Marcus Paz
University of Denver
Introduction
Cryptocurrency, much like everything else in this world, has a rich history before becoming one of the most talked about investment subjects and new forms of payment. In particular, cryptocurrency formed around 1983 when cryptographer David Chaum developed a system called eCash (which would birth another digital currency called DigiCash). This currency used cryptography to make economic transactions which would be the blueprint to what coins are on the market today.
However, it was around 2009 when an unknown person named Satoshi Nakamoto, though theorized to be several people, desired to create a currency that would not only be accepted internationally, but also decentralized in nature (self-backing). This currency is known as Bitcoin. Bitcoin has been the world’s most successful cryptocurrency and the technology behind it relies on blockchain.
However, cryptocurrency is not perfect as there are areas of concern such as how it is mined. Moreover, there are environmental concerns that target cryptocurrencies because of the way they’re mined. This is because Bitcoin in particular needs large amounts of energy due to the Bitcoin creation and consensus process called Proof-of-Work (PoW).
To better understand PoW and cryptocurrency mining in general, this paper will perform a general overview of the impact cryptocurrency mining has on the environment and what the future holds for the concept and industry in general. The coins in question for this paper will be Monero, Bitcoin (BTC), and Ethereum (ETH).
A few questions this paper will address include:
- How exactly does cryptocurrency mining happen and what is the general process?
- What can be done to mitigate impacts to the environment and how can we use what we know to understand its future?
- What challenges face cryptocurrency mining and the environment?
What Is Cryptocurrency Mining?
Cryptocurrency mining is the process in which blockchain technology embodies another form of security allowing the cryptographic hash function to maintain data using encryption and decryption. When someone talks about mining cryptocurrency, they refer to the creation of a digital ledger that records the ownership of coins for a user, in addition to maintaining a public database of owners, senders, and receivers.
The process goes as follows, initially there has to be an authentication/authorization that needs to be done using cryptographic keys (private and public) and PoW simultaneously. Afterwards, the user sends a request to the public network of Ethereum for authentication and addition of data to the network. The nodes are in charge of validating requests, in the case of acceptance, the data is then added to the blockchain resulting in the users’ nodes receiving an award for participating. Private and public keys are responsible for validating transactions. Private keys are responsible for digitally signing data, whereas public keys are used to decrypt that data at the receiving end.
Introduction To Cryptocurrency Mining Machines
The machines that are used for cryptocurrency are regular notebooks and desktops. The beauty of cryptocurrency is its decentralized architecture that grants virtually anyone the ability to mine. Many of these machines run on regular windows/OS operating systems and interestingly their CPUs and GPUs use the majority of the power, and RAM uses minimal power.
Interestingly, after BTCs first year (2009), it was soon realized that CPUs (central processing units) were not as efficient as GPUs (graphic processing units). Then FPGAs (field-programmable gate arrays) made their way into miners and not long after, ASIC (application specific integrated circuits) are used to keep up with the needed power to mine coins. However, these hardware changes have created challenges that will be discussed in a later section, as they need much more energy to power them.
Why Do Cryptocurrencies Need To Be Mined?
Essentially the reason for mining is relatively simple. Mining has everything to do with authentication and verification of transactions before being added to the blockchain network. This critical step is the center of cryptocurrency meaning this process of mining does not happen without validation. It's important for validation to happen because without this step, owning/trading/receiving Bitcoin or any altcoin would not exist. Thankfully, this is not the case, and we have machines that have the functionality of being able to solve complex puzzles and manage to overcome this validation step.
Who Are Cryptocurrency Miners & What’s Their Role?
The miners in every case will be either a notebook or desktop depending on what the user desires to mine. Their role is to generate new blocks after completion of all data in the block, each block contains information of the previous blocks’ transaction. Every block then has a chain of blocks with tremendous amounts of work because everytime change happens to a block it requires regeneration of successors and redoing all the work carried by them.
Imagine how often this happens every minute around the world and the amount of energy required. Blockchain is fortified more and more every time this process is executed making it tamper-proof – but needs a very large hash rate.
What Are The Different Types Of Cryptocurrency Mining?
Every coin (including altcoins) and Bitcoin all have certain mining cores for block generation. In the case of BTC, its mining core is the PoW (Proof-of-Work) method that actually requires the most amount of energy in comparison to other methods.
Many of the algorithms today are based on the SHA-226 algorithm, which is a set of cryptographic hash values created by the NSA and introduced as part of Bitcoin.
Efficiency of mining a coin is often subpar mainly because many coins use only one algorithm, but some can be mined using more than one algorithm such as PoW/PoS-hybrid (Proof-of-Activity), Proof-of-Burn (PoB), Proof-of-Validation (PoV) or Proof-of-Importance (PoI) to name a few. However, these methods have generated concern as they diminish block incentive and are often used to enhance network security.
Background, Overview, & Analysis On Bitcoin Mining Worldwide
Something that is often misunderstood is that mining for Bitcoin today is very different from what it used to be. According to a book published that discusses everything Bitcoin, they described mining Bitcoin at first like the California gold rush that took place in 1849.
Nowadays, not so much, see the value of Bitcoin decreases every four years since it's very limited, very much like gold. The value of 50 BTC (block subsidy equates to the amount of new Bitcoin minted into each block; Bitcoin algorithm) today is currently 6.25 in terms of subsidy, but around spring 2024 it will be halved again with a value of 3.125 per block (halves every 210,000 blocks; new circulation).
With the value depreciation, there’s also an increased difficulty in mining because the equipment and energy required can skyrocket and become pricey. The average person may not have access to such resources and miss out on what cryptocurrency offers. Considering these hurdles, it has become very expensive over the years because it requires more than just a powerful computer. In fact, much of the mining that does occur ironically is left to mining companies that mine for Bitcoin and have large mining pools (miners as a collective use all their power to form pools; PoW generation is much higher) that drive competition and BTC up in value.
Ultimately, it’s important to have a large number of miners because it generates trust in the network and makes it difficult to overtake. Mining is not isolated to just one country, it happens in many developed countries like the United States, China, Japan, Russia, and Germany. At least where it is permitted since some countries have banned mining completely.
What Economic Positives & Societal Benefits Does Cryptocurrency Mining Bring?
Interestingly, Bitcoin for the longest time has been argued among economists, specifically that it does not meet the three criteria that makes money be classified as such. However, there is some consensus now that Bitcoin is a good medium, but risky. Starting around Jan 2014, many online merchants began accepting and adjusting for Bitcoin transactions which at the time was showing promising results. Satisfaction was positive for both merchants and consumers because of its ease and smaller processing fees. Much of the research that has been conducted indicates that Bitcoin and altcoins appeal to those who are not afraid to take risks and with 200 million people being exposed to Bitcoin this promotes the global economy -- working anywhere, anytime. Not to mention, cryptocurrency mining uses advanced cryptographic methods meaning virtually impossible for government interference or any at that matter.
What Are The Negative Environmental Impacts Of Cryptocurrency Mining?
Cryptocurrency mining has a market value estimated to be around $432 billion – and thus has the potential to be a huge addition for economic development in the modern world. However, with a large market value, the environment is on the other side of that market and hence receives the anthropogenic environmental impact of cryptocurrency creation.
On the one hand, cryptocurrency trading has led to various forms of economic development, which subsequently allows for attracting additional resources to extend smart and green technologies for decarbonising this economic growth. On the other hand, cryptocurrency trading has exacerbated energy resource consumption, thus causing an increase in greenhouse gas emissions and environmental deregulation.
Considering many can be on the fence regarding the integrity of cryptocurrency, environmental issues are another added reason for concern, though more on this later.
The mining process itself relies on utilizing blockchain technology (digital ledger) to keep track of all transactions and shared among many computers and not limited to a single computer system. Since cryptocurrency is decentralized, the blockchain remains viable and continues to authenticate transactions, all of which consist of public and private keys (long strings of numbers and letters allowing users to send and receive funds) that enable the cryptocurrency.
Today there are roughly 6,000 different coins, but the majority of them are pre-mined (more than 2,000), simply meaning they already exist in which when the blockchain was created, the ledger contained a record of all the crypto that the founders planned for. No more can be added.
The miner has its hands full and therefore has a few incentives when mining. For instance, transactions fees (small fee paid by each person spending the crypto to have it added to the block; the miner gets that fee), block subsidy (newly created crypto known as block subsidy, is paid to the miner who successfully adds a block to the ledger), and block reward (these fees and subsidy combined results in block rewards). BTC subsidy began with 50, which at the current time of writing = 6.25 BTC. The block subsidy halves every 210,000 blocks or roughly every four years.
Environmental Impact
As mentioned before, many coins are already pre-mined, but those that are not (BTC, ETH) require mining and usually will utilize the PoW method. The biggest downside is many coins can only be mined using one algorithm, in turn requiring more power from the miner.
The challenge with basically anything during the mining process is where exactly all this power is coming from. Fossil fuels are the answer. Many companies, especially in the United States, rely on using, for instance, coal power plants.
For example, New York this year denied a company’s request to take ownership of a closed power plant to mine for Bitcoin. Though the plant has already been home to around 15,000 servers that were actively mining for Bitcoin, the air permit was still denied as officials argued it would go against the state’s climate goals. This ruling showcases cryptocurrencies' future, especially in states that are more progressive and aware of the current climate crisis. What is even more profound about this case in New York is that energy consumption required for mining can, in some cases, be equivalent to power needed for a big city.
(Source: ETH total electrical consumption over 5 year period)
Monero Case Study
A secondary study conducted by researchers at Hunan University in China investigated another coin called Monero and studied its carbon emission and required energy for this particular coin. Their findings were astounding, yet frightening.
Monero, like any other coin, had to begin somewhere and it did by being mined on April 18th, 2014. Four years later, Monero was ranked as the 10th largest coin with a market capitalization value of $1.7 billion dollars.
Monero, unlike other coins, is the leader in truly anonymous (uses a variety of different cryptography methods) transactions. It still uses ledger technology similar to other coins, but it was designed to completely derail ultrafast computers that dominate the validation process in other coins. Essentially, it changes the hashing algorithm the miner uses. It’s worth mentioning that hashing “fingerprinting” refers to a process that enhances blockchain security by duplicating it across many different computers making it harder to hack or manipulate.
The main purpose of Monero is to maintain its integrity for being completely anonymous and private, which is accomplished by keeping transactions between the owner and nothing else. However, it’s costly to mine and low transactions mainly due to high amounts of data which makes it an ideal coin to look further into.
While blockchain opened the doors to being able to keep a digital record of any digital currency, it among everything else requires maintenance and these researchers were able to hypothesize a relatively promising estimate of energy needed for upkeep. Keep in mind, there were limitations and challenges during their research which included knowing the exact amount of cryptocurrency, condition of miners, and currencies are untraceable making it difficult.
Despite this, the researchers went ahead with their data analysis and experiments of Monero in hopes of shedding light on global electrical consumption for this coin. Turns out that their experiments indicated hashing algorithms mainly determine mining efficiency which in the case of Monero estimations may require 645.62 GWh of electricity with an estimated carbon emission output to be 19.12-19.42 thousand tons per year if there is 4.7% mining activity happening in China. Though these are simply estimations and have room to be within a certain range.
In layman terms, the required energy needed is comparable to powering the metropolitan area of Bangkok. Considering the majority of the world actively relies on fossil fuels as a main source of energy, the computer miners are pieces of technology that require lots of energy and unfortunately remain in need of fossil fuels. Imagine the coal-powered plant in New York with its 15,000 servers mining BTC and how much electricity is needed to make that possible.
The results of this experiment are important as many other scholars around the world primarily focused on Bitcoin and Ether but limited studies have been done using PoW/PoS or PoS methods other than on the two coins mentioned above. Their dedication towards examining Monero will hopefully allow other scholars to follow-suit and investigate the thousands of other coins in circulation.
Implications
Around the world we as humans rely on energy to power everything and without it, we would struggle to thrive. Though there is a paradox in this statement because we could thrive, but it soon becomes a challenge considering the reliance on fossil fuels and lack of implementation towards renewable energy sources. Since we’re expected to hit a cozy population of eight billion people by the end of 2022, it’s hard to not accept that we will need solutions to much more needed energy.
While blockchain technology and cryptocurrency has been beneficial for economic development in countries like the United States, Japan, China, Russia, and Canada, countries like these are considered to be developed for the most part at least, which means mining is less regulated and their economies are able to mine. Several other countries have outright banned the use of cryptocurrency as an acceptable form of payment and may result in criminal charges. Considering that crypto mining is associated with needing to use large amounts of electricity, not only to power the miners themselves, but also air conditioning to cool these machines down. This fact alone contributes to the ranking of the United States and China to be neck and neck for largest electricity usage of any other country at 6,167 and 3,971 TWh respectively. While mining is not so regulated in these countries, the cost of electricity is much higher than other countries meaning these investors often will migrate to other countries and set up shop there.
BTC and ETH are the most studied coins since they have been around the longest in comparison to other coins which means there is significant enough data to explain the impact mining has on the environment.
For instance, it has been discovered that BTC mining uses approximately 0.5% electricity of total global electricity which is about 7x more than Google uses for energy per year. In addition to this, it was discovered in 2021 that approximately 91 TWh of electricity was consumed annually to mine BTC which is more than Finland needs with a population of 5.5 million people.
(Source: Power needed to mine Bitcoin)
Certainly this research is relatively new which suggests that the needed electricity to mine BTC will continue to grow every year which may cause issues for BTC since we see this happening in certain US states. Much of the electricity needed to mine coins like BTC and ETH (Ethereum v1) derives from its mining method of PoW, which again is the most common method used for the majority of the coins that exist.
Unfortunately, there is difficulty around this since mining is one big puzzle in which complex algorithms (PoW) are needed to solve the cryptographic puzzle. Since the blockchain network is growing faster with users, they need more computational power to solve this puzzle which is divided into three main problems:
- Hash Function: SHA-226 (hash code created by the NSA in 2001 built using the Merkle-Damgård construction) which uses chunk data as input and dwindles it down to 256-bits. No simple way to obtain hash data and depends on trial and error requiring large amounts of data.
- Integer Factorial: Encryption process for the public keys which is presented in the whole number by multiplication of two other numbers.
- Guided Tour Puzzle Protocol: Works to protect DoS (Denial-of-Service) attached to the blockchain and insists on focusing on the nodes to compute memory-bound puzzle allowing user access to abandoned computational power
Huge amounts of power is needed for the issues above which is the biggest drawback of the PoW method because it functions as a competition based algorithm. The trial and error process of this method is tedious, consuming time and electricity just to match hash values which skyrockets energy consumption around the world.
Evidently, since these users’ miners are often sitting around and always on, they contribute to CO2 (carbon-dioxide) emissions which happens to be one of the biggest concerns for climate change in today’s world. Picking on BTC again, it was discovered that during the year 2017, BTC’s emission output was at 0.16% and dramatically increased 5x that to 0.80% in 2021. Whereas, ETH is about half of that of BTC, though both are expected to continue rising in the coming years as electricity needed is predicted to be more than most countries need to power them.
Conclusion
The complexity of mining intrigues many users around the world because it involves cryptography, finance/business and potential wealth. However to obtain any coin requires not very consensus choices and the pay-off includes the utilization of electricity which is often generated by fossil fuels, deepening the dependence on them. Though, there is hope for cryptocurrency mining and that is using the PoS (Proof-of-Stake) method which is much more improved than the PoW method which may reduce the power consumed by 99.5% mainly because it does not rely on competition like PoW. If this method was widely adopted, we could potentially see huge decreases in energy consumed alongside CO2 emissions decline by 179.75 and 18.06 giga tonnes respectively for BTC and ETH.
An interesting aspect regarding the mining of cryptocurrency is that renewable energies could potentially solve the PoW method’s issue of needing large amounts of electricity. Not to say that the energy usage would ever decline, it’s merely a suggestion to tackle the carbon dioxide output and use cleaner energy sources which is better for the environment overall.
Blockchain technology has proven to be an essential aspect of many sectors because of its high levels of data security and essential to the survival of cryptocurrency. Nowadays, this technology is mainly used for mining and is the building block for the largest, most profitable cryptocurrency which is BTC. However, as with everything else, there are drawbacks and the biggest one here is the amount of energy required to mine any coin. The paper explored three different coins and went into detail how exactly they are acquired and what their acquisition means for the environment.
