The enormous environmental cost of crypto mining

Money is mysterious. Despite his best efforts, economists find him even more confusing than civilians. Is it a debt or a contract? Is it a mutual fantasy or a show of desire? Does it represent work or goods, or something else entirely? Nobody knows. Almost anything can act as currency, and different cultures have used meteorites, live cows, salt, iron ingots, and bat hair with success. When, in 1986, the economist Hyman Minsky said “everyone can create money; the problem is getting it accepted”, was an intuition that had already been tested for millennia.

Perhaps the most cumbersome form of money ever used comes from the small islands of Yap in Micronesia. For hundreds of years, the Yapen people have used huge round stones called Rai as currency, and are still used for some transactions today. The limestone used came from the neighboring island of Palau and the return journey, with a stone-laden canoe, was treacherous and sometimes fatal. Rai they were too large to move easily once on land, so their ownership was recorded through an oral record of transactions. This unique tradition has become a favorite pre-digital analogy for how Bitcoin works.

This “original bitcoin” label has its limits: Rai they are part of a complex system of ritual exchanges and were never the sole currency of Yap, but it remains illuminating. Rai they were very difficult to extract, which ensured that they had a scarcity value. After a certain point, no more were made, and their use and sharing was recorded in a mutually agreed distributed ledger. Substitute computers for the canoes and a string of alphanumeric characters for both the stone and the ledger, and we have a working model of what bitcoin is and what it’s supposed to do.

This mining process that creates bitcoin is a computerized “proof-of-work” process, and has become one of the most bitterly contentious elements of the cryptocurrency controversy. Instead of hard work, the energy used to mine bitcoins and other cryptocurrencies comes from electricity, and most of that electricity still comes from fossil fuels. At the dawn of the bitcoin era, it was possible to run proof-of-work processes with an ordinary laptop. As bitcoins have become more rare and valuable, this job now requires specialized bitcoin mines: vast racks of purpose-built, power-hungry supercomputers to process algorithms.

These mines are concentrated in places like Texas, Kazakhstan, and Iceland, but can be found where energy is cheap or regulations are lax.

Cumulatively, the known cryptomines in the world consume as much energy as a small country. Exactly which small country is up for debate: Different estimates have cited Jordan, the Netherlands, New Zealand, Switzerland, or Argentina.

“There has been a huge waste of resources consumed by cryptocurrency mining,” says Dr. Hai Dong, deputy director and co-founder of the CloudTech-RMIT Joint Green Cryptocurrency Research Laboratory, also called GreenCryptoLab. “Bitcoin’s total annualized carbon footprint is 64.44 million tons, equivalent to the carbon footprint of Serbia and Montenegro.” Annually, bitcoin alone consumes about 0.59 percent of the world’s electricity production and leaves behind as much e-waste as Luxembourg.

These estimates are hampered by secrecy. “It’s almost impossible to find a single company that publishes an annual report that says, ‘We consume 100 terawatt hours of electricity,’” says writer and science journalist Ketan Joshi. While it is common in other industries such as telecommunications to report power usage, it is almost unknown in crypto. “Companies refuse to say exactly how much energy they use, but it has to be pretty substantial,” says Joshi. Illegal or semi-legal mining further clouds the picture. “There are huge gaps in a lot of the data. It is a parsimonious explanation to say that the reason we have all these funny numbers is that there is a lot of secret mining going on.”

Crypto mining also contributes to the instability and increased complexity of managing large energy networks. In November 2021, Kyrgyzstan shut down almost 2,500 illegal crypto mines, and seven months later, authorities in Texas asked crypto miners to voluntarily close their operations. Almost everyone complied with this effort to help maintain supplies during a heat wave. first of all in what financial times called the “moral case against cryptocurrencies” is carbon emissions. As the world tries to avoid two degrees of warming, spending the climate budget on imaginary digital money seems not only socially wasteful, but also environmentally irresponsible, even suicidal.

US Treasury Secretary Janet Yellen singled out bitcoin as “an extremely inefficient way to transact.” Even cryptocurrency boosters like Elon Musk have been critical: in one tweet, he “suspended bitcoin vehicle purchases” at Tesla due to concerns about “rapidly increasing use of fossil fuels for bitcoin mining.” Musk makes frequent, sometimes contradictory statements about crypto, especially dogecoin (he has been called “The Dogefather”). These quirks can cause the value of the coins he mentions to skyrocket or crash.

More weather alternatives to bitcoin have been designed. The token’s main competitor, Ethereum, uses a “proof of state” model that consumes much less power, in part for environmental reasons. Renewable energy-powered bitcoin mining is another emerging offshoot of the so-called “green cryptocurrency” movement.

The green crypto also has a strong Australian contingent. On the outskirts of Byron Bay, Mawson Inc is planning one of the world’s largest solar-powered bitcoin mines. In Western Australia, Powerledger, a company co-founded by Dr. Jemma Green, uses blockchain technology to certify the provenance of renewable energy. Two brothers from the north shore of Sydney, Dan and Will Roberts, are the co-founders and co-CEOs of Iris Energy, one of the most valuable green crypto companies in the world. After a brief period of trading in the 2010s, they had dismissed bitcoin as “meaningless, magical internet money”, before making a comeback in earnest.

Dan Roberts believes that bitcoin is sometimes used as an environmental scapegoat. “Bitcoin only uses energy because the market values ​​that application of energy,” he says. “It seems you don’t get the same criticism from other industries. We choose to play Xbox and watch Netflix, instead of playing board games and reading books. Fireworks, holiday lights – there are many discretionary uses of energy. I think that is something that is lost.” Jemma Green agrees. “The energy consumption of traditional financial services (banking, gold mining, and cash manufacturing) should receive the same attention as the energy consumption of blockchain.”

Jemma Green believes that cryptocurrencies may, in fact, lead to more energy efficient alternatives to traditional financial transaction systems in the future. In particular, she believes that the blockchain technology behind bitcoin and other crypto tokens will have strong environmental benefits. “Blockchain energy consumption should not be singled out, but should be viewed in the context of the industries it will support, augment, or replace,” she says. “Blockchains are becoming dramatically more energy efficient, on par with cloud computing. They can support the development of energy tracking in general and support renewable energy integration more specifically.” Iris Energy has pioneered this type of integration, using crypto mining as a “demand-side battery” that helps absorb power surges from renewables.

For skeptics, the environmental credentials of cryptocurrencies are another in a long list of broken promises.

“There is a common idea that crypto mining inherently incentivizes renewable energy,” says Ketan Joshi. “And that’s just not true. It inherently wants to demand as much electricity as possible. Bitcoin mining is causing a big problem and then offering a slightly reduced version of that problem.” In the near future there will be enough real-world examples to end the debate. In the final days of the Morrison administration, a Senate investigation into crypto recommended a 10 percent tax break for crypto miners using renewable energy, a measure that is likely to stick. We’ll find out soon, and we’ll find out here as the market comes under closer scrutiny from politicians and regulators.

This is the third part of a four-part series.

Read the first part: How the cryptocurrency market started.

Read the second part: The dark side of the cryptocurrency market.

Next week: The future of money.

This article was first published in the print edition of The Saturday Paper on August 6, 2022 as “Planet crypto”.

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