The digitisation era has transformed various sectors of the economy on a global scale. From resource extraction and manufacturing to retail and hospitality, the leveraging of technologies and the rapid emergence of innovative tools have led to unprecedented increases in productivity, improved resource accessibility, and created millions of jobs across the world.
The financial sector is no stranger to digitization. Fintech (financial technology) has spurred the development of digital assets analogous to the use of conventional liquid assets such as notes and coins and goes beyond the use of technology for e-banking services. The boom caused a decentralized algorithm generated currency enabled by blockchain technology, known as crypto-currencies – crypto for short, which has redefined the future of the finance world. Like natural resources, cryptos need to be ‘mined’ to enter circulation in the economy. This is done using supercomputers that solve algorithms that verify crypto transactions and rewarding miners with a small fraction worth a certain value for each verification.
The often-abysmal fraction of crypto is sufficient to heavily incentivize miners to maximize this practice. Thus, miners will often recruit the aid of hundreds if not thousands of computers to construct a crypto ‘mine’, validating hundreds of thousands of transactions a day. One of the main issues arises from the operation and maintenance of the supercomputers housed in these mines. The energy consumed by these mines is divided across two sources: powering the processors and using fans to effectively cool them. To contextualize this energy consumption, it is estimated by the Cambridge Bitcoin Electricity Consumption Index that Bitcoin – the most popular crypto currency – mining alone consumes an average annual quantity of 126.67 TWh, comparable to the 131.43 TWh consumed by the United Arab Emirates in 2019.
With such huge energy consumption, the associated carbon footprint of crypto mining is proportionately huge. In fact, when China – one of the largest hubs for crypto mines – at one point decided to ban the presence of these mines causing a surge of miners to migrate to Kazakhstan to resume crypto extraction. Kazakhstan experienced an 8% increase in total energy consumption – most of which was generated from coal. The U.S. alone was responsible for the emissions of nearly 40 billion tons of carbon dioxide from mining just Bitcoin in 2020.
As nations around the world align their efforts with the Global Sustainability Agenda and aim to reduce their emissions to curb climate change and its impacts by capping it at 1.5°C by 2030, it is crucial to project the growth and study the green transition of the crypto supply chain to comply with the requirements of the Agenda.
While it may seem trivial to address the energy requirements of crypto mining, the solution is a lot more complex and multifaceted. Mining crypto is only favorable if it is profitable, and it is only profitable when the resources needed to power it are cheap. This then creates a challenge of increasing accessibility to renewable energy and supplying it at an affordable rate.
The advantage of crypto though, is that it is completely decentralized, so advocates for this currency can have a primary role in ensuring the reduction of its footprint, and governments can regulate mining practices without hindering the growth of the sector.
- Policy makers can incentivize start-ups and initiatives who strive to combat crypto-mining’s emission problem, such as LiquidStack – a company developing technologies to maximize mining rig cooling efficiencies.
- Policy makers can levy carbon taxes on crypto miners or mandate the requirement of offsetting emissions with carbon credits.
- Support the development of new blockchains that offer miners better incentives for using renewable energy – such as larger fractions of crypto as a reward for mining.
- Support the development of proof of stake validation that randomly selects miners, as opposed to proof of work that enables competitive validation – Ethereum, another crypto, is in the process of transitioning to proof of stake, making the process 99% more energy efficient.
- Invest in technology solution companies that improve the energy efficiency and durability of hardware and processors used in crypto.
While these solutions may only address and resolve a segment of crypto emissions, they are a gateway to eventually transition the sector to a more sustainable future, without hindering its growth and development. There are many challenges and obstacles that must be overcome, but cryptocurrencies can lead the way to a greener financial sector and planet overall. Yes, economic gains are favourable, but it is critical to remember, at what cost?
