Bitcoin mining, the computationally intensive process by which bitcoin is created and accounted for, has become a global concern. After China cracked down on bitcoin mining in mid-2021, miners sought out other areas of the world where energy was cheap, but not always clean. In places like Kazakhstan, miners put pressure on the power grid, which relies heavily on carbon-intensive coal-fired power stations, causing localized blackouts and contributing to civil unrest. In upstate New York, where miners took over shuttered factories and empty warehouses, locals have complained of rising energy bills and the high-frequency whine of whirring data center fans—and worried about the environmental toll mining is taking. The US currently hosts 38% of all bitcoin mining operations.
A single Bitcoin transaction uses the same amount of energy as a single US household does over the course of nearly a month. But does it have to be that way? The Bitcoin community has historically been fiercely resistant to change, but pressure from regulators and environmentalists fed up with Bitcoin’s massive carbon footprint may force them to rethink that stance.
A variety of other countries, including Kazakhstan, Iran, and Singapore have also set limits on crypto mining. In April 2023, the European Parliament is due to pass a landmark crypto bill called Markets in Crypto Assets (MiCA), which mandates environmental disclosures from crypto firms. The law is expected to go into force sometime in 2024.
That may be just the start for the EU: the European Central Bank has previously stated it cannot imagine a world where governments would ban gasoline-powered cars in favor of electric vehicles, but not act on Bitcoin continuing to pump out CO2. “Some members of the European Parliament are already wondering why Bitcoin is not following Ethereum,” Alex de Vries, the data scientist behind Digiconomist, a website that tracks cryptocurrency energy use, told MIT Technology Review.
Efforts to crack down on Bitcoin’s waste are gaining steam in the US as well. In November, New York became the first state to enact a temporary ban on new cryptocurrency mining permits at fossil fuel plants. The new law also requires New York to study crypto mining’s impact on the state’s efforts to reduce its greenhouse gas emissions.
So what would it take to make a switch?
Proof of work vs. proof of stake
Cryptocurrencies have no central guardian, like a bank, to oversee their public ledgers—the shared digital record of every transaction on the blockchain. Instead, they rely on consensus mechanisms to agree on updates. In proof of work, the approach Bitcoin relies on, a worldwide network of computers—known as “miners”—spends electricity trying to win a lottery of sorts. Whoever wins gets to append the next block and collect new coins in the process. The chance of winning is in direct proportion to how many computations a miner does. As a result, massive server farms have sprung up around the globe dedicated solely to winning the bitcoin lottery.
Proof of stake, the approach Ethereum now uses, does away with massive energy consumption. Instead of miners, proof of stake systems employ vast amounts of “validators.” To become a validator, you have to deposit or “stake” a set amount of coins—32 ether, in the case of Ethereum. Staking gives validators a chance to check new blocks of transactions and add them to the blockchain so they can earn rewards on top of their staked coins. The more coins you stake, the better your odds of getting picked to add the next block of transactions to the chain.