Cryptocurrency Environmental Impact

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21 Aug, 2024

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Cryptocurrency environmental impact refers to the adverse effects of cryptocurrency mining. The process is highly energy-intensive and leaves a higher carbon footprint in the ecosystem. The proof of work (PoW) mechanism associated with cryptocurrencies is responsible for the negative environmental impact the process induces.

The carbon footprint linked to cryptocurrency mining stems from its energy consumption, primarily when non-renewable electricity sources like fossil fuels are utilized. It requires a lot of electricity, often in hundreds of Terawatt Hours over the years. Mining and validating transactions in PoW-based cryptocurrencies, such as Bitcoin, necessitate solving intricate mathematical problems, demanding substantial computational power and energy usage.

What Is Cryptocurrency Environmental Impact?

The environmental impact of cryptocurrency and non-fungible tokens (NFTs) refers to the adverse effects caused by crypto mining and crypto-asset management.
Cryptocurrency mining is a leading cause of environmental damage as it is energy-intensive. It uses higher computational power and electricity consumption and generates a large quantity of e-waste.
Bitcoin, the most popular cryptocurrency network, has been attributed to a substantial share of greenhouse gas emissions, energy consumption, and carbon footprints due to its proof-of-work (PoW) consensus mechanism.
Ethereum, the second most popular crypto network, recently changed its consensus mechanism, which reduced electricity consumption by a whopping 99.99%.

Cryptocurrency Environmental Impact Explained

Cryptocurrency environmental impact is a growing concern among climate change proponents and environmental conservationists. Ironically, a purely digital entity such as cryptocurrencies should leave behind carbon footprints on the scale of a nation. Though this has been happening for almost a decade and a half, it is receiving colossal attention now.

Cryptocurrency mining, a process vital for transaction validation and coin creation, is notorious for its high energy consumption. However, it is essential to note that not all cryptocurrencies operate on the exact consensus mechanism, resulting in varied environmental impacts.

Non-fungible tokens (NFTs) have gained popularity, and their creation can also have environmental consequences. While some NFTs operate on PoW-based blockchains like Ethereum, it is essential to acknowledge that not all NFTs utilize this mechanism. Different blockchain networks and consensus methods exist, leading to varying energy consumption levels and environmental implications.

The largest cryptocurrency is expected to emit approximately 62 megatons of carbon dioxide annually through mining operations. This amount is equivalent to the CO2 emissions of Serbia in 2019. Moreover, the European Central Bank has estimated that the yearly greenhouse gas emissions from cryptocurrency mining total around 164 million tons of carbon dioxide. These figures underscore the substantial environmental consequences associated with crypto mining.

In addition to the environmental impact of mining, the electricity consumption involved in holding crypto assets is also a growing concern. The widespread usage of cryptocurrencies has resulted in millions of users and miners, all contributing to environmental damage. Notably, a study conducted by the Columbia Climate School found that cryptocurrencies incur approximately three times the ecological costs compared to traditional cash transactions.

Examples

Here are a few examples that throw more clarity on the concept.

Example #1

Suppose XYZcrypto is a cryptocurrency network popular among the youth. It has thousands of users worldwide, consuming 10,000 kWh of energy annually. The youth were concerned about the environmental impact of cryptos. Since XYZcrypto code is open-source, some users changed the network's code as a short-term measure. The firm planned to switch to a proof of stake mechanism as a long-term solution.

Example #2

In April 2023, the European Union made a landmark decision by approving the Markets in Crypto Act (MiCA), marking it the world's first comprehensive regulatory framework for cryptocurrencies. The act received substantial backing, with 517 lawmakers voting in favor and only 38 opposing it.

The rules will include regularizations against transparency, authorization, disclosure, and supervision of transactions. The EU also aims to take on the environmental impact of cryptocurrency mining. It will require crypto firms and networks to disclose their energy consumption.

How To Reduce?

To better understand how to mitigate the negative environmental impact of cryptocurrencies, let's compare Bitcoin and Ethereum. Among cryptocurrencies using proof of work consensus, Bitcoin is the leading contributor to energy consumption and greenhouse gas emissions.

Ethereum recently transitioned from proof of work to proof of stake mechanism. This innovative approach replaces traditional mining by using ether as collateral, which is destroyed if a transaction cannot be validated. This transition has resulted in a remarkable reduction in carbon footprints, with estimates indicating a decrease from 94 TWh/year in February 2022 to 0.0026 TWh/year in September 2022, representing a staggering 99.99% reduction.

However, any new changes in the Bitcoin algorithm are not expected as the network is entirely automated. Nevertheless, Bitcoin mining is expected to go down due to halving, where the rewards for miners reduce with each cycle. Proper management of electronic waste is another important consideration. However, it is essential to remember that prevention is always better than cure, and efforts should be focused on minimizing e-waste generation from the outset.

Frequently Asked Questions (FAQs)

1. What is the least environmentally damaging crypto?

Ethereum is one of significant crypto networks' most environmentally friendly options, particularly after transitioning to a proof of stake mechanism. Other lower environmental-impact cryptocurrencies include Cardano, Ecoterra, Stellar, Tron, Solana, and more. Conducting a cryptocurrency environmental impact comparison can help investors and users make environmentally conscious decisions.

2. Does cryptocurrency have an environmental impact greater than gold mining?

Yes, Bitcoin alone has a more significant environmental impact than gold mining. According to a report by The Guardian, Bitcoin's environmental impact is comparable to that of natural gas extraction. In 2020, Bitcoin's environmental damage accounted for approximately 82% of its market value, averaging 35% over the past five years.

3. What percentage of environmental impact is cryptocurrency?

While there is no universally agreed-upon figure, here are some statistics to consider. The maintenance of crypto assets contributes to approximately 0.3% of annual carbon dioxide emissions. 2022 Bitcoin mining alone accounted for about 0.1% of global greenhouse gas emissions. A report published in Nature Climate Change suggested that Bitcoin independently could contribute to a 2°C increase in the average global temperature within three decades.