Cryptocurrencies and Sustainability: Addressing the Energy Consumption Debate

If you’re someone who’s recently delved into the world of crypto, you’ve likely come across the concept of cryptocurrency mining. We briefly touched on this topic in our previous note on personal stories, and now, we believe it deserves a more in-depth discussion. This area is undeniably one of the most contentious in the industry, with ongoing debates about its high energy consumption in many countries. The question that often arises is: Is cryptocurrency mining illegal? The answer varies depending on the country and jurisdiction. In some regions, this practice is permitted as long as participants adhere to specific tax regulations, whereas in others, it’s outright prohibited. Furthermore, some states have not yet established a clear legal framework, leading to skepticism among various users. Staying informed about current laws is crucial to ensure the legitimacy of our activities.

How much energy does cryptocurrency mining require? Can renewable energies play a role in this field? Throughout this note, we’ll address these questions and more, but first, let’s explain what crypto mining is: it’s the process of creating new units of a cryptocurrency. This involves using specialized equipment to solve complex mathematical problems that group transactions into blocks and record them on a Blockchain. Once a crypto transaction occurs, it’s sent across the network for verification and processing. Miners gather transactions and compete to solve computationally intensive calculations to find a hash value that meets specific requirements – the first miner to find this hash is rewarded with a fee. Bitcoin uses a consensus algorithm known as Proof of Work (PoW).

The controversial details begin to emerge. Mining, particularly in Proof of Work (PoW) systems, demands a significant amount of energy. To provide some context, in August 2023, the Cambridge Center for Alternative Finance (CCAF) revised the estimates of a study it had published on Bitcoin’s electricity consumption. As outlined in the final report, up to that point, BTC mining required 70.4 terawatt-hours (TWh) of electricity, a figure that, according to the paper’s authors, is comparable to the electricity consumption of countries like Belgium (83 TWh) or the Netherlands (113 TWh). The CCAF clarified that its analysis considers the specifications of ASIC equipment, which are devices specifically designed for mining.

Some technical aspects

PoW provides a very high level of security, as the mining difficulty is periodically adjusted based on the network’s computing power. This ensures that as the network grows, mining becomes more challenging. Modifying the transaction history of the Blockchain would be extremely difficult and costly for an attacker. Now, is PoW used in all cryptocurrency projects? The answer is no. There are other consensus methods:

Proof of Stake (PoS): In this method, network participants lock a portion of their cryptocurrency as collateral to have the opportunity to validate new transaction blocks. If a validator behaves incorrectly, the protocol can withdraw its investment. Unlike Proof of Work (PoW), PoS doesn’t require expensive computing equipment, making its systems cheaper to maintain. However, the lack of costs and ease of participation also come with certain drawbacks. If an attacker accumulates a large amount of cryptocurrency within the system, they could influence the selection of validators and compromise the system’s security. Two examples of cryptocurrencies that use PoS are Cardano (ADA) and Ethereum (ETH).

Delegated Proof of Stake (DPoS): Often regarded as a more democratic form of PoS, DPoS is a consensus protocol where token holders elect delegates to validate transactions and create blocks on behalf of the community – unlike PoS, where delegates are chosen randomly. DPoS systems, like PoS, offer energy-efficient and cost-effective maintenance. However, a concentration of power may occur if enough delegates unite, potentially compromising the network’s security and integrity. Furthermore, if a significant number of delegates experience technical issues or abandon their roles, the system may experience interruptions and lose trust. Some blockchains that utilize DPoS include Tron (TRX), EOS (EOS), Ark (ARK), and BitShares (BTS).

Proof of Authority (PoA): Unlike previous consensus mechanisms, PoA involves the creation of new blocks by nodes or validators who are preselected based on their identity and reputation in the network. There is no democratic selection process, nor is token staking required. Essentially, it’s a more centralized system, typically used in private or consortium blockchains to facilitate fund movement audits. Given the minimal community engagement, validators overseeing the network may lack trust in each other and experience conflicts of interest. Some projects utilizing PoA include Kovan (KETH), RSK (Rootstock), VeChain (VET), and xDAI (xDAI).

Proof of Space (PoSpace): This consensus protocol centers on storage capacity. Miners must demonstrate that they have available space on their hard drives to participate. These systems are known for their energy efficiency and require minimal investment in hardware equipment—having free space is essentially all you need.

In order to prevent miners from reserving excessive space prematurely and thus boosting their chances of earning more rewards, the Proof of Time (PoST) algorithm was introduced. This algorithm requires miners to prove that they have reserved and maintained their storage space for a specific period.

PoSpace and PoST often collaborate on certain projects to enhance security. Chia (XCH), developed by Chia Network, is an example of a network that utilizes both protocols.

The environmental debate… Can we do better?

Fortunately, the issue hasn’t been left in limbo, especially among industry stakeholders. Many entrepreneurs are establishing mining farms in areas with abundant renewable energy sources, such as sunlight and wind. A notable example occurred in El Salvador, the first country to adopt Bitcoin as legal tender. As part of a public-private partnership, Volcano Energy selected a district in western El Salvador, known as Metapán, for a major investment of $1 billion to build a comprehensive facility powered by renewable technologies. The project will be implemented in phases, starting with 241 megawatts (MW) of capacity and aiming to reach around 20,000 MW. Initially, 169 MW will be sourced from solar photovoltaic (PV) panels, with an additional 72 MW from wind energy. Volcano Energy anticipates that the facility will be fully operational, reaching 100% of its energy capacity, by 2028.

Decimal Digital Currency is another company that deserves recognition for its efforts in advocating for responsible energy consumption. Notably, in early 2013, the company agreed with Generate Capital and US Bitcoin Corp to establish a mining farm at the Wolf Hollow data center in Granbury, Texas. This 300-megawatt center, owned by Generate Capital and managed by US Bitcoin, ensures seamless connectivity between the mining facility and the power plant. The arrangement enables the mining operation to utilize surplus energy from the plant without overburdening the electrical grid. Furthermore, the data center leverages its interruption capacity to provide support to essential sectors such as hospitals during periods of peak demand, thereby bolstering energy reliability for the region.

While cryptocurrency mining remains a contentious issue, Ethereum stands out as a notable example of progress. The platform transitioned from the Proof of Work (PoW) to the Proof of Stake (PoS) consensus protocol, driven by various factors such as the need for enhanced scalability, optimal decentralization, and addressing energy efficiency concerns. Despite prevailing narratives highlighting the detrimental effects of crypto mining, responsible alternatives exist that comply with legal regulations. Unfortunately, some individuals overlook the strides made in reducing energy and environmental impacts, choosing instead to focus solely on the negative aspects for convenience.

We understand that a single note can only scratch the surface of a topic as complex as this one. However, consider this just the beginning of our exploration. Our goal is to delve into the controversial issues surrounding the world of cryptocurrency, not only to present our perspective but also to encourage you to conduct your research and form your conclusions – that’s what truly matters. Purse.io is one of the projects we’ve poured our hearts and efforts into in recent years. Additionally, we’re equally committed to Hamza.biz: the first e-commerce platform powered by the Loadpipe protocol. Through this platform, we aim to provide buyers and sellers with access to multiple cryptocurrencies and stablecoins. Click here to access the roadmap we’ve designed for Hamza.