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Will Bitcoin ever get over its ESG barrier?

06 January 2022

By Ian Silvera

Mass energy consumption is currently hardwired into Bitcoin’s software. Even in the early days of the payments project it was a concern for the first adopters of cryptocurrency, most notably Hal Finney, who openly queried “how to reduce CO2 emissions from a widespread Bitcoin implementation” on Twitter back in 2009.

The main issue surrounds Bitcoin’s proof-of-work consensus, which sees nodes/computers solve cryptographic puzzles in return for rewards – Bitcoins.

As the network grows, so does the computational power (hashrate) needed to mine Bitcoins. The stark reality of this growth, is that warehouses full of mining rigs run 24/7 in order to generate tokens, while also helping to secure and validate Bitcoin’s blockchain network at the same time.

The mining rigs, which use specialised processors (GPUs), often can’t be reused or recalibrated and the operations, especially in the developing world, use extensive fossil fuel energy.

Prompted by Tesla chief Elon Musk, the industry has started to self-regulate in North America, as part of the Bitcoin Mining Council. The group has vowed to increasingly use renewable energy resources, with Texas being a big beneficiary of their new, cleaner operations.

However, this is still somewhat of a work around and does not get away from the fundamentals of Bitcoin’s current programming. This was noted by Goldman Sachs in its latest note on the prospects of Bitcoin. The bank said that a $100,000 price milestone was possible, as the cryptocurrency continues to eat into gold’s market share as a store of value.

However, Goldman also reportedly cautioned that institutional adoption could be limited, due to the Bitcoin network’s natural resources consumption. As to how big that annual energy burn is, Cambridge University’s Judge Business School puts it at 123.97 terawatt-hours at its present level. That is equivalent to a medium-sized European country.

The good news is that there is another way. Bitcoin could switch to a proof-of-stake consensus, where transactions are validated by holders of a cryptocurrency who ‘stake’ their own tokens. There is subsequently no mining of cryptocurrencies, and the process is relatively not resource intensive.

The second largest cryptocurrency, Ethereum, is currently switching to a proof-of-stake consensus to address energy consumption and other concerns. Eventually, the project’s developers hope that the Ethereum network can be easily run off laptops and smartphones.

If this proves to be a success, Bitcoin will look more and more like a climate baddie in the cryptocurrency space.