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Thought leadership | 05/27/2020

Energy consumption – Crypto vs FIAT?

Energy consumption crypto and FIAT paper currency

Bitcoin and other cryptocurrencies are highly discussed topics with endless opinions. The people that are not a big fan of these cryptocurrencies can give you a list of negative effects that are linked to these currencies. One of the most noted effects is probably the energy consumption, something that is not always explained properly. Yes, it consumes lots of electricity. But what are the real energy costs? And what happens if we compare it to our native currencies?

A Deep Dive Into Crypto’s Energy Consumption

Cryptocurrencies are using different types of algorithms to secure their network – the most common ones being Proof of Work (PoW) and Proof of Stake (PoS). Both systems have a different approach to ensure the security of the network and to validate transactions.

The Bitcoin network uses PoW. This type of algorithm needs a huge amount of power to run the network and about 90% of it is used for mining alone. Just imagine that a typical miner has a room full of computers that are solving mathematical problems all day long. The difficulty is consistently increasing so most of them need to expand to have even more equipment, leading them to consume more and more energy. The estimated usage of all miners together for 2020 is around 58 terawatt hours per year. Yes, this is a lot and it’s more than the total amount of electricity that is used in a year in Switzerland or Greece.

A study from Coinshare analyzed the mining network and highlights the fact that the Bitcoin network gets 74.1% of its electricity from renewable sources (wind, solar and hydropower). The exact numbers are not always precise and easy to find out because most of the miners want to remain anonymous. As they need more and more equipment, some miners are migrating to sustainable energy, mainly to reduce their costs and increase their profits. Another solution to reduce the energy consumption can also be found in the algorithm – PoS can be an alternative.

The PoS algorithm is used by different crypto projects and changed the way blocks are validated. Block validators are chosen because they lock a certain amount of crypto into the system, the more you lock the more chances you have to be a block validator. You will receive rewards on the amount you locked. It can be compared to your bank account where you receive money if you hold it in a savings account. 

By nature, this PoS is a low-energy algorithm as there is no mining involved in the proces. The only thing that is needed is a laptop to run a node, that will be on 24/7 and will use around 350 kilowatts of energy for an entire year. This means that it uses as much as 35% energy of just one single BTC transaction.

We are still on the edge of innovation and we need to find out what is the best way of ensuring the security of a blockchain network. New solutions are also on the rise like sharding to make a blockchain more efficient or better mining equipment to lower the amount of electricity being used.

Now you know what it costs to create and maintain decentralized networks for cryptocurrencies, but are you really aware of the costs of current currencies such as dollars or euros?

Our Paper Currency

There are less coins and bills in circulation than there were at a certain time, but the production is still there and the circulating supply is $1.87 trillion dollars only in the US. Money is not always purely digital and needs to be printed, which means that it has a life cycle: some bills and coins wear out and need to be reproduced. A $10 bill has an estimated life span of 5.3 years and a $5 bill is estimated to last for 4.7 years. To reproduce these bills and coins, you need a lot of natural resources as well (water, ink, pulp, cotton, linen and different kinds of metals).

The estimated global production costs of paper currency in 2014 were 5 terawatts per year and 10 billion liters of water. While the banking system alone is even consuming more energy than the Bitcoin network, bankings energy costs are calculated around 100 terawatts per year. This is almost double that of Bitcoin. Indeed, banks need to run a lot of servers, branches and ATMs to keep their system accessible to the public.

Both systems need a certain amount of energy to thrive, so how can we reduce this?

Evolution of energy

We are at the beginning of an industrial revolution and this one will use more renewable energy solutions than the last one. Miners are already migrating to the Pacific Northwest where electricity is cheap for them because of the massive availability of hydropower.

Iceland is also becoming a famous mining destination as this nation almost entirely relies on renewable energy. 

So what are your thoughts? And what do you think is best to be used as a solution? New protocols will probably emerge to decrease the energy consumption or all the miners will migrate to a renewable energy source.

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