickly becomes less valuable since newer and more advanced hardware is introduced. This leads to waste. Typically, specific parts from this electronic equipment can’t be recycled, further impacting the environment.
  • Carbon emissions. The power consumed is generated from fossil fuels, which can lead to significant carbon emissions. This has raised concerns about the role of cryptocurrencies in climate change and global warming, and organizations are considering ways of emission reduction.

All these arguments are valid, and one wouldn’t think there might be any positive aspects of cryptocurrency mining and transaction processing. However, here are a few interesting arguments that crypto offers positive changes:

  • Financial inclusion. Cryptocurrencies can potentially improve financial inclusion, especially in countries with unstable financial systems. Thus, crypto could have positive economic benefits, which outweigh the negative environmental impact of crypto transaction processing.
  • Renewable energy innovation. Since more people are mining, it increases energy consumption. However, what if it’s a benefit rather than a disadvantage? This increased need for energy might trigger innovation in renewable energy, leading to environmental improvement. 
  • Efficient use of energy. Another excellent argument for cryptocurrency mining is that, eventually, miners will find better, more effective ways of getting energy. For instance, companies may develop ways to increase mining hardware efficiency while not consuming that much power. 

Despite different views on cryptocurrency’s impact on the world, today, it’s still concerning how much energy digital transactions require.

The Real-World Impact of Cryptocurrency Energy Consumption

Power consumption for cryptocurrency is a controversial topic (as described in the previous section), with concerns about its impact on the environment and sustainability. The cryptocurrency power consumption to validate transactions is significant and has a real-world effect on several levels.

The biggest concern is the environmental impact, including non-renewable sources, such as coal and natural gas. This leads to an increase in greenhouse gas emissions, contributing to climate change and global warming. However, there is a problem that only some consider: the mining process requires a significant amount of water, leading to water scarcity in some regions.

This process also has a social impact since when someone is consuming a lot of energy, it increases demand. Thus, the prices increase, influencing social unrest. Moreover, mining has an economic impact. This process is highly competitive and requires powerful equipment. Only wealthier people can afford expensive equipment, making mining less accessible for less lucky people.

The high energy consumption also leads to people seeking ways to avoid overpaying for electricity. For instance, China became a hub for miners since the energy used to be cheaper in this country. However, it leads to the government outlawing mining entirely 

Another hub was established in Venezuela due to low energy costs. Unfortunately, the political and economic instability in the country leads to officials confiscating miners’ equipment and charging miners with electricity theft.

A less negative example is Iceland. Due to the cool climate, it’s perfect to use mining equipment. Iceland became the place for the biggest cryptocurrency mining company. A similar situation happened in Canada since its climate offers perfect mining conditions.

The Role of Regulation in Mitigating Environmental Impact

Regulation by worldwide governments can play a significant role in controlling the environmental impact of cryptocurrency mining and the energy costs of cryptocurrency transactions. Here are some ways in which regulation can help:

  • Promoting renewable power sources. Governments can encourage miners to utilize alternative and renewable energy sources by offering subsidies or tax breaks. 
  • Limiting power consumption. Worldwide, governments may set energy consumption limits for mining. For instance, they could consider creating legislation that requires miners to pay more taxes. 
  • Monitoring and enforcement. Governments can enforce laws and monitor miners to verify that they comply with environmental regulations.
  • Requiring environmental impact assessments. Governments worldwide may require mining operations to conduct environmental impact assessments before starting operations. 
  • Collaboration with the cryptocurrency industry. Countries can collaborate with industry stakeholders to create efficient practices for sustainable mining operations. 

Overall, the cryptocurrency industry’s responsibility for high energy consumption levels is undebatable. However, it’s also the responsibility of governments and global organizations to impose legislation and sanctions to control the environmental impact crypto transactions cause to the world. 

The Future of Cryptocurrency and the Environment

One of the options that cryptocurrency platforms have is switching from the Proof of Work (PoW) consensus mechanism to the Proof of Stake (PoS) algorithm. The first option requires mining rigs and powerful computers to solve complex algorithms that validate financial operations within a blockchain. 

However, the PoS consensus algorithm requires people to buy a cryptocurrency and create a stake. Thus, stakeholders validate transactions. So, the process does not require mining or energy consumption – it requires staking, which is what the method is called. This method enables cryptocurrency sustainability. 

So, the difference between these two consensus mechanisms is how much energy they consume. Thus, let’s see the energy consumption comparison of these two algorithms. 

To validate transactions and create new blocks, nodes in the network must solve complicated mathematical problems using the PoW consensus mechanism. These issues are designed to be challenging to solve, necessitating a significant amount of computer power and, thus, energy usage. The challenges become more complicated when more nodes join the network, increasing energy usage. Hence, that’s how the Bitcoin network consumed the energy necessary for Argentina. 

PoS does not necessitate nodes solving hard mathematical issues. Instead, nodes are chosen depending on how much money they have in their wallets to validate transactions and create new blocks. So, the more coins you have in a stake, the more chances you have to validate the transaction and receive a reward. Logically, this algorithm consumes significantly less energy.

Many people suggest that it’s best to switch to the PoS algorithm. Moreover, Ethereum recently switched from PoW to PoS, showing it’s possible. Still, many experts debate whether it’s a good idea, given the implications of the potential corruption of the PoS mechanism.

If one user or organization gets more than 50% of the entire coin circulation, they get the power to control the blockchain. Thus, PoS makes blockchain more susceptible to risks and attacks.

Final Thoughts

The rise of cryptocurrency brought numerous advantages, such as accessibility of financial markets and trading, faster and cheaper transactions, and decentralization. However, the cryptocurrency’s environmental impact has also become a concern. The cryptocurrency validation process requires control, regulations, and innovations; otherwise, it may harm our planet.