Cryptocurrencies, a Not-So-Green Technology?

First appearing in 2009 with the advent of blockchain, cryptocurrencies – also known as crypto-assets – are financial exchange instruments in the digital world. Issued peer-to-peer outside of any centralised banking system and highly sensitive to market volatility, cryptocurrencies – particularly Bitcoin – are also extremely energy-intensive. This raises the question of their environmental impact and the associated electricity consumption. A discussion with Camille Boulenguer, economist and researcher at IRIS, whose work focuses in particular on the challenges and evolution of illicit economic practices in the age of new technologies.

At present, what does cryptocurrency electricity consumption represent? What are the projections for the coming years?

The energy requirements associated on the one hand with transaction validation processes, and on the other with the many exchanges carried out using cryptocurrencies, currently amount to around 130 TWh per year. This represents 0.4% of global annual electricity demand – equivalent to the total annual electricity consumption of the Netherlands. Although uncertainties remain regarding the pace of cryptocurrency adoption and improvements in the energy efficiency of these technologies, the International Energy Agency International Energy Agency (IEA) baseline scenario estimates that electricity demand from cryptocurrencies will increase by over 40% annually, reaching around 160 TWh by 2026.

It is the functioning of blockchain technology that requires significant computing power to validate the conformity of transactions with the rules defined by the virtual currency’s encryption. Depending on the cryptocurrency, the validation process (or “mining”) differs, consuming more or less energy. Bitcoin, the leading cryptocurrency by market capitalisation, uses a highly energy-consuming transaction validation method called “proof of work” (PoW). Cryptocurrency mining fulfils two energy-intensive functions: verifying transactions on the blockchain and generating new “bitcoin coins”. To achieve sufficient computing power, miners typically connect one or several computers to the Bitcoin network. This process of transaction validation is similar to that of banks: “miners” verify whether the sender’s wallet is correct and whether sufficient funds are available. This verification takes the form of algorithmic problems requiring significant computing power – and therefore high energy demand. Miners who validate transactions compete to receive financial compensation: the reward goes to the first miner to find the cryptographic solution. It follows, therefore, that the greater the computing power, the greater the chance of receiving a monetary reward. Under this system, there is a non-negligible race to consume energy.

While electricity demand remains negligible on a global scale (0.4% of annual global demand), it does raise concerns regarding its environmental and economic impacts. What are they?

To reduce the production cost of mined Bitcoins, many miners set up operations in regions where electricity is cheap – often generated by coal or gas-fired power plants, thereby producing massive greenhouse gas emissions. High energy consumption is therefore compounded by the environmental footprint from primary energy emissions: the mining of a single Bitcoin represents 169 tonnes of CO₂ emissions. Since mining was banned in China, Chinese miners have relocated – often illegally – to Russia and Kazakhstan to continue their activities. These two countries account for 11.2% and 18.1% respectively of the total computing power (hashrate) used to mine cryptocurrencies. Numerous undeclared farms have been discovered in Dagestan and in remote areas of Krasnoyarsk Krai and Irkutsk Oblast, where coal is the primary energy source. The same holds true in Kazakhstan, where mining farms have been set up near coal-fired power plants, attracted by low rates and a lenient regulatory environment, notably encouraged by former President Nazarbayev, who was heavily involved in the Bitcoin economy. In January 2022, Kazakhstan suffered a major blackout, underlining the dependency of Bitcoin transaction validation processes on stable energy sources. This outage affected not only the local economy but also the global cryptocurrency market, causing a 14% drop in the global Bitcoin hashrate. This major power cut exposed the vulnerabilities of Bitcoin mining systems in the face of serious energy disruptions.

What solutions could reduce electricity demand linked to cryptocurrencies?

In the current context of rising energy demand, the search for efficiency is critical. Advances such as the change in Ethereum’s validation mechanism point the way towards significantly reducing electricity consumption. Ethereum, the second-largest cryptocurrency by market capitalisation, cuts it’s electricty demand by 99% in 2022 by changing its mining mechanism. Unlike Bitcoin’s “proof of work” method, the “proof of stake” (PoS) mechanism selects validators based on the quantity of cryptocurrency they hold and are willing to stake, thereby removing the need for expensive, energy-hungry hardware. This less energy-intensive method could serve as a model for other cryptocurrencies. However, some resistance to its adoption has emerged, particularly regarding blockchain cybersecurity and the potential reduction in decentralisation. Furthermore, even if Bitcoin were to adopt the proof-of-stake model and reduce electricity demand, there is nothing to prevent new cryptocurrencies from emerging in the coming years, generating fresh energy demands.

Other methods also exist to limit electricity consumption peaks on the power grid. In the United States, cryptocurrency mining operations account for a significant share of electricty usage – comparable to all domestic computers or residential lighting. The Bitcoin mining company Riot Platforms in Texas has capitalised on electricity market fluctuations by operating its platforms at low intensity rather than actively mining Bitcoin. This technique, known as “demand response” or “load shedding”, allows the company to receive substantial compensatory payments from Texas’ grid operator, the Electric Reliability Council of Texas (ERCOT). This mechanism enables the grid manager to modulate electricity output during periods of high demand and avoid blackouts. However, while demand response by industrial sites such as cryptocurrency farms can help manage peaks during high-demand periods (such as summer, when air conditioning use surges), it should not be viewed as a cure-all. Finally, the risk of blackouts raises broader concerns about the resilience of our electricity systems.