The digital age is here, and it takes a lot of work.
Digital currencies, crypto assets, digitized securities, and distributed ledgers require an enormous amount of power. While the combination of these assets is subject to tremendous hype, the environmental impact has been mostly ignored. However, this is changing because there has been increasing alarm about crypto’s carbon footprint and environmental impact.
An example of this growing alarm is in New York. Recently, lawmakers in New York have proposed a three-year moratorium on all cryptocurrency mining centers unless they undergo a full environmental impact review. It is likely that any such review would show that these facilities do not meet the state’s greenhouse gas emission targets. Demonstrably, those targets include 70% renewable energy by 2030 and 100% zero-emission electricity by 2040. This is a dangerous precedent for the digital industry and exposes the vulnerability of the energy intensity related to cryptocurrency mining and digital assets.
Disruption Costs Money
Traditional infrastructure for financial systems is based on intermediaries, verifying, sending, and receiving money from one party and transferring it to another. Of course, this system has been shown to be anachronistic, cumbersome, and inefficient. Digital assets have created the opportunity for a decentralized alternative to this rigid system where intermediaries are obviated, and parties can work directly with each other. In other words, a lender or investor interacts directly with a borrower or business to send and receive funds. The intermediary structure is no longer required. This creates a great opportunity for efficiency, verification, and authentication to be distributed and secure, and eliminates the friction that an intermediary structure establishes.
Essentially, the disintermediation is a series of software programs. That seems quite innovative and disruptive, but software needs to be processed – and the intensity of that processing is more and more becoming a critical issue. Verifying transactions, adding new “blocks” to the distributed ledger, and “mining” new digital currency via complex cryptographic equations on a secure basis is energy-intensive.
Since the main task involves solving complex mathematical equations requiring extremely power-hungry computers, data centers dedicated toward digital asset processing, or massive warehouses that are essentially mega factories filled with supercomputers, cooling systems, and other equipment – consuming almost 150 TW hours of electrical energy. To put that into perspective, it would be approximately the 30th largest energy consuming country in the world.
A Free Asset That is Hardly Free
The power intensity of digital asset processing means that its profitability is dependent on where the digital asset is processed. There was always a joke about software that the first copy cost $1 billion, and the second copy cost three cents. However, in this case, the misconception is that software is not cheap. Energy is expensive, so factors such as electricity prices, temperature, environmental policies, and other issues impact mining operations and profitability. We have seen that some of those variations can be particularly disastrous in countries like China, where up until recently almost 65% of all digital assets were processed. Thus, China’s central government could no longer tolerate the vagaries of crypto assets and crypto mining and its related costs – increasing unpredictably. Demand for carbon-intensive power sources, such as coal-fired power, in China (and elsewhere) is rapidly increasing (and thus eliminated in China). Coincidentally, new locations seem to be where governments’ environmental standards and policies are relatively weak. However, this also makes crypto mining an easy target. There is a better solution, and it is intelligent green energy.
It’s the Carbon Footprint, Stupid
Initially, cryptocurrencies, such as Bitcoin, were not as complicated or difficult to create as today. An ordinary computer with a reasonable CPU could mine efficiently enough to generate profits from the crypto mining endeavor. However, as we know, cryptographic equations are increasingly more challenging, and the validation method known as “proof of work” is becoming exponentially more energy-intensive. Computational power today required to mine is so high that only large mining operations with tens of thousands of GPUs can generate a reasonable return on such an extensive capital investment.
While there are attempts to use alternative energy, such as solar farms, thermal heat, and wind farms, sustainability for processing digital assets is still evolving. One thing is clear, as advancements are made in clean and renewable energy, digital asset mining will reduce its requirement for carbon-based energy. This is an essential trend if digital asset processing is to be sustained as an important component of global finance.
The trend toward digital assets disrupting global finance is irreversible, thus green energy solutions are essential, and a condition precedent in order to participate and profit from this economic opportunity.
The Way Forward
Sustainable and cleaner energy are the obvious solutions, along with efficient computation. The technological prowess required for efficient processing may take decades, and therefore an immediate solution to digital asset and cryptocurrency mining operations is renewable energy. The economics can be quite compelling for wind and solar energy to power the intense processing required.
One crypto mining technique that is promising is “Proof of Stake.” The “Proof of Work” currently required to validate transactions is the core reason why digital asset processing is so energy demanding. Fundamentally, it is based on trial and error, and it may take millions of trials until the correct answer is found to the cryptographic algorithm. This is highly inefficient. Proof of Stake uses a different model to verify transactions and reward miners. While still using cryptographic equations, the reward is not based on the computational power used to solve them. In crypto mining using Proof of Stake, miners are rewarded according to the percentage of the currency in circulation that they put at stake to validate the next block of transactions.
While the two major cryptocurrencies, Bitcoin and Ethereum (Ether), use the Proof of Work model, developers at Ethereum are developing variations that may ultimately enable an entire shift to Proof of Stake. Specifically, what this means is that the efficiency can go from between 7 to 15 transactions per second to over 1,000 transactions per second.
Sustainability of digital assets and digital currencies will require developmental discontinuities for energy, along with other dimensions to the technology. The potential is for the disruption of a global industry, and digital assets are still in their nascent stage. Alternative systems enabling economic and financial functioning to be global and efficient will come. It will be driven by green energy and elements in development to make digital assets and cryptocurrency sustainable in all aspects.
Low-cost Providers and the Reality of Economics.
One cannot escape cost structures and efficiency, regardless of how innovative a process may be. Essentially, one of the largest cost components to digital asset processing is power. Put quite simply, the low-cost provider wins. This is a scale-based process and efficiency matters.
Renewable sources clearly create the most profitable opportunities for digital asset processing simply because it provides the cheapest energy sources. While there are opportunities within hydroelectricity, these may be limited depending on government regulation, and also may be facilities that are disconnected from the electrical grid. This does not solve a more general problem of providing renewable energy to the electrical grid – an issue gaining greater attention among government authorities.
Therefore, a collaborative effort with local government among digital asset processors that provides a lower carbon footprint for digital asset processing while enabling green energy to be connected to the local grid offers a better solution and more sustainability to a digital asset and crypto mining operation.
It is crucial for crypto mining to address the environmental concerns attached to digital asset processing and creation. There is an irreversible shift to decarbonization and lower carbon footprints. The digital asset market is not going to go away, but since energy is such a critical component, energy efficiency and green energy are essential components to any long-term perspective of a digital asset strategy. The low-cost provider wins. With digital assets, that means the combining lowest carbon footprint with scale and the ability to connect to the electrical grid.