When the Bitcoin network launched back in 2009, it didn’t take long before cryptographer and Bitcoin pioneer Hal Finney infamously wondered “how to reduce CO2 emissions from a widespread Bitcoin implementation”. By adding a proof-of-work based consensus mechanism, Bitcoin creator Satoshi Nakamoto had embedded a requirement for the network to waste resources in order for Bitcoin’s underlying blockchain to function. Finney quickly realized that, as the network would continue to grow, so would the environmental footprint of the cryptocurrency network.
Thinking about how to reduce CO2 emissions from a widespread Bitcoin implementation— halfin (@halfin) January 27, 2009
Along with the price of Bitcoin, the Bitcoin mining industry did indeed grow significantly over time. As a result, the energy consumption of Bitcoin mining has now been in the spotlight as well for several years. It has become a popular topic among academics, and prominent sources like the Bitcoin Energy Consumption Index (BECI) and the Cambridge Bitcoin Electricity Consumption Index (CBECI) even provide daily estimates for the total energy required by Bitcoin mining.
Even so, two new studies published on the third and fourth of August 2020 show that, despite all efforts, we’ve only seen tip of the iceberg when it comes to the true environmental cost of cryptocurrency mining. In a paper released in Energy Research & Social Science titled “Bitcoin’s energy consumption is underestimated: A market dynamics approach” it is argued that we’re still looking at optimistic estimates regarding the Bitcoin network’s energy demand. The paper states that “common estimation approaches don’t only fail to capture” the behavior of industry participants, but also “fail to properly capture the market circumstances” in which industry participants operate. It is said that this “combination leaves common approaches prone to providing optimistic estimates”. The paper ends by stating that even a conservative estimate of the network’s energy requirement shouldn’t be below “87.1 TWh of electrical energy annually (equaling a country like Belgium)”, whereas the real number is likely to be even higher.
In a paper released in Joule titled “Energy Consumption of Cryptocurrencies Beyond Bitcoin” we are subsequently reminded that Bitcoin isn’t the only proof-of-work based cryptocurrency. Specifically, the paper argues that Bitcoin accounts for two thirds of the total energy demand of cryptocurrency mining. This implies that a significant part of the environmental costs associated with cryptocurrencies has, so far, managed to remain mostly hidden behind the public attention for the Bitcoin network. The only exception to this is the Ethereum network, for which there exists the Ethereum Energy Consumption Index, but this still captures only a third of the remaining energy demand.
In their own ways, both papers seek to improve our understanding of the environmental impacts of cryptocurrencies. This understanding is the key to ultimately “implementing the right policy response in the right locations and for setting up mitigation programs”, and will require both a more fine-tuned methodology, as well as a more holistic view of the entire cryptocurrency space.