A solution to Bitcoin’s Environmental Impact

While a lot has been written about the environmental impact that can be associated with the digital currency Bitcoin, finding a solution to the problem is far from easy. Even though it’s technically possible to replace a proof-of-work mining algorithm, which is primarily responsible for Bitcoin’s energy-hunger, unwillingness inside the community may prevent such a solution from being implemented. That raises the question what other alternatives are available, and how feasible these are. Let’s dive into some of these options.

Proof-of-Stake

Taking a step back, let’s first consider why proof-of-stake is such a popular solution to the environmental impact of proof-of-work systems. In proof-of-work mining, the addition of new blocks to the blockchain requires the participating devices to compete against each other in a game of “guess the number”. The first one to guess correctly through a process of trial-and-error can add their block to the blockchain, and get the  built-in reward for doing so. Every second of the day, the Bitcoin network alone is generating more than 130 quintillion of such guesses, and consuming a whole lot of energy doing so. Effectively this whole process resembles a lottery, where owning more computational power results in a bigger chance of winning. In proof-of-stake based systems the chance of winning this lottery depends on wealth rather than computational power. The only hardware requirement is having a device that is connected to the internet, but the specifications of this device don’t lead to better odds of winning. As such, there’s no incentive at all to use specialized energy-hungry machines as is the case in proof-of-work mining. It’s therefore been estimated that replacing a proof-of-work by a proof-of-stake protocol can reduce the energy consumption of a network by 99.95%.

However, while it’s technically possible to implement such a solution into Bitcoin, the community so far appears unwilling to even consider this. Most of the time the arguments to justify this reluctance come down to arguing that proof-of-work is more robust than proof-of-stake. It’s said that proof-of-stake concentrates power in the hands of the wealthy and promotes inequality. This reasoning often ignores that proof-of-work based systems suffer from plenty of centralization issues themselves. For example, more than half the Bitcoin network has historically been located in China, the network’s computational power is dominated by a mining pool oligarchy, and a single manufacturer may control up to 80% of the hardware market. It may indeed be the case that switching from proof-of-work to proof-of-stake contains more trade-offs than purely environmental ones, but proof-of-work is far from perfect in many other ways as well. Even so, the simple fact that there’s currently no work on making such a switch happen forces us to consider alternative options.

Turning Bitcoin Green

Increasing the use of renewables for Bitcoin mining is often mentioned as a way to make the process more sustainable. This is easier said than done, as there exist no natural incentive for Bitcoin miners to make use of renewable energy sources in the first place. Because Bitcoin mining devices typically only last for about 1.5 years until they lose the ability to operate profitable, miners try to get access to the cheapest and most constant energy sources. While renewables can be cheap, they are also intermittent power sources. This means that they’re not continuously available depending on external factors. A very specific example of this is Bitcoin miners historically using hydropower from the South of China during the summer months (rain season). When the season comes to an end, miners have always migrated to the North of China to use coal-based energy for the rest of the year (see image below). This intermittency thus presents an obvious natural barrier in trying to service devices that run 24/7 all year round. In fact, as the world transitions to renewables, it’s the fossil fuels that are becoming obsolete that make for the most attractive power source for Bitcoin miners, as these can provide both the cheap and constant power that miners need. Because of this, we’ve already seen cases where miners revive idle gas plants (New York), or keep obsolete coal-based power plants alive (Montana), for the purpose of mining Bitcoin. One of the reasons behind China’s recent crackdown on Bitcoin mining was that Bitcoin miners were illegally reviving idle coal-based power plants, which included a series of deadly incidents. This road thus appears to be a dead end.

hashrate-share-over-time

Towards Net-zero

If it’s difficult to reduce actual emissions to zero, one may consider how carbon offsetting can help. Even though the latter doesn’t reduce the emissions of the system, it enables companies and individuals to compensate for their environmental impact by investing in environmental projects. These projects, in turn, help reduce global CO2 emissions. Emerging companies like ImpactScope are now offering a broad range of offsetting solutions that can be applied in this context. By achieving a balance between carbon emitted and removed, it’s possible to reach net zero emissions. This doesn’t change that fossil fuels are better left in the ground, but it may be particularly appealing for, for example, participants with the Ethereum ecosystem – as this community plans to migrate from proof-of-work to proof-of-stake within several months’ time. There are, however, also clear examples of carbon offsetting can be abused. In New York an idle gas-plant was revived for the purpose of mining Bitcoin. The operator subsequently decided to become “carbon neutral” by using offsetting solutions. It would thus be recommended to assess this solution on a case-by-case basis, but it’s typically better than doing nothing.

External Policy Solution

In the meanwhile, external policymakers way wonder about their options to force the network to actually cut its emissions. The centralization within the Bitcoin ecosystem mentioned earlier in the article can certainly be abused to affect the mining network. As miners are typically large-scale operations that take advantage of low industrial energy rates, they can easily be targeted and effectively removed from the grid. Bitcoin miners are currently fleeing China as many provinces are starting to enforce a ban on this particular activity. Even so, there’s a limit to how much impact this can ultimately have. Mining is something that can be done in any home, with any number of machines. While residential rates would increase the average cost of electricity and therefore reduce the total impact of the network (as miners will be unable to afford the same amount of energy) – that impact would never go to zero.

A last option is then to attempt to influence the value of assets like Bitcoin that run on proof-of-work. As the creation of a block pays a reward in Bitcoins, the price of Bitcoin directly determines how much money miners are making. This, in turn, drives the environmental impact of the network. The higher the Bitcoin price, the more profitable mining becomes, the bigger the incentive to add more energy-hungry machines to the network. If the price of Bitcoin was zero, miners wouldn’t be making any money, and they wouldn’t be able to pay for any electricity bills. Here policymakers can consider measures like carbon taxes that may make specific assets less appealing, or outright banning people from investing their money into environmentally damaging protocols. The broader the support for such measures in an international context, the more likely it is that these will have the desired effect.

Conclusion

While there is no perfect way to stop Bitcoin’s environmental impact while the community remains unwilling to replace the proof-of-work mining, it’s not the case that absolutely nothing can be done about it. The Bitcoin community should be especially mindful of the increasing risk of adverse regulatory actions, as already seen in China, if they continue to dismiss and greenwash the network’s externalities. It infamously took Hal Finney, one of the first persons to run Bitcoin, only weeks to realize the network had an environmental problem. A real solution is long overdue.

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