Amid recent news of the leading crypto exchange FTX’s collapse, and as countries move to implement climate targets after COP27, the question of crypto-assets’ sustainable future has never been more pertinent.
On September 8, the White House Office of Science and Technology Policy (OSTP) released a report claiming the environmental impact of producing cryptocurrencies could “impede US efforts to combat climate change.” President Biden ordered the study in March as part of a sweeping executive order on digital assets. In the coming months, other federal agencies and offices, including the Environmental Protection Agency (EPA) and the US Department of Energy (DOE), are expected to release recommendations and reports for how the United States should regulate the asset class to align with net-zero carbon emissions goals. Immediate criticism from OSTP seems to cast a shadow on the mining process. But recent developments, such as Ethereum’s “merge” and renewable energy’s ability to power mining operations in order to support the grid transition, position crypto as a strategic utility for meeting US climate targets.
Soon after the report’s release, Ethereum executed the so-called merge, which reduces the asset’s energy consumption by an estimated 99.9 percent. By transitioning the digital machinery securing the second-largest cryptocurrency by market value from an energy-intensive proof of work (PoW) to a property-based proof of stake (PoS) verification, the equivalent of Finland’s energy consumption is conserved.
This overhaul not only decreases Ethereum’s profile as a major contributor to crypto’s carbon footprint, but is also advantageous for the platform’s long-term function and visions. Unlike Bitcoin, Ethereum aims to be a blockchain platform for smart contracts and decentralized applications, and has little prospect of becoming a monetary system. The growing popularity of the Ethereum blockchain, which hosts a majority of non-fungible tokens (NFTs), decentralized finance (DeFi), and other web3 applications, has started to overwhelm the system. Therefore, it makes sense for the community to take years of research and development to plan for the transition to PoS, which promises greater scalability and throughput than PoW, since transactions and blocks can be approved more quickly, without the need to solve complex equations.
Ethereum’s transition, despite its complexity and challenges evidenced by several delays of the overhaul since 2020, is well justified in order to fulfill the platform’s purpose as a web3 substructure. PoS’ versatility, cost-effectiveness, and operational efficiency also unlocks potential to explore the role of blockchain and distributed ledger technologies (DLT) in environmental markets.
In contrast, Bitcoin’s key function as a peer-to-peer electronic cash system is well served by PoW. Bitcoin’s robustness and simplicity are the fundamental layer that upholds its role as the most liquid and largest cap cryptocurrency. Under PoW, the chance of winning a Bitcoin block reward is proportional to the computational power one directs to solve the mathematical puzzle. It is deliberately designed to be expensive in terms of electricity and hardware as a defense against cyberattacks. In theory, subverting the Bitcoin network requires gaining an inordinate amount of power, which is extremely costly, if not impossible, given the scale of the network. PoW incentivizes participants to spend the expensive energy resources to honestly join the competition, earn Bitcoin rewards, and safeguard the security of the network.
While PoS effectively mitigates crypto asset emissions, many solutions have begun exploring how a PoW mechanism—used by Bitcoin—can accelerate the global energy transition by directing its large appetite for energy towards renewable, nuclear, and other clean sources of energy. Miners also serve as a complementary technology for clean energy production and storage because they offer highly flexible and easily interruptible loads, provide payouts in a globally liquid cryptocurrency, and are completely location-agnostic, requiring only an internet connection. These combined qualities constitute an “energy buyer of last resort” that can be turned on or off at a moment’s notice anywhere in the world.
By nature, renewables like solar and wind face intermittency issues, whereby energy supply is either abundant or nonexistent. This deficiency is further exacerbated by limited transmission capacity and feasibility of energy storage solutions, presenting hurdles to deployment. PoW mining can symbiotically employ renewable energy that would otherwise go wasted due to grid congestion, a strategy put into practice by CleanSpark mining in Georgia. This opportunity is particularly attractive given that 66 percent of the primary energy used to create electricity has dissipated by the time it reaches consumers. Incentivizing more solar and wind power construction will help hasten the retirement of fossil fuels.
Further, a sizable percentage of the hash power is derived from remote regions with abundant renewable energy (mainly hydroelectric). These areas have tremendous potential to generate and distribute renewable energy, which would otherwise not be marketable due to a lack of local demand. Bitcoin mining’s ability to be completely location-agnostic and provide highly flexible demand allows the delivery of electricity to populated areas, creating ancillary revenue possibilities for these bitcoin mining sites, enhancing their attractiveness for capital investment.
New and innovative clean energy companies focused on powering mining operations like TeraWulf and XBTO allow the monetization of previously dormant natural resources and simultaneously creates economic and environmental value. There are also projects such as the Sustainable Bitcoin Protocol that incentivize miners through a market-based solution to use and deploy clean energy sources, while enabling investors to hold Bitcoin in a verifiably climate-conscious way.
OSTP underscores the importance of collaboration with the private sector in developing performance standards for environmentally responsible digital asset development and suggests that DOE, in coordination with the Federal Energy Regulatory Commission, the North American Electric Reliability Corporation, and its regional entities, conduct reliability assessments of crypto-asset mining on electricity system reliability and adequacy. However, the report admittedly lacks enough data to have a conclusive understanding of the scale of energy used for mining and calls for the Energy Information Administration to collect data on mining energy usage and environmental justice implications. OSTP states that crypto-asset industry associations should publicly disclose crypto-asset mining locations, annual electricity usage, and greenhouse gas emissions. This would likely cause an uproar in the crypto community as it imposes additional regulations and reporting costs.
While there are good intentions and a need for further research, some of the recommendations in the report have the potential to create more bureaucracy and regulations. The report does not take into account existing sustainable mining companies that currently use renewable energy. The industry’s mining electricity mix increased to 60 percent sustainable sources in Q2 2022, and despite a considerable increase in hash rate, has decreased overall energy consumption by just 25 percent.
The White House report also lacks substantial input from the mining sector, cites non-peer reviewed sources, and lacks sufficient data and analysis. Additionally, there are virtually no case studies present in the report, even though there are many examples of miners operating sustainably, adding power to the grid, taking zero-carbon approaches, and engaging in grid stabilization.
The good news is that technology matters, the type of electricity matters, and there are ways now to drive innovation and accelerate the just transition in a way to get to net-zero that enables us to meet our climate goals.
Dr. Julia Nesheiwat is a distinguished Fellow at the Atlantic Council Global Energy Center, and since December 2020, has served as Commissioner on the US Arctic Research Commission reporting to the White House and Congress on domestic and international Arctic issues.
Ari Kohn is a Sustainability and Strategy Fellow with Sustainable Bitcoin Protocol and a student at Harvard University.
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Image: A visual representation of a Bitcoin. (Michael Förtsch, Unsplash, Unsplash License) https://unsplash.com/license