The environmental impact of cryptocurrencies looms large among the many concerns voiced by sceptics. Earlier this year, Agustín Carstens, who runs the influential Bank for International Settlements, called Bitcoin “a combination of a bubble, a Ponzi scheme and an environmental disaster.”
Carstens’ first two indictments have been challenged. Contrary to his assertion, while the true market potential of Bitcoin, Ethereum and other such decentralized networks remains uncertain, by now it is clear to most people that they are more than mere instruments for short-term speculation and the fleecing of unwitting buyers.
That Bitcoin damages the environment without countervailing benefits is, on the other hand, an allegation still widely believed even by many cryptocurrency fans. Sustaining it is the indisputable fact that the electricity now consumed by the Bitcoin network, at 73 TWh per year at last count, rivals the amount consumed by countries like Austria and the Philippines.
Computing power is central to the success of Bitcoin
Bitcoin’s chief innovation is enabling payments without recourse to an intermediary. Before Bitcoin, any attempt to devise an electronic payments network without a middleman suffered from a double-spend problem: There was no easy way for peers to verify that funds promised to them had not also been committed in other transactions. Thus, a central authority was inescapable.
“Satoshi Nakamoto”’s 2008 white paper proposing “a peer-to-peer electronic cash system” changed that. Nakamoto suggested using cryptography and a public ledger to resolve the double-spend problem. Yet, in order to ensure that only truthful transactions were added to the ledger, this decentralized payments system needed to encourage virtuous behavior and make fraud costly.
Bitcoin achieves this by using a proof-of-work consensus algorithm to reach agreement among users about which transactions should go on the ledger. Proof-of-work means that users expend computing power as they validate transactions. The reward from validation are newly minted Bitcoins, as well as a transaction fee. Nakamoto writes:
Once the CPU effort has been expended, to make it satisfy the proof-of-work, the block cannot be changed without redoing the work. As later blocks are chained after it, the work to change the block would include redoing all the blocks after it.
[…] Proof-of-work is essentially one-CPU-one-vote. The majority decision is represented by the longest chain, which has the greatest proof-of-work effort invested in it.
Because consensus is required for transactions to go on the ledger, defrauding the system – forcing one user’s false transactions on the public ledger, against other users’ disagreement – would require vast expenditures of computing power. Thus, Bitcoin renders fraud uneconomical.
Electricity powers governance on Bitcoin
Bitcoin and other cryptocurrencies replace payments intermediation with an open network of independent users, called ‘miners’, who compete to validate transactions and whose majority agreement is required for any transaction to be approved.
Intermediation is not costless. Payment networks typically have large corporate structures and expend large amounts of resources to facilitate transactions. Mastercard, which as of 2016 accounted for 23 percent of the credit card and 30 percent of the debit card market in the U.S., employs more than 13,000 staff worldwide. Its annual operating expenses reached $5.4 billion in fiscal year 2017. Its larger competitor Visa had running costs of $6.2 billion.
Equally, doing away with intermediaries such as Mastercard has costs. Bitcoin miners require hardware and electricity to fulfill their role on the network. A recent study puts the share of electricity costs in all mining costs at 60 to 70 percent.
Electricity prices vary widely across countries, and miners will tend to locate in countries where electricity is comparably cheap, since the Bitcoin price is the same all over the world. One kilowatt-hour of electricity in China, reportedly the location of 80 percent of Bitcoin mining capacity, costs 8.6 U.S. cents, 50 percent below the average price in America. Assuming an average price of 10 cents per kWh, the Bitcoin network would consume $7.3 billion of electricity per year, based on current mining intensity. This yields total Bitcoin annual running costs of $10 to 12 billion.
The value of Bitcoin’s electricity use
Bitcoin total operating costs do not differ much from those of intermediated payment networks such as Mastercard and Visa. Yet these card networks facilitate many more transactions than Bitcoin: Digiconomist reports that Bitcoin uses 550,000 times as much electricity per transaction as Visa.
However, the number of transactions is a poor standard for judging the value exchanged on competing networks. Mastercard and Visa handle large numbers of small-dollar exchanges, whereas the Bitcoin transactions are $16,000…