Bitcoin’s incredible power consumption has become a matter of popular concern this year, most recently because of an errant tweet from Tesla CEO Elon Musk—whose musings on cryptocurrency are watched closely by crypto-enthusiasts.
On Wednesday, Musk reversed his February decision to accept Bitcoin as payment for Tesla, citing the “rapidly increasing use of fossil fuels for Bitcoin mining.”
The carbon footprint of global Bitcoin mining operations has increased by 40 million tons in the past two years, according to a Bank of America report published in March. That makes Bitcoin mining more polluting than American Airlines.
Musk hasn’t written Bitcoin off, however, adding that Tesla would hold on to the roughly $1.5 billion worth of Bitcoin it has on its books until “mining transitions to more sustainable energy.” But with Bitcoin mining currently draining more power than all of Argentina, is that shift possible?
Power hungry
Bitcoin mines are data centers where thousands of computers work continuously to both verify the Bitcoin blockchain’s algorithm and spit out complicated numbers for the chance to be rewarded for their work. That computing power consumes vast amounts of energy. And the cryptocurrency’s energy demands are unlikely to abate anytime soon.
“Bitcoin’s power consumption is a feature, not a bug,” says Dan Roberts, founder and executive chairman of Australia-based Bitcoin miner Iris Energy. Bitcoin requires such staggering computing power because its ledger—the blockchain tech that documents the cryptocurrency’s transaction history—is maintained by a consensus model known as “proof of work.”
The proof of work (POW) model requires each miner to perform two tasks. First, verify a series of transactions on the blockchain and, second, correctly guess a random 64-digit hexadecimal number, called a hash. The miner to guess the correct number or lower first is rewarded with a Bitcoin payout—if the verification performed in step one matches the work performed by the majority of other miners.
Because miners are rewarded only if they verify accurately and then generate the correct number first, miners have to commit vast amounts of computing power—and energy—to guessing the number quickly.
A different model
Blockchain protocols don’t need to be built on the POW model. Developers of Ethereum—another popular blockchain protocol—are trying to shift the Ethereum network from POW to an alternative model known as “proof of stake” (POS), which they say requires roughly 1% of POW’s energy input.
POS uses less energy because it doesn’t reach consensus by having every miner work on the same puzzle at the same time. Instead, POS randomly selects miners from the network to validate each block. To increase their chance of being selected, miners need to front a stake in the relevant cryptocurrency as collateral, which is then forfeited if their computations are fraudulent or wrong.
If that sounds complicated, it is. Ethereum has been trying to make the switch to POS for years, but developers keep encountering issues in designing the new consensus model. Converting Bitcoin—which, unlike Ethereum, doesn’t have a team of core developers that advocate for change—from POW to POS would be much harder.
That means Bitcoin mining is likely destined to remain an energy-intensive enterprise.
Chasing cheap
But just because Bitcoin is energy intensive, it doesn’t necessarily have to be powered by fossil fuels. Renewables are already in the mix, although the exact proportion of electricity contributed by clean power is a best guess. Estimates of Bitcoin carbon-neutral energy consumption range from 39% to 73% of the total. The actual figure likely changes seasonally too.
During China’s rainy season in the summer months, for instance, many miners migrate from coal-powered provinces in the north to lush provinces in the south, such as Sichuan, in order to take advantage of the seasonal hydropower surplus.
“Cyptocurrency has played a productive role in terms of driving demand for hydropower, thus helping Sichuan reach its emissions reduction goals while also reducing waste [energy] and increasing fiscal revenue,” says Da Hongfei, CEO of Chinese blockchain pioneer Neo.
But once the rainy season ends, miners move out and revert to fossil fuels.
Bitcoin as a driver?
In April, digital payments provider Square and asset managers ARK released a white paper that argued that Bitcoin mines could create a “customer of last resort” for green power plants that suffer from a surplus of production. Twitter and Square CEO Jack Dorsey shared the report in a tweet. Musk endorsed it.
Critics slammed the paper as “greenwashing,” pointing out that inserting Bitcoin mines into renewable energy grids will do little to solve the key issue facing wind and solar generation: storing excess energy for future periods of high demand. But Iris Energy’s business model is built on the premise promoted by Square’s white paper.
“We go into markets where there is an excess of power, and the people will need new load, and they need a buyer for that power. We come in and provide that service. We pay a market rate for that power; we then monetize that power effectively into Bitcoin, which we liquidate daily,” Roberts says.
Relying solely on excess power means Iris’s earnings are somewhat inconsistent, since the power supply is inconsistent too. But Roberts says the business model is built with long-term sustainability in mind and—given Bitcoin’s soaring price—operations continue to be profitable.
Convincing other miners to switch to renewable energy could require government intervention, which might happen as global economies pledge to achieve net-zero carbon emissions in the decades ahead. Bitcoin mines, like other industries, could be offered incentives to go green or—as was the case this month in China’s Inner Mongolia province—be shut down altogether.
Which route regulators choose to take—incentivize or outlaw—depends largely on whether they see Bitcoin mining as worth the energy it takes to produce the digital currency—no matter how that energy is created.
