The carbon emissions of bitcoin are not just Elon Musk’s problem. As much as bitcoin fans hate to admit it, Satoshi’s currency was built on an inefficient mechanism and must give way to alternative protocols. Time for a greencoin to emerge from the dust?
Elon Musk was finding the bitcoin sexy and a perfect match for Tesla, until he discovered the environmental issue. It turned out bitcoin was more «diesel» than «Tesla» and clashed with his green creed. Musk’s February buzz about Tesla accepting bitcoin, which he reversed mid-May, hadn’t even boosted his company’s share price. While bitcoin gained 20% on the news, Tesla lost 33%, following its 1500% surge since 2019.
A lot has been said about Musk’s change of heart, but the environmental issue extends way beyond the Twitter skirmishes. Bitcoin mining currently consumes more energy than Greece, and a bit less than the Netherlands. Increasing the number of bitcoins by 2.4 million, to their 21 million total, will require as much electricity consumption per year as a sizeable industrialised nation.
The carbon emissions for a transaction volume of $1bn in bitcoins are higher than any other human activity, according to a Bank of America report published in March. $1bn inflows into bitcoin equal 1.2 million cars driven over the course of a year, or the consumption of 12.7 mn barrels of oil. A single bitcoin purchase at a price of $ 50’000 has a carbon footprint of 270 tons, or 60 internal combustion engine cars.
Bitcoin enthusiasts go out of their way to discard the bitcoin energy issue. «Bitcoin is Key to an Abundant, Clean Energy Future», claimed an April memo signed by fund manager Ark Invest and payment company Square. Their baseline: bitcoin miners are day-and-night buyers of renewable energy, solving the intermittency problem, and their green transition will propel green energy production. The Financial Times attacked this narrative, mentioning that the authors, Cathie Wood and Jack Dorsey, «have skin in the game», as their businesses are deeply involved in this space.
Some critical research is more refreshing. To keep mining bitcoins is a useless giant energy waste, said a March report from Dutch asset manager Farringdon Capital Management. «You don’t need extra bitcoins», says the founding partner Bram Cornelisse. The value of bitcoin doesn’t depend on how many bitcoins are mined, say the authors. «Whether there are 18.6 million (current amount) or 21 million bitcoins in total, does not matter for how much bitcoin is worth. A bitcoin can be bid up to any amount. It is a commodity, and it’s an allocation decision that will determine the price of bitcoin».
Which raises a key question: why mine 2.4 million additional bitcoins and pollute for nothing? If mining «happens for the sake of mining», they argue, «then we cannot think why this should not be immediately stopped». A number of people have argued that bitcoin mining uses a lot of renewable energy. «As far as we can tell, this is not true, but more importantly, even if 100% of bitcoin mining used renewable energy, it is still a colossal waste, as this energy could have been used for something useful currently relying on fossil fuels», write Bram Cornelisse, Dennis van Wees and Wybe Blankvoort.
To these hedge fund managers from Amsterdam, mining less means preserving the scarcity of bitcoin, and hence its value. «While most things that pollute give something in return, extra bitcoin mining gives extra pollution, but nothing in return». If bitcoin’s energy consumption is set to rise in the future, as confirming transactions is algorithmically set to become more energy-intensive, they ask: «are the benefits of bitcoin worth the environmental impact? Their conclusion : «For those who want a scarce asset and a clean environment: stop bitcoin mining!»
Stop? Bitcoinomics get in the way. They trap the system into a growing need for supercomputers. The higher the bitcoin price and number of blockchain transactions, the higher the mining rewards and incentives to add computing power. As to the question «will mining stop when 21 million bitcoins are mined», experts aren’t even sure. If miners don’t get their block reward anymore after all the coins are mined, it will get less interesting to keep all the computers protecting the blockchain.
However, as the price of bitcoin rises, the required calculation power will also rise, as will the need for supercomputers, even while the business will be less rewarding. The risk is that, if no one is willing to invest billions, the difficulty to break the system will go down. So if people are concerned about the integrity of the network, they may decide that miners need to be rewarded to keep the network safe, by giving them more bitcoins. So it is theoretically possible that we exceed 21 million bitcoins. Which also means increased pollution.
A major player in this field is China: 72% of bitcoin mining is concentrated there because of lower energy costs. Two-thirds of all electricity in China is generated by coal power. China produces the machines that do the mining and has most of the miners. Every bitcoin holder is putting a big part of his trust in the hands of Chinese miners. This profitable business is an incentive for the Chinese to keep mining and to hold to the proof-of-work system, in which miners are the ones who decide if the transaction is real. And why couldn’t the Chinese government nationalize all miners?
There is too much geographical concentration and too much pollution. Proof-of-work is a suboptimal mechanism. A major alternative is proof-of-stake, a mechanism offering better energy efficiency. In this system, there is no need for computational power. Stake owners (instead of miners) validate the transaction. But in order to switch systems for bitcoin, the Chinese miners would have to vote against their own salaries, in a way, which makes bitcoin reforms difficult. Ethereum, the rival blockchain, is moving to proof-of-stake and away from proof-of-work. «This was always the plan, says the platform, as it's a key part in the community's strategy to scale Ethereum via the ETH 2.0 upgrades».
Other promising alternatives that consume less energy are being studied, including «AT2», or Asynchronous Trustworthy Transfer. It was created three years ago by the team of Rachid Guerraoui, professor at the Swiss Federal Institute of Technology in Lausanne (EPFL): «The current system needs a lot of processing power, but it doesn’t have to be that way. Consensus is not needed to implement a decentralized asset transfer system». That’s a major discovery.
Instead of asking all nodes to validate a transaction, this mechanism checks a number of randomly selected nodes for their viewpoint. Professor Guerraoui’s team has mathematically demonstrated that this lightweight mechanism provides the same degree of security as the old one, with higher speed and less energy waste. This innovative protocol – initially financed by the European Commission – is now open source. Time for a greencoin revolution?