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Cryptocurrencies consume a lot of electricity, but eco-friendly alternatives come with risks

Broadcast United News Desk
Cryptocurrencies consume a lot of electricity, but eco-friendly alternatives come with risks

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By Dulani Jayasuriya* dialogue

dialogue

Binary code and a representation of bitcoin displayed on a laptop screen are shown in this illustration photo taken on November 2, 2023 in Krakow, Poland.

Cryptocurrencies like Bitcoin consume more electricity than countries like Finland.
photo: Jakub Porzycki/NurPhoto/NurPhoto via AFP

analyze – As the urgency of climate change grows, there is growing interest in digital currencies to address its impact on the environment.

The global cryptocurrency market is expected to surge to US$4.94 billion (NZ$7.97 billion) by 2030, according to industry forecasts. But the process of mining digital currencies such as Bitcoin requires enormous computing power – which is a heavy drain on energy.

“Miners” use sophisticated hardware to solve complex mathematical puzzles to secure transactions and mint new coins, but this process, called “proof of work” (PoW), consumes a lot of energy.

Imagine a giant lock with millions of possible combinations. Miners are all competing to find the right combination to unlock a block (a set of transactions) and get a reward. The more computing power you have, the faster you can try different combinations.

But this computing power requires a lot of energy, just like a more powerful car consumes more gasoline. Therefore, miners need to use a lot of electricity to run supercomputers 24/7.

In 2021, British police raided an industrial unit, suspecting that cannabis was being grown indoors. They were surprised to find a large-scale Bitcoin mining rig inside that was illegally stealing electricity from the mains.

In 2021, Bitcoin mining ranked 27th among countries in terms of energy consumption, surpassing Pakistan, which has a population of over 230 million. Just one year later, Bitcoin’s energy consumption exceeded Finland’s national electricity consumption.

To address the energy consumption issues associated with cryptocurrency mining, a number of alternatives have emerged. But the question is, are these green currencies viable alternatives to traditional currencies?

The emergence of green cryptocurrencies

Green cryptocurrencies use a less energy-intensive process called “Proof of Stake” (PoS). Miners don’t need powerful computers, but instead need to own a certain amount of the relevant cryptocurrency — a bit like a deposit.

If someone tries to cheat or sabotage the system, they could lose some of their cryptocurrency. This “skin in the game” ensures that validators (those who verify and validate transactions) are honest and secure.

A key moment for those interested in green alternatives is the cryptocurrency Ethereum’s migration to PoS in September 2022 through an update known as a “merge.”

The switch reduced Ethereum’s energy consumption by 99.9%. Before the switch, Ethereum’s energy consumption was comparable to that of Switzerland. After the merger, its electricity consumption is closer to that of a small town.

Challenges and the road ahead

In addition to Ethereum, several other cryptocurrencies are also making significant progress in the field of green finance. Notably, Cardano and Solana are making progress in the cryptocurrency market. They consume significantly less energy, can process a large number of transactions without slowing down, and claim to be secure.

Despite the benefits, the transition to green cryptocurrencies is challenging. Some users worry that PoS may not be as secure as PoW. And people with more tokens have a higher chance of validating transactions. This could lead to a situation where a few people control the network.

Additionally, the initial distribution of cryptocurrencies using PoS can be less democratic, often benefiting early adopters.

Therefore, early adopters who accumulate large amounts of cryptocurrency may have a disproportionate influence on the network. This can be seen as less democratic because it gives more power to the wealthy, which goes against the decentralized spirit of cryptocurrency.

The evolution of green money continues

PoS isn’t the only revolution trying to address cryptocurrency’s energy consumption. Sharding is another.

Sharding divides the network into smaller parts, called “shards,” each of which processes its own set of transactions. This frees individual computers on the network (called nodes) from having to process all transactions at the same time, significantly increasing transaction speeds and reducing costs.

This innovation does more than just improve efficiency. Sharding’s parallel processing approach minimizes energy requirements, potentially making cryptocurrencies more environmentally friendly.

Ethereum’s upcoming upgrade, Ethereum 2.0, uses sharding technology to address the network’s current speed and transaction fee limitations. By implementing sharding technology in phases, developers hope to ensure a smooth transition while maintaining the security and decentralization of the network.

While sharding appears to be a game-changer, it also presents several hurdles. Effective implementation of sharding requires careful planning and rigorous testing to safeguard the integrity of the network.

Overall, sharding technology gives us a glimpse into the future: cryptocurrencies can process transactions faster, become more cost-effective, and even reduce their impact on the environment.

Green cryptocurrencies demonstrate how technology and finance can support ecological sustainability, providing a model for others to follow. But risks always exist. As green cryptocurrencies develop, they need to address concerns about security, network integrity, and accessibility.

*Dulani Jayasuriya is a lecturer in accounting and finance at the University of Auckland.

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