The Environmental Debate on Crypto

Bitcoin, Mining, and NFTs

There is much to be said about the environmental impact of cryptocurrencies. Bitcoin specifically gets the brunt of the critique. But with NFTs making their way to the forefront of the cultural zeitgeist1, there are those who question the energy efficiency of Digital Art. Make no mistake, the environmental debate on Bitcoin and NFTs is multifaceted. If you’re not well versed in how Bitcoin works in the first place, the details can get confusing. My aim with this letter to is to break it all down, present both sides of the arguments, and leave you with the ability to decide for yourself where you stand on the matter.

TL;DR

  • Bitcoin and its Proof of Work algorithm is a complex system of incentives and rewards that may result in greener energy practices

  • All Proof of Work based cryptocurrencies spend a massive amount of electricity

  • It doesn’t make sense to measure the carbon footprint of transactions, addresses, or NFTs

Stating my Biases

In the interest of presenting the most balanced point of view that I can, I will state my biases in this conversation up front.

I am a Bitcoin Holder, and Believer

I obviously have a massive bias in favour of Bitcoin. However, I don’t believe that my current investments in Bitcoin alter my stance on the environmental impact of Bitcoin. I used to be against Bitcoin because of how much energy the network takes to run. This was before I looked into the various data points that make up the argument. Nonetheless it is important that you know that I am a Bitcoin believer, and holder. I have an interest in seeing the network succeed, and others adopt it.

I am Pro-Environment

I have been a supporter of environmental movements for as long as I can remember. I shop at zero-waste stores when I can, bring cloth bags to the grocery store, bring mugs to cafes; I recycle and compost everything, and turn off the lights when I leave the room. To be clear, I am no David Suzuki, and I still have practices that are not friendly to the environment. I drive a car almost everyday and I fly when I am travelling. What I am saying, is that I am aware of the environment, and I am making a consistent effort to improve my carbon footprint. I have a bias towards things that are environmentally friendly, and against inefficient systems. I do believe that one of the largest threats to the future of humanity is how we are treating our environment.

NFTs and Energy

There is an onslaught of environmental concerns around NFTs. The aim of this letter is to break down the technology, so you can understand what the energy on these blockchain networks are actually being used for. At no point in this article will I refute that the networks don’t use massive amounts of energy. They do. Instead, the discussion will be around providing context to the energy use, and the various points of view one may have around it.

You can measure the CO2 footprint of any Ethereum address (or NFT) by using this website [ carbon.fyi ]. The problem with this analysis is the same problem as we outline below. Transactions on the network do not directly consume energy. Ethereum uses Proof of Work, just like Bitcoin. The processing of transactions is a side-effect of Proof of Work, rather than the purpose. Ethereum would use the same amount of energy if there were 0 transactions moving through the network, or 0 NFTs being created.

Comparing the amount of energy a single Ethereum address, transaction, or NFT uses is like comparing the amount of energy you personally used while on a flight. We know that the individuals on the flight are partially responsible for the fuel, but at the same time, the flight would take place regardless of whether or not you’re sitting on the flight. We can therefore say that it is important to have each block of Ethereum filled with transactions. The more people on the flight, the better we’ve used the fuel for the flight. The more transactions in a block, the better we’ve used the available space within the block. The block was going to be produced regardless of whether or not your transactions were in the block.

Check out my earlier letter, or podcast for an in depth analysis on NFTs

What is Mining

The crux of the argument against Bitcoin comes from the Bitcoin mining process. It is technically referred to as “Proof of Work”2. I will be using Mining and Proof of Work somewhat interchangeably throughout this letter. In order to understand the argument behind the inefficiency of Bitcoin, we must all learn how, and why Bitcoin works the way it does.

Mining is the process through which blocks get added to the blockchain

Bitcoin Blockchain - The Chronological Record of ALL transactions that have taken place on the Bitcoin Network

The Bitcoin Block Reward

We’ve all heard of people that have gotten insanely rich from mining Bitcoin 10 years ago. Chances are, they got ahold of a large number of Bitcoin by mining it. This simply means that they downloaded a program, and ran it long enough to mine a block. When your computer mines a block, the network rewards you with Bitcoin. In 2009, the block reward was 50 Bitcoin. The Bitcoin network publishes a block roughly every 10 minutes. Approximately every 4 years (every 210,000 blocks) the network cuts the block reward in half. The result is that Bitcoin is a “deflationary” currency.

Block Rewards:

  • 50 Bitcoin — 2009 - 2012

  • 25 Bitcoin — 2012 - 2016

  • 12.5 Bitcoin — 2016 - 2020

  • 6.25 Bitcoin — 2020 - Present

The Bitcoin Block Reward is the mechanism through which new Bitcoin enter circulation. On January 3rd 2009, there were 0 Bitcoin in circulation. Ever since blocks started to be mined, there has been more and more Bitcoin in circulation. Due to the decreasing block reward, there is a limit to the number of Bitcoin can ever exist. Eventually, the block reward will become so small, that it is smaller than the smallest unit of Bitcoin (1 Satoshi OR .00000001 Bitcoin). At that point, there will be 21 million Bitcoin in circulation, and there will be no more reward for mining blocks. This won’t take place until around the year 2140.

Mining is Problem Solving

The Bitcoin Block Reward is given to the computer that mines the block. But how is a block mined?

Blocks are mined through an abstract process of trial an error.

Every computer participating in the mining process is racing at guessing the answer to a math (cryptography) problem generated by the network. There is no straightforward way to solve this math problem, other than through trial and error. This actually makes every single participant of the network have the same chance of solving the problem as the next. The only way to increase your chance of solving the problem, is by adding more computers to the network. This is the reason that more and more computers are consistently being added to the network. This is also the reason why the Bitcoin Network continues to use more and more electricity as time goes on.

Lastly, this race is winner takes all in the sense that once the answer is known, the race starts again.

The Block Reward gives miners a financial incentive to spend electricity running computers that could reward them with Bitcoin.

The two main critiques on the efficiency of Bitcoin are the trial and error and winner takes all aspects of its mining process. It is an inefficient process because only a single computer within a 10 minute period is rewarded for spending the electricity to create a block and receive the reward (winner takes all). Furthermore, whatever electricity was spent by other computers seeking the answer to the problem is wasted, as they must start again from scratch to find the answer to the next block (trial and error).

What is the Point of Mining?

There are two main reasons why mining is the de-facto way of producing blocks on the Bitcoin Blockchain.

  1. The first reason is that mining “secures the network”. This is abstract if you don’t immediately understand how guessing random answers to a difficult math problem secures anything. [ More on this below ]

  2. The second reason is that mining regulates the Bitcoin supply schedule. Mining is the process that keeps the Bitcoin Supply on Track to produce 21 million coins by the year 2140.

How Does Mining Secure the Network?

The network is secured by mining because there is no way to add a block to the blockchain other than proving that you solved that tough math problem. Blocks on the blockchain are tantamount3 to truth. Blocks tell everyone where the Bitcoin was at any given point and time in the history of Bitcoin. When a miner produces a block, other miners on the network check that miners work. As long as no transactions within that block are malicious, the rest of the network will accept the block, and the process will continue.

Abstract Example of Accountants within a Business

An abstract example is a group of 100,000 accountants all doing the books for a single business. (Accountants are miners, the business is the Bitcoin Network). The business has hired 100,000 accountants to process every single transaction for the business to distribute trust required to validate transactions being recorded. So each accountant must record each and every transaction, and show their work. Once every 10 minutes, the accountants must agree on which transactions took place in the previous 10 minutes. In this example, the business can have near 100% confidence that the state of their books is pristine, and no malicious or fraudulent transactions have been added to the businesses ledger.

The Energy Required by the Bitcoin Network

How much energy Bitcoin consumes is an ever-changing statistic. In general that number is rising. The general statistic goes like this.

Bitcoin uses more energy than “Country X”

In the case of this BBC article4, it is Argentina, and the amount of energy Bitcoin consumes in a year is 121.36 Terra Watt Hours (TwH). To put that in perspective, the airline industry used 390 TwH in 20185. While actuals numbers and reports of energy consumption may vary, there is no point in disputing the fact that the Bitcoin Network consumes massive amounts of energy.


The Case for Bitcoin

Now that we’ve properly laid out the underlying facts of the matter, we are free to dive into the case for and against Bitcoin. It is true that Bitcoin consumes massive amounts of energy. Facts are not worth disputing. Instead, we can highlight a number of other points to make the argument that Bitcoin is environmentally friendly. With each of the points I make, I will also attempt to provide a counter argument.

Mining Consumes Mostly Green Energy

Coinshares6, a Bitcoin research company regularly reports on the number of miners using renewable sources to power their mining farms. They estimate that as much as 78% of miners use renewable electricity in their operation7. One wonders why the number of miners using renewables is so high. This has to do with the mining profitability equation.

Counter Argument

It is important to note that while these operations use green energy, they may not be 100% fuelled by green energy. Exact numbers are difficult to attain.

Mining Profitability is Based on the Cost of Electricity

The entire profitability of a mining operation is dependent upon how much that miner pays for electricity. As it turns out, renewable sources of energy are among the cheapest in the world. In 2020, energy supplied by solar is leading as the least expensive8. The cheaper the energy, the more profitable the mining operation. In other words, miners have a financial incentive to use green energy.

Counter Argument

Renewable energy sources have their own distinct environmental impact. Solar Panels / Wind Turbines require them to be manufactured. Hydroelectric dams often require regional ecological destruction.

Bitcoin Puts Unused Energy to Use

Power plants need to overproduce energy in order to meet peak demand for the power grid they’re supporting. Nowadays, power plants are pretty good at predicting this and modulate the amount of electricity they generate at any given point and time in the day. With fuels such as coal, we can simply modulate the amount of fuel in the furnace. With some renewables like solar and wind, it is a little bit more difficult to make use of the energy as we cannot predict with certitude when the wind will blow or the sun will shine. Some of the energy goes unused, and may ultimately be discharged into the ground. Bitcoin miners offer a solution to this problem by utilizing excess electricity on the grid. The miners end up paying for electricity that would otherwise be discharged into the ground at a loss for the power company. The miners are using the electricity to generate a profit in Bitcoin, and the power company gets to sell some of its electricity. It’s a win-win situation for both the power company, and the Bitcoin network.

Bitcoin “Heat-Waste” Can be Recycled

Miners are just computers. When computers run at 100% capacity, they tend to produce a lot of heat. Clever Bitcoin miners are finding ways to put the heat that miners generate to good use. Some use it to dry herbs, while others circulate the air and heat their entire homes9. Instead of paying money for oil or wood to heat your home, you can run a fancy computer that pays you to heat your home.

Bitcoin is More Efficient than other Global Monetary Networks

Every country has their own currency, except for the United States. The USD is the global reserve currency, and is basically the only globally accepted monetary unit, except for gold. Bitcoin on the other hand is global by design. Human civilization is marching towards unification on a global scale, and the USD as the global reserve currency is a pre-emptive realization of this trend. Bitcoin is on orders of magnitude more efficient than having separate monetary units and networks for each and every country on earth.

When we consider what materials go into building and maintaining the money of a country, we start to glean a bigger picture. In order to have paper money, we need to grow cotton and linen. We need to run printing presses to print the physical bills. Then we need to ship, and distribute the cash to its location of distribution. Banking infrastructure requires us to run computers to support digital versions of our money.

In order to run Bitcoin, we only need computers and electricity, not plant based resources. This narrows Bitcoin resource footprint. Lastly, Bitcoin is global, which inherently increases the efficiency of the system by broadening the scope of its applicability. Anywhere there is internet, (which is soon to be everywhere), people can have access to money.

Units of Bitcoin are Infinitely Recyclable

As I mentioned above, units of physical money require cotton and linen. These bills are then subject to wear and tear, something that Bitcoin is immune to given that it is entirely a digital currency. A $1 USD Bill needs to be replaced every 18 months due to the wear and tear on that bill10. The smaller the denomination, the more wear and tear, and the sooner it needs to be replaced. Units of Bitcoin are infinitely recyclable, which is a massive efficiency gain over physical money.

Counter Argument

Governments can make their own digital money and do away with physical bills in order to attain this same efficiency.

The Case Against Bitcoin

There are two axioms that one must accept if they want to debate the environmental impact of Bitcoin. If these two axioms cannot be accepted, then Bitcoin will inevitably be inefficient and bad for the environment.

  1. Bitcoin is Money

  2. More energy use is not in and of itself a bad thing for the environment

If you disagree with one or both of those statements then none of the arguments for Bitcoin will make any difference. If we can agree on those two axioms, then we are free to debate the details.

Mining Hardware is Bad for the Environment

This is the argument that I think is most true with respect to the environmental harms of Bitcoin. I think it is this point that is most easily made, but ironically brought up the least. Bitcoin is run by computers which themselves cost energy and resources to produce. So the main detriment to the environment is not the energy requirements of the Bitcoin network, but the environmental cost of producing the hardware in the first place. The carbon footprint of mining and refining the minerals into functional computer hardware is not exactly a well known number. Still, we know that mineral mining in general is a carbon intensive process, as it involves pulling rock out of the ground and subjecting it to multiple processes of refinement, transportation, and assembly into the end product.

Less Energy the Better

The less energy we use as a society the better. In order to get ourselves out of the impending environmental disaster that we face, we need to collectively use less electricity. The less energy we use, the less demand on our power plants to burn fossil fuels, and the less CO2 will enter the atmosphere. Therefore, we should turn off systems that consume large amounts of electricity, in order to reduce our overall carbon footprint.

Counter Argument

The more energy a society uses, the more prosperous it becomes (as measured by GDP). Energy usage is correlated with higher standard of living and quality of life. This is because the ability to use electricity unlocks efficiencies within our environment. We spend electricity to keep our food cold so we can store meat and not have to hunt (or go to the grocery store) every day of the week (giving us more time). We spend electricity to run public transportation (Metros) so we can transport more humans to social hubs within our communities.

This statistic is all well and good, but we should keep in mind that this doesn’t give us permission to be wasteful with our electricity usage. It matters WHERE we spend the electricity. It also matters that we pursue systems that are more efficient than the systems of energy utilization that preceded them. A good example of this is moving to automobiles that are powered by electricity rather than fossil fuels. We should constantly be pursuing systems that give us efficiency gains in the general consumption of energy as a society.

There are More Efficient Blockchains

Since the inception of Bitcoin, there has been the critique of its energy usage. Many computer scientists have since devised alternative ways of achieving the same result as Proof of Work. We now have blockchains available to us that allow us to process thousands of transactions per second (as opposed to Bitcoin’s 6 tx/s limit). These blockchains typically utilize a “Proof of Stake”11 model rather than a Proof of Work model. If we can utilize monetary networks that use Proof of Stake instead of Proof of Work, why wouldn’t we?

Counter Argument

These new algorithms that achieve the same result as Proof of Work are not yet battle tested. They are relatively new and have not been deployed at scale. We don’t really know whether or not they will be able to achieve the same level of security as Bitcoin. Only time will tell. The project that is best doing this right now, (in my opinion) is Cardano.

Proof of Work is Wasteful

Proof of Work is designed to not conserve the work performed by all machines except for the one that solves the current block. This means that 99% of the computational power that went into solving any given block within a 10 minute period of time was spent on nothing at all. No reward was given to those network participants, and the work cannot be carried forward into the next block because of the winner takes all principle embedded within Proof of Work. This is analogous to a race taking place, wherein after the first person completes a lap, every participant must start again from scratch.

Energy Cost Per Transaction

The amount of energy required for a single Bitcoin transaction is about 741 KwH12. This is about as much energy as the average American household will use in 2 months. This number is simply too high to be reasonable for any global monetary network.

Counter Argument

We cannot say that one transaction takes ‘x’ amount of energy to process. Those who make this argument are misunderstanding Proof of Work, and what the Bitcoin Network is using the energy for in the first place. The Bitcoin network will consume the same amount of energy regardless of whether or not there are transactions taking place on the network in any given block. The energy is being used to produce blocks, not to process transactions. The processing of transactions is a side-effect of block production, not the core purpose. It is much more cogent to say how much energy is required to produce a unit of Bitcoin. The utilization of energy is ultimately going into block production, and thus we can relate the energy to the Bitcoin being mined, not transactions.


Conclusion

Humanity should continue to pursue ever more efficient and greener means of producing and utilizing energy. This was, and still is one my core axioms through which I make the majority of my decisions. It is my belief that Bitcoin provides a net positive for humanity, as well as the earth. For me, Bitcoin is an example of how we can BEST uses the energy we’ve harnessed.

As radical as it may seem, I believe that Bitcoin is incentivizing Bitcoin mining companies to seek out cheaper forms of electricity, which inevitably will lead them to leverage greener sources. If there is one thing we can rely on, it is that companies will always seek out solutions that result in higher profits (Capitalism Yo). This is actually one of the beautiful things about Bitcoin and Proof of Work. There are intricate elements of Game Theory in place that utilizes one of the most reliable human emotions; Greed. It is through this channel that Proof of Work may actually lead to a greener future, instead of the opposite so often proposed by dissenters of the technology.

My hope is that you’ve made it to the end of this article, and are more informed o the nuance of the debate. This is by no means cut and dry, or straightforward. Understanding how Bitcoin and Proof of Work is put together requires an understanding of Economics, Computer Networks, and Game Theory. My own journey had me hating Bitcoin for its intense energy usage, only to discover that it is actually a beautifully crafted system of incentives and rewards. My only advice to you at this point is to remain curious, and skeptical. Ask more questions. Get more answers.

2

Proof of Work is Efficient by Dan Held - https://danhedl.medium.com/pow-is-efficient-aa3d442754d3

4

BBC Article on Bitcoin Energy Consumption - https://www.bbc.com/news/technology-56012952

5

Energy Statistics by International Energy Agency - https://www.iea.org/reports/electricity-information-overview

11

Investopedia Definition of Proof of Stake - https://www.investopedia.com/terms/p/proof-stake-pos.asp