Fintech | April 18, 2022

Crypto’s energy consumption issues and a potential solution

The debate around whether cryptocurrency is here to stay is now part of the past. Regardless of whether or not they are into technology, everyone has heard about Bitcoin. And more and more people outside the techie bubble have started to take an interest in this technology, either as an investment or because of its innovative potential. But the impact of crypto on the environment and its high energy consumption levels are worrying issues.

Let’s start at the beginning. Cryptocurrencies use blockchains to verify transactions. These blockchains are like massive ledgers that anyone can audit. That’s one of the main benefits of this technology. Unlike banks, which have closed systems that only a few people can check, blockchains allow for truly transparent technology.

And those blockchains are powered by computers from millions of users that offer their computing power to check transactions in exchange for crypto rewards. This process by which users offer their computing power to get virtual coins is called mining.

Here’s where the issues begin. Although this technology is innovative and disruptive, these computers that are constantly “fighting” one another to check transactions consume a lot of energy, contributing to the climate crisis. According to a study published by scientific magazine Joule in 2019, “Bitcoin production is estimated to generate between 22 and 22.9 million metric tons of carbon dioxide emissions a year.” That is equal to the consumption of 2,700 million homes.

And while energy consumption is a crucial issue, we cannot ignore the fact that you need specialized hardware to mine Bitcoin. That hardware eventually pollutes the environment because most of it is not recycled.

But enough with the bad news. There seems to be a solution on the horizon: Ethereum, which has the most used blockchain on the market, will start using Proof of Stake technology to reduce the energy consumption level of transactions by 99.95%. This is an absolute game-changer.

Ethereum has always used the same consensus algorithm as Bitcoin, called Proof of Work. Now, it’s leaving it behind in favor of the new algorithm, which offers benefits in terms of consumption and processes transactions faster. It also has lower entrance requirements because less powerful hardware is needed.

Why is it more eco-friendly? With Proof of Work, users “fight” to solve transactions. And those with more processing power have a greater chance of “winning.” With Proof of Stake, users need to deposit a certain number of coins —like a security deposit— to become a “validator.” The more coins they deposit, the more chances they will be chosen by the algorithm to validate a new block. Why? Because according to this logic, those who deposit more coins will be those who are more interested in the survival of this technology.

By Axel Marazzi

Axel is a journalist who specializes in technology and writes for media such as RED/ACCIÓN, Revista Anfibia, and collaborates with the Inter-American Development Bank. He has a newsletter, Observando, and a podcast, Idea Millonaria.

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