Bitcoin, in particular, uses a large amount of electricity, a problem affecting most cryptocurrencies that are created by “miners”. There are solutions provided by newer algorithms, and by non-mined cryptocurrencies..
We can see from the chart above that Bitcoin uses up almost half the electricity that New York City does. Ethereum is a bit more efficient, using less electricity measured by power/market cap..
There is an argument, made by some Bitcoin maximalists, that the electricity consumed is a price necessary for the security of the currency. We find that logic wholly unconvincing. Ripple (XRP) is over $100 billion in market cap, consumes far less power and has not been compromised, for example. And as we pointed out in our note yesterday – click here – Ripple transactions are far faster and cheaper than Bitcoin. We believe there are better ways to ensure security.
It’s going to get worse, unless we do something. Bitcoin, Ethereum and some other cryptos use Proof-of-Work cryptographic algorithms. These are energy intensive, and the way they work is that if you do enough calculations, you’re highly likely to be rewarded by mining a coin. The economics of this dictate that the more expensive the coins become, the harder one is willing to work for them, i.e. spend more on mining rigs and electricity. Because there’s a fixed amount of cryptocurrency per unit of time, the electricity consumption should track closely with the price, although there are other factors that come into play.
We are doing something. The primary way to solve this electricity problem – and the one that Ethereum will take – is Proof-of-Stake. In this case, miners are replaced by owners of the coins, who can then choose or be chosen to create new coins by validating new blocks of transactions. Conceptually it’s a bit like a dividend on a stock. Another way is for coins to be issued based on transactions themselves, yet another is by compensating miners via transactions fees. All these solutions would use perhaps 1% of energy currently used by Bitcoin.
Note: data in the chart above comes from various sources as cited. Facebook is 2016 actual consumption. Google is 2017 projected. Both Google and Facebook include all power consumption, not just data centers. Bitcoin and Ethereum are current, annualized. New York City is 2015, as the amount used by all US Data Centers. New Zealand is 2014.